OTTAWA — Canada’s food manufacturing industry will continue to stall over the next five years and will see growth in export markets but not domestically, reports the Conference Board of Canada.

In a report titled "Canada’s Food Industry: Industrial Outlook" The independent not-profit organization, specializing in economic trends, argues that "the export market has become a crucial source of growth" for the food manufacturing industry. Meat and dairy processing are the largest two sectors in the industry. But demand for beef, pork, poultry, and dairy, will be weak until 2010, the report says. The outlook for grains and oilseeds is only slightly better.

Meantime, the Ottawa-based board concludes that the higher value of the Canadian dollar will continue to be damaging to exports. "The Canadian dollar is expected to weaken modestly, but remain above US$0.85" to 2010.

"The food processing sector in Canada must also contend with rapidly changing consumer tastes," the report states. "For example, the popularity of low-carbohydrate diets reduced consumption of pasta, potatoes and other high-carbohydrate foods. Some industries, such as fruit and vegetable processors, are ideally suited to take advantage of these changing tastes, while others, notably beef, dairy and bakery processors, will have to invest in new product development to maintain their profits."

In exports, Canada’s top four destinations for food products are the United States (accounting for 69 per cent of exports by value), Japan, China (3.3 per cent) and Mexico (2.3 per cent). But there is considerably more potential for growth in exports to "developing economies, such as Mexico and China, where demand is more responsive to the rise in incomes that these countries are experiencing."

"One of the weakest performances in the food manufacturing sector."

Real production in the industry plunged last year by 10.2 % but there could be signs of hope.

"Changing consumer tastes are the major reason for the weak demand growth. Increased consumption of low-carbohydrate foods has detracted from demand for grain-based food products, while a growing preference for low-fat foods has reduced demand for fats and oils. A transition in demand towards imported oil products, such as olive oil is another factor."

Corn prices plummeted in the second half of 2004 and United States experienced two years of bumper harvests. However, "corn prices have been edging up this year, but not for traditional reasons related to the market for food. Instead, it is the quest for alternative fuels…Plans for new ethanol plants are being announced almost weekly. As a result, ethanol production could nearly double in over the next five years."

Beef forecast:

Remaining restrictions on beef due to BSE are expected to be lifted by the end of this year, meaning "BSE is expected to have a minimal influence on the outlook for the meat products industry." However, per capital meat consumption "is flat, at best, over time." In fact, domestic demand for beef actually declined 1.5 per cent in 2005.

Pork is the new phenomenon: Pork now accounts for the largest share of meat produced in Canada, accounting for 40 per cent of production by weight. Beef accounts for 33 per cent and poultry, 26 per cent. Mutton accounts for 0.7 per cent. Several large processing facilities have "allowed exports of pork products to more than double since 1999.

However, pork prices dropped to a near three-year low this year. "As pork accounts for the largest portion of the industry’s output, industry prices as a whole have declined. But with hog inventories now dropping, this source of deflation is also expected to fade over the course of the year."

Asian Flu continues to be a risk for the industry, although no affect on domestic demand has been noticed to date, "with per capita consumption actually rising in 2005. However, poultry consumption in some foreign markets has been negatively affected."

"Demand growth will stagnate," with real production growth averaging only 0.9 % per year.

"Per capita demand for dairy products has risen in recent years thanks to increased consumption of specialty products, such as yogurt and dairy-based drinks." But market saturation for newer products is near and, overall, demand for fluid milk is in decline.

Why? Competition ranging from juices, soft drinks and bottled water. Price is also a factor. "Since 1997, prices for dairy products have risen by 17 per cent more than they have for the entire food sector."

The largest demographic factor is the increasing population from east Asian countries, where very little milk is consumed. Also, import penetration of speciality products is expected to increase.