Grain and Food Processing

Global Competitiveness Snapshot: Grain and Food Processing

IBM-PLI Quality Score Ranking

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IBM-PLI Profitability Index Ranking

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Western Canadian Capabilities in Grain and Food Processing: Strong Grain, Beef and Biofuel Capabilities

By any measure, Western Canada can be described as North America’s grain, beef and biofuel production centre. The total value of the Grain and Food Processing sectors (excluding crop production) in Alberta, Manitoba and Saskatchewan was over $16.6 billion in 2007⁵⁸, with Alberta accounting for $10.8 billion, Manitoba $3.6 billion and Saskatchewan $2.4 billion in sales in 2008 (no recent statistics were available for B.C.).

Alberta’s grain and food processing industry is dominated by meat products processing. In 2007, this sector accounted for $5.4 billion in sales (or about 33% of grain and food processing for the three western Canadian provinces). Other major sectors in Alberta were grain and oilseed milling ($1.1 billion in sales in 2007), and beverage manufacturing ($779.9 million in sales in 2007). The remaining $3.5 billion in sales consisted of animal food and feed, dairy products, bakery and tortilla products, snack foods, fruit and vegetable products, specialty foods, and other manufactured food products.

Manitoba’s $3.6-billion grain and food processing industry is dominated by significant operations in wheat, oat and feed milling, oilseed crushing, and flax milling operations. Manitoba is a leading global supplier of milled oats, and its grain and oilseed milling industry exported $642 million worth of milled products in 2008. Manitoba is home to a number of leading global agri-food companies (many of them Canadian), including the Canadian Wheat Board, Cargill Limited, Intercontinental Exchange Inc., Bunge, Emerson Milling, Can-Oat Milling (a division of Viterra Inc.), Richardson International, Parrish and Heimbecker, Agricore United, and Keystone Grain.

Saskatchewan’s $2.3-billion grain and food processing industry includes more than 300 processors and over 6,100 employees, and is dominated by grain and oilseed milling, primarily for North American consumption. Saskatchewan also produces over $1 billion worth of beef annually, making it the second-largest producing province in Canada (after Alberta). In 2007, there were a total of 22,000 beef producers in the province, with a total of 1.5 million beef cows. There are ten provincially-inspected and seven federally-inspected beef processing plants in the province. The beef products from these facilities are sold in the retail, wholesale, hotel, restaurant and specialty markets.

A growing Grain and Food Processing sub-sector in Saskatchewan is biofuels. Saskatchewan is the largest source of agricultural biomass in Canada. Each year, on average, Saskatchewan's farmers produce 13 million tonnes of wheat, 4.6 million tonnes of canola and 5.3 million tonnes of barley. This makes Saskatchewan particularly well-suited for the production of biofuels, including ethanol, biodiesel and biogas. There are three ethanol plants currently operating in Saskatchewan. In total, these three plants produce 167 million litres of ethanol per year, with total capacity scheduled to increase to 1 billion litres of ethanol and 400 million litres of biodiesel by the end of 2010. A new market derived from the co-products of wheat-based ethanol production is emerging. Wheat Distillers' Dried Grains with Solubles ( ) is high in energy, protein and fibre. is suitable for consumption by various classes of livestock as both an energy and a protein supplement. Saskatchewan currently has 150,000 tonnes of wheat available for sale, with that number expected to climb to 300,000 tonnes with the opening of a new ethanol plant. The presence of Potash Corp. and Viterra Inc. (formerly Saskatchewan Wheat Pool) also provides Saskatchewan with a strong global presence in the grain and food processing industry.

Business Case Analysis: World-class Advantages

Our analysis of IBM-PLI data shows that from both a profitability and quality point of view, Alberta, Manitoba and Saskatchewan offer superior advantages over competitor U.S. grain and food processing centres. Centres such as Brandon, Manitoba; Medicine Hat, Alberta; Red Deer, Alberta and Regina, Saskatchewan have a 10-15% cost advantage over important U.S. grain and food processing centres such as Wichita, Sioux Falls and Lubbock.

Key western Canadian advantages include ready access to raw materials (i.e., grains and livestock, etc.), low transportation and cold-chain costs, world class R&D facilities available in all three western Canadian provinces, and integration of the Agriculture sector into global value chains because of both the presence of large multinationals in Canada and the fact that Canadian firms such as the Canadian Wheat Board, Viterra Inc., Agricore United, etc. are themselves important global players in the grain and food processing industry.

Industry Structure and Competitive Dynamics: Global Competitiveness vs. Local Competition

It is interesting to note the structure of Canada’s food and grain processing industry, and the important role played by foreign investors in developing this sector in Canada.

In the Beef sector, for example, the processing of cattle in Western Canada has been dominated by two U.S. firms: Cargill Inc. and (until recently) Tyson Inc. Cargill Meat Solutions’ meat processing plant in High River, Alberta and XL Foods’ Lakeside plant in Brooks, Alberta (purchased in 2009 from IBP Tyson) together have a 95% market share of the Canadian finished cattle slaughter market. The majority of Canadian boxed beef is exported to the United States market, as a result of investments by both Cargill and Tyson.

In grain processing and handling as well, U.S.-based companies have had an important role to play in stimulating competitive developments in Canada and causing Canadian firms and co-operatives to compete globally. Faced with the high costs of refitting outdated mills in the United States, U.S. mills began purchasing Canadian mills to meet increasing demand for grain products in U.S. markets. Since 1990, milling companies based in the U.S. have invested substantially in the Canadian milling industry. In Saskatchewan, Grain Millers (Minnesota) acquired Popowich Milling in Yorkton in 2001, and in 2002, Michigan-based Dawn Food Products bought CPS Foods from the Wheat Pool, as well as Humboldt Flour Mills Ltd. In 2002, Agriculture and Agrifood Canada estimated that over 70% of Canada’s wheat milling capacity was controlled by U.S. interests⁵⁹.

