Canadian food processing industries: Structure and recent changes

Archived Content

Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please "contact us" to request a format other than those available.

Canadian food processing industries: Structure and recent changes

The objectives of this paper are to review recent structural changes in Canadian food processing industries and describe how these industries are positioning themselves to take advantage of export opportunities and changes in their domestic market. The paper also compares the performance of Canadian food processing industries with international standards and competitors.

The Canada United States Trade Agreement (CUSTA) has created a free trade environment by eliminating tariffs over a period of ten years for most agricultural and food products. Pressure to compete in existing world markets and to find new markets to sustain the food processing industries’ growth will likely result in tariffs being less and less important in the long run.

Canadian food processing industries are large by any measure. In 1993, Canadian food processing industries represented 1.9 per cent of Canadian Gross Domestic Product (GDP). Food processors are Canada’s third largest group within manufacturing industries after transportation equipment and electrical and electronic products. (See figure 1.) In 1995, food processing industries employed 183,000 people, accounting for 10 per cent of total manufacturing employment. Food processing industries do not include economic activity associated with the production of primary agricultural products such as wheat, barley, oats and oilseeds shipped in bulk, live animals, fresh eggs and unprocessed fresh fruit and vegetables. Together, the agriculture industry plus food processing industries represent almost 5 per cent of total Canadian employment and about 4 per cent of GDP valued at factor cost.

The largest industries within the food processing sector include snack food, dairy, processed fruit and vegetables, meat and meat products and bakery products. Each industry accounted for 12 to 16 per cent of GDP within the food processing sector.

Canadian food processing industries, although considered mature, have registered steady growth since 1989. In 1995, exports by Canada’s food processing industries accounted for 17 per cent of total processed food shipments, an increase in export orientation (exports as a share of shipments) from 14 per cent in 1990. In particular, industries such as vegetable oil crushing, sugar and confectionery, other food products and bakery products became more export-oriented. Many Canadian food processors have seen new export opportunities in foreign markets. The value of the Canadian dollar in relation to other major currencies is likely to give Canadian producers an additional cost advantage in export markets.

The focus of this section is on the structure of food processing industries. This is accomplished through a review of their location, growth and impact of demographics, their consolidation and research and development initiatives.

Canadian food processing industries tend to be concentrated near major population centres. (See Figure 2). In 1994, Ontario had 42 per cent of all food processing industry shipments compared to 38 per cent of Canada’s population, followed by Quebec with 23 per cent of shipments (25 per cent of the population), the Prairies with 18 per cent (16 per cent of the population), Atlantic Canada 9 per cent (8 per cent of the population) and British Columbia with only 8 per cent of all shipments (13 per cent of the population). Food processing industries play a larger role in the manufacturing activity of the Atlantic and Prairies provinces where they account for over 20 per cent of all manufacturing shipments.

The average growth rate of annual shipments from 1990 to 1994 was highest in Ontario (3.3 per cent), closely followed by British Columbia and Atlantic Canada (2.8 per cent each), the Prairies (1.8 per cent), and Quebec (0.2 per cent).

Total shipments of processed food products reached in 1994 a total value of almost $36 billion (in 1986 dollars). (See figure 3.) Changes in shipments are likely the result of demographic and household composition changes in Canada and greater access to new markets abroad.

Canada’s population has been growing at an annual rate of about 1.3 per cent a year since 1980 and by 6.5 per cent over the 1990-95 period. This is marginally faster than in the United States. The continued growth of Canada’s population has resulted in a larger and more diversified market. Food processors are now faced with the challenge of serving such a market, which is composed of different segments (with different needs) all expanding at different rates.

During the period 1990-95, the decline in the number of people between the ages of 15 and 29 has been somewhat offset by the 4 per cent increase in the number of Canadians who are under 15. (See Figure 4.) It is expected that in the next decade, people under 30 will still account for almost 40 per cent of Canada’s population. This is welcome news for food processors since younger people usually eat more food than older people.

The number of people in their 30’s has increased by 9 per cent during the past five years, but will decrease by 8 per cent in 2006 as the baby-boomers grow older. Typically, many are faced with the challenge of juggling between raising young families and building careers. This busy pace combined with high labour force participation rates by women (57 per cent in 1995) will likely increase the demand for time-saving products such as prepared foods.

