Food manufacturing and processing in Canada has grown tremendously the last few years and it’s a trend expected to continue through 2019.
That is the synopsis provided by Farm Credit Canada (FCC) and its chief agricultural economist J.P.Gervais in the corporation’s annual agricultural industry outlook.
“We also know that there are other export countries that are challenging us in our own markets as well,” he said.
Gervais noted the Canadian food manufacturing and processing sector has been one of the strongest economic engines and most important business categories in the country for the last five years.
“Especially in the last two or three years, the industry’s growth has far exceeded any type of other growth throughout the economy,” he stated.
“The benefit to having that strong of a sector is that more of Canada’s raw commodities are being processed at home and the value of that is being added to our economy. That’s significant.”
Another benefit, especially for exporting processed products, is the continued weakness of the Canadian dollar.
Currently, the loonie is worth around 75 cents USD — good news for exporting products because of the exchange rate — and has remained around that mark for the past couple of months following a steady decline last year.
However, Gervais added there is one big question that faces the industry as a whole and that is if the sector wants to maintain profitability.
“With Europe for example, we have a trade deal, but they have been growing their exports to Canada faster than we have grown our export market there,” he said.
“That means more competition for Canada and, if you put that with some of the added costs our processors face — higher labour and energy to name a couple — that tends to put some significant headwinds in front of our sector.”
On top of that, new rules on packaging for export is another cost processors must tack on.
“Although in reality, from a demand standpoint, the sector remains very strong,” Gervais noted.
Other factors that could affect the industry include inflation on food expected to exceed 1.8 per cent in 2019, the impact of expanded online ordering options on food preferences and purchases, and how the commodity markets react to any outcome of the ongoing U.S.-China trade tensions.
On the fruit and vegetable processing front, profit margins improved last year with revenue outpacing the cost for the raw product and those margins are expected to stay on the positive side due to greater demand from consumers.
Gervais noted climbing operational costs, a tight labour market, plus higher interest rates will put pressure on both businesses and consumers.
“This may deflate some consumption of high quality or expensive foods,” he stated.
Meanwhile, a keen eye will be needed for potato processors as profits are likely to weaken in spite of strong product demand.
The average raw potato has climbed as a result of a rising energy costs and a reduced 2018 production — from a combination of a hot and dry summer followed by a wet harvest, which left an estimate 15,000 acres still in the field.
As for meat processors, 2018 saw inconsistent profits across the sector. It’s expected beef and pork processors will see the value of exports get better this year with the lessening of European and Asian tariffs.
“However, expect some warning shots too, as demand for plant proteins is growing,” Gervais added.
“While they may not directly substitute meat, they also can’t be easily dismissed.”
Lastly, challenges in garnering high-quality wheat will keep profits in the bread and baked goods sector at levels similar to last year’s. Cashing in on canola crush is expected to be similar to 2018 with lower domestic crop acres and strong demand to export the product.
This is the fourth of seven articles in a series looking at the agricultural sector for Canadian producers.