By farmnewsNOW Staff

FCC Food and Beverage report providing optimism for margin improvement

Apr 19, 2024 | 2:07 PM

A change in consumer spending habits, lower commodity prices, and inflation all factor into Farm Credit Canada’s (FCC) outlook for food and beverage manufacturers.

In its annual Food & Beverage Report, FCC is forecasting a slight drop of 1.4 per cent in manufacturing sales this year to $162.6-billion.

Desmond Sobool, Director of Economics and Deputy Chief Economist with FCC, said the forecast is not a surprise. The report said ‘high inflation of the last two years and the corresponding interest rate increases meant to combat it are stretching household budgets. The spending of the massive amount of savings accumulated during the pandemic has slowed as household budgets tighten amid a slowing economy, and debt-servicing levels (as a percentage of disposable income) are at a record high. This has left less for consumers to spend on discretionary and higher-priced items.’

“We’re seeing inflation come down and that’s actually moderating sales. So, it’s not surprising where we’re at this year. Our forecast for this year is that sales will be lower than last year. It’s still higher historically. So, that’s good news for the sector even thought it’s a little bit of moderation – the trend is still upward,” said Sobool.

He said the one wild card they have in their estimates is the U.S. economy’s resiliency, given that 80 per cent of our food and beverage exports went to the U.S. in 2023.

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“We know their economy is actually doing really, really well. So, if if continues to perform well and maybe even outperform what economists are projecting, that could actually cause a little bit of a bump for our exports as well, which would actually maybe bring that sales growth up a little bit this year.”

The report covers eight different sectors: grain and oilseed milling, sugar and confectionery products, fruit, vegetable preserving and specialty food, dairy product, meat product, seafood preparation, bakery and tortilla products, and beverage manufacturing. Sobool said the results for each sector are quite variable for different reasons. Grain and oilseed milling, for example, is projected to decline 11.3 per cent in sales, but volumes are expected to increase marginally at 1.1 per cent.

“You know, we saw a dramatic increase in global commodity prices through the pandemic and then Russia’s war against Ukraine. So, you know, there was really, really strong growth in the grain and oilseed milling sectors. So, this year, we’re seeing commodity prices coming down. They’re still higher than average but that’s causing sales at the grain and oil seed milling to decrease this year quite a bit from what we saw last year or last couple of years. Even with that though, you know margins will still be improving for that sector. So that’s one of the good news stories there as well,” he said.

Gross revenue margins are expected to improve slightly this year by 1.5 per cent on average compared to the previous year. Sobool said it will vary across the eight sectors.

“Like I said, inflation fueled the sales and so volumes actually haven’t been nearly as high as the sales growth because those sales numbers include inflation. If you look at it from the cost side and we’ve actually seen, you know, in 2023, costs really began to stabilize across the manufacturing sector and in some cases they did decline and so the one cost that’s still elevated and is still a concern for manufacturing, and this you know applies to farmers as well that are looking for labour, is wages. Wage growth is still hot. e. The labour market is cooling, but it’s still elevated, so we’re going to see, you know, until that vacancy rate comes down, we’re seeing an uptick in the unemployment rate, but we’re still seeing strong wage growth. So, that’s one of the reasons why some of the sectors like grain and oilseed milling had their margins compressed because wage growth was really strong. So, that’s going to continue this year as well.”

From a consumer perspective, the report indicates grocery price inflation has slowed from its peak period of late 2022. But Sobool says spending habits have changed. As food prices rose over the last couple years, consumers began purchasing more sale items, less expensive brands and cut back on the amount of food purchased. The report said ‘According to the Agrifood Lab at Dalhousie University, we should expect these behaviour shifts to continue. For example, in 2024, over four in ten (43%) Canadians say they’ll be watching for sales and promotions, while over one in five Canadians (21%) say they’ll opt for generic or store-brand products.’

“So consumers are having to make those adjustments because prices are still elevated. So, with inflation coming down, our forecast is grocery prices inflation should come down about 2 per cent by summer through the end of the year, which is a great news story for consumers,” Sobool said.

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