The largest segment of Canada’s population is composed of people in their 40’s which increased by 18 per cent over the 1990-95 period. This group, which currently represents 25 per cent of the total population, is expected to increase by an impressive 38 per cent over the next 10 years, possibly accounting for 30 per cent of the total population. Many of these Canadians, driven by concerns over maintaining good health, having higher disposable income (compared to when they were younger) and more leisure time, will likely increase demand for prepared foods that are not only nutritious but also convenient.

Seniors - those 65 years and over - increased by 14 per cent for the 1990-95 period. Their numbers are expected to increase by 23 per cent to 4.4 million people by 2006, representing over 13 per cent of the total population. The growth in this population segment represents a unique market segment of consumer who eat less, need reduced saturated fat, sodium, sugar and high fiber and calcium products, and likely to eat out less and shop at convenient place.

Immigration has averaged about 250,000 per year over the 1991-95 period, making a greater contribution to the growth of the Canadian population than the natural increase (births minus deaths). These people have come from all over the world and present new challenges to food processors which now must cater to a wider variety of tastes and preferences than in the past.

The changing composition of Canadian households is also influencing consumer food expenditure patterns, as the number of single-person and single-parent households continue to increase. The average size of Canadian households is also becoming smaller and in 1996, at 2.7 persons, was almost 8 per cent smaller than a decade earlier.

The combination of demographic shifts, a more culturally diverse population, and greater numbers of single-person and one-parent households suggest that domestic growth in food expenditures is likely to continue to be slow but steady. Demand for high quality prepared foods and foods prepared outside the home is likely to experience the most rapid growth. Canadian food processing industries will be catering to older, smaller and more culturally diverse households. With modest growth in domestic demand, the industry is expected to intensify efforts to expand exports, which have increased dramatically in recent years.

All these changes started to show up in the industry shipments in the 1988-94 period. Most notable is the 25 per cent surge in vegetable oil shipments, specifically canola oil, that reached $1.1 billion (in 1986 dollars) in 1994. Canola oil has become very popular with health-conscious consumers and is much in demand by restaurants, caterers and food processors.

Shipments of sugar and confectionery products and the other food products also increased substantially, by 24 per cent and 11 per cent. Shipments were likely fuelled by strong demand for prepared foods, fresh pasta, foods prepared outside the home and snack food products.

Shipments of processed fruit and vegetables, which stood at $2.9 billion in 1994, grew by 7 per cent during the 1988-94 period, perhaps in response to a growing awareness of the nutritional benefits of these products.

The value of shipments by Canadian fish processors decreased by 5 per cent to just over $2.3 billion despite higher prices. This decrease was likely a consequence of declining fish stocks rather than any change in consumer demand.

Canadians are drinking less milk and as a result shipments by dairies fell by almost 13 per cent to stand at $5.9 billion. This drop can be attributed in part to declining percentage of children and teenagers in the population, increased immigration from countries where milk products are not prominent in the diet and a growing preference for other beverages such as soft drinks and juices. There has also been a dramatic shift in the type of milk that Canadians are drinking, as a growing number of consumers pursue a lower-fat diet¹. On the other hand, probably the results would have been worse if it were not for the stronger demand for cheese (particularly cheddar) since cheese accounts for more than half of the total value of shipments by the dairy industry. Promotional campaigns designed to emphasize the nutritional benefits of cheese and increased demand for prepared convenience and take-out foods such as pizza are in part responsible for the growth in this area.

Over the 1988-94 period, the number of food processing plants in Canada declined by 11 per cent. (See Figure 5.) The size of the remaining plants increased during that period. The average shipments by plant (in in 1986 dollars) increased by 15 per cent while the average gross capital stock by plant increased by 36 per cent. Canadian food processing industries have undertaken tremendous efforts to become more competitive globally. Some factors, which may have contributed to this consolidation process, include changes in demand (both domestic and international), a freer trade environment following the Canada-United States Free-Trade Agreement (CUSTA) and changes in labour supply.

Employment in food processing fell over the 1988-95 period as the industry adopted labour saving advanced technologies. In 1995, it was 12 per cent below the peak employment level reached in 1988. Employment decline started prior to the 1990-91 recession and is the consequence of structural changes, not weakening demand, since shipments have increased during the period. (See Figure 6.)