These developments and investments in production capacity by the likes of Cargill, Bunge, Archer Daniels Midland, Louis Dreyfus Mitsui Foods, etc. have prompted the restructuring of some important Canadian institutions, particularly the formation of Viterra from Agricore United and the Saskatchewan Wheat Pool.

A look at the history of FDI in Canada’s Agriculture sector shows that Canadian inward investment policies are fairly liberal, with important areas such as milling and food processing open to foreign interests. Furthermore, in areas such as seed and chemical distribution and genomics, Canadian investment policies have resulted in investments by players such as Monsanto, Bayer, Syngenta, CF Industries and Terra Industries, among many others. As pointed out above, the presence of these global players has prompted M&A activity among Canadian firms and resulted in the formation of homegrown western Canadian companies that are global agribusiness players. These include companies such as Potash Corp., Viterra Inc., the Canadian Wheat Board and XL Foods.

However, not everyone is supportive of these developments in Western Canada’s food and grain processing industries. There is a significant amount of trepidation among Canadian farmers and ranchers about the high level of concentration in these value-added sectors, which effectively reduces farm incomes⁶⁰. There are also strong calls among primary producers for expansion of publicly-funded plant and animal breeding programs; the establishment of rights to save, reuse, exchange and sell seeds; changes in current variety registration and de-registration systems to stop the introduction of genetically modified seeds; and the establishment of clear competition rules preventing further consolidation in areas such as grain marketing and grain handling.

It is an increasingly tough challenge to balance the viability of agricultural sectors with the demands imposed by the global nature of agribusiness today, where scale is an important determinant of efficiency and global competitiveness. At one level, the responses have been uniquely Canadian: the formation of Viterra Inc. or the divestment of Potash Corp. has resulted in global operations that are substantially owned by Canadians. These and other western Canadian agribusiness companies compete effectively at the global level and source most of their inputs from Canadian sources. Nonetheless, it is tough to deny Western Canada’s farm crisis and the impact of forces of globalization on western Canadian farmers.

Foreign Direct Investment Implications: Targeting Smaller, but Higher-value-added Investments and International Markets

Thus far, investments in Western Canada’s food and grain processing industry have been limited to large investments and M&As in primary processing areas such as grain milling, grain distribution or boxed beef production where operations in Western Canada are vertically integrated with, primarily, U.S. markets. It is clear that while opportunities for consolidation in grain milling, grain distribution, fertilizer production, etc. will always exist in the North American and global marketplace, real global growth opportunities are also available in areas such as functional foods, nutraceuticals, natural health products and biofuel production.

Foreign investors face a number of constraints that are unique to the Agriculture sector when seeking a location for higher-value-added investments. Key factors include:

1. Investment cycles: Given that agricultural production and distribution have a high fixed cost at all stages of the value chain, there is a strong incentive throughout the value chain to stabilize volumes processed, schedule flows, optimize capacity utilization and meet regulatory requirements. To do this, most processors and distributors have established facilities closer to consumers and will only look at investing in new plants and operations when past investments have come to the end of their life cycles. The new investments also mean not just a new plant, but a different supply chain where raw material and distribution to wholesalers/distributors/retailers must be as efficient as, or more efficient than, existing supply chains.
2. Technology and regulatory cycles: The vertical integration of Western Canada’s beef industry with that of the United States is an excellent example of how technology and regulatory cycles can impact on foreign investment in an industry. In the 1990s, there were dramatic changes in traditional approaches to beef and pork production, with technology for disease control and regulatory changes mainly responsible for the vertical integration of all parts of the beef value chain, from cattle feed, cow-calf operations, stockers and backgrounding to finishing, packing and processing, etc. In other words, as technological and regulatory changes materialize (in areas such as packaged foods), foreign investors will seek locations that best meet their supply chain requirements.
3. Product cycles: A major constraint faced by foreign investors when seeking a location for higher-value-added investments in Western Canada (or any other location) is the perishability of many food products. This single fact has resulted in an entire supply chain and cold-chain industry that caters to the quick movement of agricultural raw material, from the farm, closer to the consumer’s plate, and limits the extent to which further processing can take place close to the farm. Therefore, it is not surprising, given Canada’s open investment climate, that most major investments in Western Canada have taken place in primary processing of agricultural commodities. Again, however, as product cycles are extended through the use of technology and regulations, secondary processing operations should materialize in Western Canada.

We therefore think that it will be important to encourage investments by niche food processors that focus on the production of end-consumer products and encourage these firms to establish plants and operations in Western Canada. Producers of functional foods, nutraceuticals and natural health products are particularly relevant here, because the value chain for functional foods and nutraceuticals differs from that of the standard food model. Three components are added to the value chain: research, technology development and product commercialization⁶¹. While these three components are also present in the value chain for conventional foods, they are generally considered insignificant. With functional foods and nutraceuticals, scientific research and technology development are often the driving force behind product development, and product commercialization takes on added significance.

Importantly, Western Canada has some great R&D facilities in the area of functional foods development. The Richardson Centre for Functional Foods and Nutraceuticals, which is part of the University of Manitoba, is the only centre of its kind dedicated to R&D of functional foods and nutraceuticals. Our research suggests that while other centres exist elsewhere, the Richardson Centre is the only one exclusively dedicated to the development of a market for this type of food category.