Annual Capital Spending Outlook: More ham and cheese!

“Sometimes the combined production is going to a greenfield plant,” adds Gomolka. “It might just be the bigger players looking at new plants or considerable expansions, but everybody’s looking at anything that will save them labor. You look at the overhead structure of each plant and you realize you can save a lot by consolidating in fewer plants, even if you have to spend money to expand them.”

This year particularly, energy costs — both the efficient heating and processing that comes with a modern plant and proximity to markets for lower distribution costs — are on every food executive’s mind.

Smithfield Foods is building a new pork processing plant in Kinston, N.C., at a cost of $100 million. It’s part of a corporate strategy to add value and further-process meats in pursuit of higher margins.

2005 was challenging

Last year at this time, we said 2005 looked like it would be a modestly good year for capital spending. A snapshot survey of 10 of the largest food and beverage companies indicated at least a 5 percent increase in capital outlays. But as we pored over public financial filings, more than half of those same companies underspent their 2005 budgets, some significantly. Tyson, which budgeted $600-650 million last year, spent $571 million. General Mills forecast $450-500 million, then spent $434 million.

Of course, 2005 turned out to be a less than kind year for bottom lines. As companies reported their year-end results, many fell short of income projections. As their annual reports and 10K reports are published, many food processors are blaming the unexpected cost increases for energy, raw materials and acts of nature for lessened profits.

But last year’s biggest domestic act of nature, Hurricane Katrina, is giving rise to at least one significant new project. Minneapolis-based Cargill Inc. just began construction on a $100 million sugar refinery in Louisiana that will be the country's biggest. The refinery will be built at an existing Cargill grain shipping port in Reserve, La.

The project is a joint venture with Louisiana Sugar Cane Products Inc., a cooperative representing more than 700 cane growers that produce about 75 percent of Louisiana's sugar. The state produces roughly a third of the nation's cane sugar supply. Once complete, the plant is projected to produce 10 percent of all sugar consumed in the U.S.

Cargill and the co-op will split the cost and ownership of the refinery 50-50. Construction is under way, with production planned to start in 2008. The refinery initially would focus on producing industrial-grade sugar for the food business but could branch out into table-grade sugar.

Other big projects

Barilla America and Jacobson Warehouse Co. just last month announced a joint pasta-making facility and distribution center in Avon, N.Y. Barilla will spend $88 million on the 100,000-sq.-ft. plant and Jacobson will kick in $8.5 million for the 200,000-sq.-ft. warehouse. Some production is expected to begin in June 2007, with operations hitting full strike in June 2009.

Campbell Soup will spend approximately $360 million for capital projects in fiscal 2006, up from $332 million last year. This year will see a new facility in Everett, Wash., for the company's Stockpot subsidiary.

To view the "Major Projects for 2006" chart, which lists companies that are building or renovating facilities as well as the costs of those projects, click here.

Kellogg is spending mostly on “assets necessary for us to increase production capacity.” The company's 10K filing explained unabashedly: “We have introduced such popular products, and have supported them with such effective brand-building programs, that we need additional capacity to meet demand.”

General Mills reported that, among its $434 million in capital projects, it’s adding manufacturing capacity for the launch of Progresso microwaveable soup and Yoplait yogurt beverage lines.

Of course, not all capital spending money is being spent on bricks and mortar, or even other ways of expanding capacity. Accounting firm Grant Thornton, Chicago, reported from a 2005 survey that three out of four food and beverage companies expected to have a greater need for capital in 2006 than in 2005. While the majority of the surveyed firms planned to plow this cash into physical plants (48 percent), technology was not far behind, at 42 percent.

“We’re seeing a second wave of automation with a lot of mid-size companies now beginning to automate,” says John Gunst, packaging engineering manager at Power Engineers. “And a lot of money still is being devoted to information technology.”