Decreases in employment in food processing have affected both production and non-production workers equally. In terms of job loss, the most affected region was Atlantic Canada where 35 per cent or 8,600 jobs were lost over the period 1990 to 1995. Hardest hit was Newfoundland where 4,900 jobs - over half of its food processing jobs - were lost, largely a consequence of declining fish stocks and the resulting impact on the fishery. Prince Edward Island was the bright spot with a 145 per cent increase in employment mainly in the vegetables processing industries. British Columbia lost about 2,000, or 11 per cent of its food processing jobs. Quebec suffered a loss of 8 per cent or about 3,300 jobs. Employment fell in the Prairies by 3 per cent or 800 jobs and in Ontario by almost 3 per cent or about 2,100 jobs.

In 1995, the meat and poultry products industry employed 46,000 or 25 per cent of the total food processing employment, followed by the bakery products industry (27,000 or 15 per cent), the dairy products industry and other food products industries (24,000 or 13 per cent each), the fish products industry (17,000 or 10 per cent), the prepared flour, cereal foods and feed industry (16,000 or 9 per cent) and processed fruit and vegetables industries (16,000 or 9 per cent). The smallest industries (sugar and confectionery products and vegetable oil crushing plants) accounted respectively for 6 per cent and 1 per cent of the total employment in food processing. Over the 1988-95 period, the largest increases in employment were in the processing of vegetable oil (81 per cent), sugar and confectionery products (33 per cent) and dairy products (9 per cent). The largest decreases occurred in the fish products (38 per cent), processed fruit and vegetables (21 per cent) and other food products (20 per cent) industries.

Demographics may also explain structural changes that are occurring in food processing industries. During the mid-60’s to the mid-80’s, Canada was rich in terms of labour resources as the baby-boomers moved to the labour market. Labour was abundant and relatively cheaper than capital. This might have slowed down the incentive to borrow capital for investing in new technologies. Towards the end of the 80’s, the relative price of capital to labour decreased or remained stable while the relative quantity of capital employed to labour has increased. (See Figure 7.)

Food processing industries are not very capital intensive in comparison to the steel and automotive industries. At $48,000 per worker in 1995, net capital stock per worker is about half that of all manufacturing. However, annual growth rates for the year-end gross capital stock has been stronger than all manufacturing rates for the last 5 consecutive years. (See Figure 8.) The net capital stock of food processing industries grew by almost 5 per cent between 1991 and 1995.

Capital expenditures within the food processing sector on labour saving technology and corresponding reductions in employment levels raised the capital/labour ratio. The capital investment per worker increased by 10 per cent during the 1991-95 period. In 1995, the meat and poultry products and the vegetable oil crushing industries were the most capital intensive ($86,000 net capital stock per worker), followed by the dairy industry ($63,000) and the processed fruit and vegetables industry ($60,000). The other food products industry was the least capital intensive ($18,000 net capital stock per worker). Capital investment in the relatively small vegetable oil processing industry increased by $53 million to $62 million over the 1991-95 period due to the expansion of crushing capacity. Meanwhile, capital investment in the bakery products industry increase by $39 million (30 per cent).

Despite slow growth and fewer jobs, average weekly earnings increased in the 1990-95 period, an average 2.3 per cent per year. For the same period, unit labour costs fell marginally suggesting that structural changes were occurring, possibly involving the adoption of advanced technology and the substitution of "knowledge workers" for less skilled, lower paid workers. (See Figure 9.)

Research and development (R&D) expenditures by food processors were approximately $71 million in 1995, and provided direct employment for more than 700 highly skilled professionals and technicians. (See Figure 10.)

R&D expenditures, which represent an investment in the development of new products or processes but which companies typically treat as a current expense, were equivalent to almost 6 per cent of the food processing industries’ capital investment in 1995. At the same time, this R&D expenditure represented only 0.2 per cent of company revenues².

Adoption of advanced technologies in food processing industries has been fairly extensive with over 78 per cent of the group reporting the adoption of at least one type of advanced technology and almost 50 per cent reporting the adoption of more than 5 technologies. Advanced technologies include, for example, computer-aided manufacturing, automated material handling systems controlled by computers, computer controlled equipment serviced by robots and computer controlled automated sensor equipment.

