2006 Annual Capital Spending Outlook

The biggest or most plants are going to those proteins, but broad-based growth plans hint at an 11 percent increase in capital outlays this year.

By Dave Fusaro, Editor in Chief

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There are some real and widespread signs that capital spending will be up significantly in the food industry this year. At least for 21 of the largest companies, capital budgets this year appear destined for an 11 percent increase over 2005.

Meat and poultry appears to be the most active category, and pork products are particularly hot. Smithfield Foods and its subsidiaries are on a spending spree, with $354 million in projects all involving bricks and mortar expansions under way, although not all of that amount is allocated to the current year's budget.

But for the second year in a row, a cheese and whey plant takes the honor of being biggest project of the year. Hilmar Cheese Co., which already claims to have the world's largest cheese factory at its home in Hilmar, Calif., broke ground in March for its only other plant, in Dalhart, Texas. The 200,000-sq.-ft. facility will process 5 million lbs. of milk per day into bulk, natural American-style cheeses. The budgeted cost is $190 million over 10 years.

"Demand for cheese overall is strong, and our customers' demands are especially strong," says David Ahlem, site manager for Dalhart. All of Hilmar's cheese is sold in bulk to further-processors for private labeling or cutting and wrapping. "We see a good milk supply in the Texas panhandle area, and this moves us a little further east toward more customers." The plant will be built in phases with the first expected to be completed in late 2007. At startup it should employ 126.


2006 Capital Spending Report: Big Spenders chart
To view the "Some Big Spenders" chart, which provides a snapshot of food industry capital spending, click here.

Last year's biggest project was SouthWest Cheese Co.'s inaugural plant in Clovis, N.M., budgeted at $192 million.

"We're seeing more interest in bricks and mortar, and more bidding on massive projects," says Gerry Gomolka, vice president of process engineering at architect-engineering-construction (AEC) firm Stellar Group (www.thestellargroup.com), Jacksonville, Fla. "We're getting a lot of inquiries right now on new construction and major expansions. Whether that translates into contracts and plants being built, we'll have to wait and see."

"We're seeing more activity right now than we've seen in at least five years," concurs Burt Young, in charge of food and beverage business development in the Cincinnati office of CH2M Hill Lockwood Greene (www.lg.com), Spartanburg, S.C. And while he acknowledges continued busyness in meat, Young also says the activity and interest is broadening; he notes a lot of inquiries from beverage companies.

We asked a handful of capital spending questions last December as part of our annual Manufacturing Trends Survey. The answers were promising. Nearly 48 percent of the 273 respondents to the question said they were looking at 2006 capital spending budgets that would be up from 2005 - 13 percent got nominal increases, 20 percent budgeted 5-10 percent more and 15 percent planned on spending greater than 10 percent more. Forty percent were looking at "about the same" budget figure, and only 12 percent were figuring on less.

More than half (53 percent) said they were planning to expand operations in the new year. Only 12 percent said they were shrinking. On a question of production volume, 28 percent said they expected increases of 5-9 percent, 27 percent anticipated 10-19 percent more and another 20 percent predicted increases of 20 percent or more.

Two kinds of consolidation

Why all the activity in the meat industry? "It's the result of consolidation, but in this case the consolidation is cutting out the middle man," continues Young. Companies that once were little more than slaughterhouses are adding more sophisticated processing higher up the value chain.

C. Larry Pope, president/COO of Smithfield Foods Inc., one of the biggest spenders, explained to analysts last September: "We could sell a pork belly to another processor who makes it into bacon and we might make one or two cents a pound on it. When we go to convenient and fully cooked products, our margins double and triple, [and] those are the products that are growing today."

Not all the interest in pork is in the U.S. Maple Leaf Foods is constructing a C$110 million (US$95 million) pork processing plant in Saskatoon, Saskatchewan, which will replace a 65-year-old facility of its Mitchell's Foods subsidiary.

More often, the AEC firms see a different type of consolidation among their customers. "We're still seeing a lot of consolidation resulting from the merger and acquisition activity of the past few years," says Jim Haynes, facilities unit business director at Power Engineers (www.powereng.com), Boise, Idaho. "They're closing one or more plants, especially some that were acquired, and expanding others to give the company the same capacity at a lower cost."

"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.

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