2013 Capital Spending Outlook: Processors Invest in the Tools of Production, Not Brick and Mortar

Balance sheets look strong, but food companies are holding the line on capital projects, projecting only a 5.4 percent increase this year.

By Kevin T. Higgins, Managing Editor

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That level of spending may be an aberration, but it will impact other industry sectors. Together, Chobani's newest facility and the soon-to-be-completed Muller-Pepsico yogurt plant in upstate New York will generate byproducts that will create production opportunities for other manufacturers.

American-style Greek yogurt typically is made with low-fat milk. Before pasteurizing raw milk, yogurt processors separate the fat and sell it for other uses. Sales of Greek yogurt and butter prices are moving in opposite directions. Rising supplies also present capacity-expansion opportunities for creameries and other milk fat users.

One of Chobani's new Idaho neighbors is Glanbia USA, which specializes in fractionating milk solids, primarily proteins. If research on isolating elements in fat pays off, Glanbia could tap into a huge source of locally available raw materials. Another ripple effect from a million-square-foot dairy is that, within 36 months, hundreds of thousands of spent milking cows will start moving into retirement. That will spur capital projects for Italian meatball manufacturers and others.

Jobless recovery

New-plant construction has trended downward since 2006, when America's real estate bubble peaked. Modernization programs at several major food companies are winding down, though a number of brick and mortar projects continue to come on line.

J.M. Smucker goosed its spending plans three years ago when it unveiled Project Heritage, a plant rationalization and new facilities initiative. Most of the work is now in the rearview mirror; budgeted spending is down 23 percent in fiscal 2013. The same year Smucker started Project Heritage, Hershey Co. announced its Next Century project, a similar effort to modernize facilities and replace obsolete plants. Next Century also is expected to wind down after this year.

The power of automation to downsize the workforce is reflected in both initiatives. Hershey expected to eliminate 500-600 jobs by shuttering a century-old plant and spending $226 million to modernize and expand its West Hershey facility.

Smucker also replaced a legacy facility in its Ohio hometown, sharply increasing capacity while eliminating 700 positions, or 40 percent of the staff. Another 150 layoffs were calculated from the closing of two additional plants, although growing peanut butter sales prompted Smucker to pivot on the previously announced shutdown of a Memphis facility. Instead, the ROI on equipment upgrades proved irresistible when local authorities delivered $6.3 million in tax breaks for the plant.

Even more dramatic reductions in force are playing out in Idaho, where J.R. Simplot is completing work on a highly automated potato processing plant. Production from three existing facilities will be consolidated, resulting in a net loss of 500 jobs. At an estimated cost of $330 million, CEO Bill Whitacre describes it as the company's largest single investment in its home state.

High feed prices and uncertain demand have conspired to put some greenfield plans on hold in the protein sector. Sanderson Farms pulled the plug on a new facility that had been announced last August, although other factors also were in play. After the selection of Nash County, N.C., was announced, individuals in a neighboring county filed a slew of legal challenges. Economic development agencies are not just hungry, they are litigious.

What's inside the building is more important than the walls that surround the equipment, of course, and food companies are updating their machinery and installing advanced technology at a steady pace. The investments are as likely to occur in the mid-tier market as at major corporations' plants, according to Chris Nay, senior managing director of food and beverage in the Chicago office of GE Capital, Corporate Finance.

Lending a sense of urgency to projects is the uncertain future of accelerated depreciation schedules. The so-called bonus depreciation was renewed for 2013, but future tax advantages depend on action by a dysfunctional Congress. Given the uncertainty, many privately held food companies are pulling the trigger now on improvement projects, says Nay.

Tyson Foods is more focused on value-added production than bricks and mortar. No new plants are on the horizon or in the recent past, but the company is in the midst of $40 million in production improvements at four facilities. The majority of the spending was in Glen Allen, Va., and Jacksonville, Fla., at plants serving foodservice customers. Retail-oriented facilities in Goodlettsville, Tenn., and Sherman, Texas, are still adding capacity to produce case-ready meats.

Outlays to support food safety initiatives are a high priority, as are plant-floor investments to boost efficiency and capacity, says Nay. Snack food manufacturers have been particularly aggressive, thanks to innovative new products and the transition to better-for-you snacks.

Food safety concerns and migration to natural ingredients are rippling down to the supplier level. To lower water activity and extend shelf life, many suppliers of flavors and fragrances are turning to spray drying, reports Richard DiBernardo, project engineering director at Initech, a Saddle Brook, N.J., engineering firm specializing in batching systems. Both tolling services and ingredient suppliers are adding spray driers to meet rising demand. "Industry-wide, there is a general capacity issue," he says.

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