Labour productivity, as measured by output per person-hour rose by almost 17 per cent for the 1988-94 period. (See Figure 11.) Gains are mainly attributable to the introduction of labour saving technology, reflected by increases in capital expenditures and shipments, reductions in employment levels and the achieved economies of scale with the consolidation of the food processing sector. For the 1988-92 period, the largest gains in labour productivity were observed in the sugar industry (47 per cent), vegetable oilseed crushing industry (39 per cent) and non-specified food products industries (27 per cent). Interestingly, productivity decreased in the poultry products industry by 15 per cent, in the feed industry by 13 per cent and by 11 per cent in the meat and meat products industry.

Productivity can also be measured by the value added per worker which is the contribution to GDP per worker (at factor cost). Value added per worker in food processing increased a sizeable 21 per cent, from $46,000 (in 1986 dollars) in 1988 to $55,800 in 1995.

Food processing accounted for about 4 per cent of Canada’s merchandise trade. In 1995, Canada exported $7.4 billion worth of food products, an increase of $2.4 billion (48 per cent) over the 1990-95 period. Although Canada has always traded heavily in food products, Canada’s export orientation (exports as a share of shipments) reached 17 per cent, up 3 per cent during the past 5 years.

Since 1992 export growth has been averaging 7 per cent a year for a total growth of $2 billion or almost 40 per cent over the 1990-95 period. Most food processing industries registered increases. The largest gains in value terms were recorded in the other food products ($610 million or 123 per cent), followed by meat and meat products ($514 million or 36 per cent), sugar and confectionery products ($262 million or 127 per cent), prepared flour, cereal and feed products ($248 million or 77 per cent), processed fruit and vegetables products ($232 million or 102 per cent), bakery products ($223 million or 138 per cent), and vegetable oil products ($211 million or 184 per cent).

The United States, which purchased 63 per cent of Canada’s total processed food exports, continues to be Canada’s largest single export market. Following the signing of the CUSTA, exports to the United States increased by a significant $1.8 billion (62 per cent) between 1990 and 1995. However, the Canadian share of the combined Canada-US food processing market declined from 8.3 per cent in 1988 to 7.1 per cent in 1994. (See Figure 12.)

North American, Japanese and South-East Asian markets were the best export growth areas for food processing industries from 1991 to 1995. Canadian food products are experiencing growth in exports to Asia and achieving significant success in penetrating new markets. Canada recorded a significant and growing surplus in its food products trade with Japan, which stood at $1.3 billion in 1995. However, Canada has lost markets and market share in the European Union (EU) following the 1990-91 recession.

A rapidly growing middle class in developing countries is contributing to the growth in demand for the higher value-added Canadian food products, particularly consumer-ready, highly processed packaged products such as breakfast cereals, cake mixes, biscuits, frozen dinners, pizzas and soups. The higher value-added industries offer the greatest investment and employment opportunities in Canada for the years to come.

International trade in food products has tended to lag that of other sectors, particularly manufacturing. Agriculture and food exports now account for less than 10 per cent of global merchandise exports, compared to about 25 per cent in the early 1960s.

Some of the more far-reaching changes to patterns of world trade in agriculture and food products may be the result of the recent economic reforms in the People’s Republic of China. China is unique in several ways. It is the largest remaining centrally planned economy. It represents one quarter of the world’s total population and its booming economy is rapidly moving towards a market driven system. China is now ranked as the sixth largest exporting country, compared to fifteenth in 1977. China’s share of world agricultural imports has remained stable over the past decade, at around 2.3 per cent but that is expected to increase as China’s economic reforms proceed. As China industrializes and shifts away from its agrarian roots, its appetite for food imports, from countries such as Canada, is expected to result in sharply higher demand and world prices for cereals and other food products.

Increasingly diversified markets and more intensive regional trade have dominated agricultural trade flows during the past few decades. The impact has been far from uniform but has not resulted in large shifts in overall patterns of agricultural trade. The closely integrated agricultural markets of Eastern and Central Europe and the former USSR became much more open to imports, particularly from North America and the EU, even before the reforms of the 1990s and the breakdown of the traditional regional trading systems. In addition, developing countries still depend to a very large extent on developed country markets as both suppliers of imports and outlets for exports.

