Drought and economic uncertainty squeeze outlook for food manufacturers

The Canadian food manufacturing industry is struggling through a tough 2012. A slow recovery in Canada’s key export market of the United States, a significant increase in commodities prices due to drought, and a slowing Canadian job market mean that the industry will generate meagre growth this year, according to The Conference Board of Canada’s Canadian Industrial Outlook: Canada’s Food Manufacturing Industry-Summer 2012.

“Food manufacturers are being squeezed by both costs and prices. Input costs are rising due to a run-up in commodity prices, and demands from retailers and consumers are limiting the ability of manufacturers to increase their own prices. The result is pressure on the industry’s profit margins,” said Michael Burt, director, Industrial Economic Trends.

The worst drought in decades continues to punish key farm states in the United States, and predictions are that 2012 could see the lowest average corn yield in more than 15 years. The U.S. accounts for nearly 40 per cent of global corn production and 35 per cent of soybean production. Plummeting yields have major implications for world food prices. Corn is used in everything from cosmetics and cereals to cake mixes and candy bars, so consumers are likely to see increases in their grocery bills as high corn prices make their way through the food product supply chain.

The industry’s output is forecast to advance by only 0.5 per cent this year. Industry profits will inch up from $4.6 billion in 2011 to $4.7 billion in 2012, and pre-tax profits will gradually improve beyond 2012. However, manufacturers will not likely see the kind of profit growth they enjoyed between 2006 and 2009.

Food manufacturing is one of Canada’s largest industries, employing more than 275,000 workers, and consumer tastes will largely dictate the direction of the industry. Conveniences (such as the increasing popularity of snack foods) and healthfulness are two leading drivers for manufacturers. The trend among consumers toward more healthful eating is exerting considerable influence over food manufacturers’ business plans.

“Introducing innovative organic and natural products with higher profit margins and opening up new markets are likely to be the twin engines that drive growth in the future,” said Burt.

As well, catering to consumers in emerging countries such as Brazil, India, China, Mexico, Poland, and South Korea creates opportunities for Canadian food manufacturers looking to export their products.