The outlook for food and beverage processors remains positive amid economic conditions that have shifted from the start of the year, according to the Food and Beverage Report mid-year update from Farm Credit Canada (FCC).
Year-over-year sales growth is expected to slow in the second half of the year to six per cent from 12 per cent in the first half, finishing the year at nine per cent.
“We expect slower growth in the second half of the year as inflation eases, global economic growth moderates and Canadian consumers pay attention to the price of food and their own limited savings compared to a year ago,” said JP Gervais, FCC’s chief economist, in detailing the mid-year report. “Food and beverage manufacturers are reckoning with high costs and shifting consumer food patterns, but profitability is projected to improve in the months ahead.”
Grain and oilseed milling led sales growth in the first half of the year, along with sugar and confectionery, and meat products. That trend is expected to continue for the latter half of 2022.
“Demand for chicken and pork continues to be strong, and we are still expecting consumers to get back to eating more beef,” Gervais said. “Consumers have cut back on beef consumption domestically since the start of the pandemic, but that is offset by strong beef exports. We are seeing positive trends in red meat and expect sales to rise in 2023.”
The seafood and alcohol processing sectors are feeling the impact of higher food costs as consumers cut purchases in the last six months due to inflation in other areas prompting them to reconsider their spending. Seafood, breweries and wineries are forecasted to see sales slip in the second half of 2022.
“Understanding these economic trends is critical for processors to navigate the headwinds we are experiencing,” Gervais explained. “For those figuring out how to best withstand a slowdown, it may be time to review performance to make possible adjustments in financial planning and or relationships with suppliers. This will help manufacturers set budgets, monitor and control costs, and decide pricing strategies.”
Processing gross margins have been under pressure with consumers focused on purchasing lower-margin basics in the face of higher retail prices. As input costs were elevated relative to selling prices, the gross margin index in food and beverage manufacturing fell nearly 10 per cent in the first half of 2022.
“We anticipate margins will start to improve as commodity prices decline,” Gervais said. “Overall, the trends to watch are the decline of global economic growth, job vacancies in the food and beverage sectors, and domestic food consumption growth as inflation slows and consumers return to normal shopping habits.”