Imports of processed food products have grown steadily since 1990 to reach $7.4 billion (40 per cent increase) in 1995. The largest increases in value terms were recorded in the other food products ($594 million or 56 per cent), followed by the fish products ($472 million or 76 per cent), processed fruit and vegetables products ($297 million or 33 per cent), prepared flour, cereal and feed products ($264 million or 92 per cent), sugar and confectionery products ($195 million or 26 per cent), bakery products ($159 million or 85 per cent), and dairy products ($122 million or 74 per cent).

The largest increases were in imports from the United States, which rose by $1.8 billion (65 per cent). This higher level of Canadian food imports from the United States was accompanied by a corresponding increase in the value of food exports by Canada to the United States, and represented a significant increase in two-way trade in the period since the signing of the CUSTA. Significant increases also occurred in food imports from the EU which rose by $140 million or 24 per cent between 1990 and 1995, and from Thailand ($165 million or 146 per cent), New Zealand ($52 million or 37 per cent), Australia ($47 million or 14 per cent), the Philippines ($18 million or 51 per cent), and Indonesia ($17 million or 71 per cent).

Import penetration, which measures imports as a share of shipments plus imports less exports, have increased by 3.2 per cent to reach almost 15 per cent for the processed food products over the 1990 to 1995 period. The largest increases occurred for fish products (10 per cent), bakery products (4.2 per cent), sugar and confectionery products (3.9 per cent), prepared flour, and cereal and feed products (3.8 per cent).

In terms of value added, at US$10.8 billion (expressed in terms of Purchasing Power Parities or PPP’s), the Canadian food processing sector is the smallest of those in the G-7 and Mexico. (See Figure 13.) However, this group of industries is important to Canadian manufacturing activity, representing 13 per cent of value added for the manufacturing sector, second after Mexico (19 per cent).

Canadian food processing industries are some of the most productive of the G-7 group and other countries. In 1993, at US$58,000 (adjusted for PPP’s), Canada is a close third to Italy and the United States in productivity, as measured by value added per worker, and well ahead of all the other G-7 countries.

In 1993, Canadian labour compensation per worker in food processing was US$30,000 (adjusted for PPP’s), which was the second highest in the G-7 following the United States (US$35,000). Mexico reported the lowest labour compensation per worker (US$10,000), but value added per worker is 22 per cent lower than a Canadian worker.

The ratio of the value added per worker over the labour compensation per worker (unit labour costs), which measure the cost of labour per unit of output, placed Canada (at 0.51), fourth lowest in the G-7 and Mexico, the lowest being Mexico (0.23), followed by Italy (0.41) and Japan (0.42). The United Kingdom (0.62) was the highest, followed by Germany (0.59), the United States (0.58) and France (0.54).

Some key indicators of the structure and performance of Canadian food processing industries have been reviewed. These industries have changed significantly over the last few years. Changing demographics and greater access to foreign markets, through international trade agreements such as the Canada United States trade Agreement (CUSTA), the North American Free Trade Agreement (NAFTA) and the General Agreement on Trades and Tariffs (GATT), are driving forces that have reshaped these industries. Firms in the food processing sector have undergone a process of consolidation while plant size has increased. More capital has been invested (more than likely in labour saving technology), while the number of jobs has decreased (probably fewer but more highly skilled workers). As a result, sizeable gains in productivity have been observed which place Canadian food products in a very competitive position to capitalize on growing international markets.

¹Thirty years ago, Canadians consumed 72 litres of standard (3.25 per cent fat) milk per person. By 1995, that amount had plummeted to just over 15 litres per person. The trend towards 2 per cent milk peaked in 1988, when consumption reached more than 62 litres per person. Since then, demand has fallen consistently as products such as 1 per cent and skim milk have become more popular. In 1995, Canadians were drinking more than 14 litres of one per cent milk per person, up significantly from 5 litres in 1990. Skim milk consumption, which has almost doubled since the early 1980's, has also continued its steady upward trend and in 1995 stood at 7 litres per person per year.

²R&D expenditures are likely understated because they do not include public sector funding of 12 university and 18 federal and provincial government food research facilities that are involved in food research and applied molecular biology.