2018 Capital Spending Outlook: A Flat Year for Food Plant Investments

With only a 2 percent increase in the Capital Expenditure budget, capital flows to hot categories like plant-based meats, French fries and pet foods.

By Kevin T. Higgins, Managing Editor

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Demand drives supply. Manufacturers who believe otherwise and expand capacity in hopes of increased demand litter the dockets of bankruptcy courts.

Just as Willie Sutton robbed banks because that’s where the money is, food companies build factories to make products that are in demand, preferably those with strong growth curves.

Case in point: French fry production. U.S. and Canadian companies are unmatched in terms of efficiency and throughput. The final sale may be at a McDonald’s in Asia, but odds are good that the spud was grown and cut in Idaho and other growing regions in North America. Global demand is increasing at a 6 percent clip, and North American processors are tooling up to meet it.

J.R. Simplot, Lamb Weston and McCain Foods have undertaken multiple greenfield and major expansion projects in recent years. As an encore to a 300 million lbs.-a-year line in Boardman, Ore., Lamb Weston is adding a twin in Hermiston, Ore., to the tune of $250 million.

That’s no small potatoes. Neither is the $16.2 billion in capital spending we’ve identified in this, our annual outlook on the subject. But that number is an anemic 2 percent increase over the budgets of the same companies from this time in 2017 (but a 14 percent jump over what was actually spent). Although the 38 companies in our report forecast $15.9 billion in 2017 capital expenditures, they only spent a collective $14.2 billion last year, a phenomenon that’s happened the past four years in a row. But not in our 2014 report, in which the $16 billion actually spent in 2013 exceeded the nearly $15 billion budgeted for that year.

Capital spending at those firms last year equaled 3.9 percent of sales, down half a point from 2016 but still on the high end of historical ratios.

Hot categories

Protein foods seem to be the most active segment, along with high-end pet foods, suggests Tyler Cundiff, vice president of architectural and engineering firm Gray Construction, Lexington, Ky. On the human foods side, many of the projects involve meat analogs based on peas and other plant-based proteins. “We are seeing activity in that sector, and not necessarily small investments,” he says. An example is Pinnacle Foods’ Hagerstown, Md., facility, a $32.7 million investment in the company’s Gardein product line.

Capital spending in food and beverage manufacturing generally is bullish, Cundiff and other A&E professionals say, a trend aided by the retirement of older plants that do not measure up to contemporary standards for food safety, efficiency and flexibility.

Adds David C. Dixon, food & beverage strategic business unit leader at O’Neal Inc., an Atlanta architectural engineering firm, “Many companies who entered the market only a few years ago are already building $50 million-plus plants.”

Manufacturers who cater to health and wellness are leading the capex charge. An example is Nellson LLC, a copacker of nutraceutical bars and powders that recently christened a $70 million facility in Ontario, Calif. Sales volume tripled in the past four years, according to Bart Child, senior vice president-commercial development, and the company projects 9 percent-plus annual growth over the next four.

Niche audiences for sports nutrition, wellness products and weight management bars are merging, justifying capacity investments, Child explained. A desire for more protein is the common denominator. His biggest challenge: procuring enough “alternative proteins” (peas, pumpkin, brown rice, etc.) because raw-material demand exceeds supply.

Beet consumption mirrors growth in nutritional bars, thanks to the root’s heart-healthy reputation. Raw beets account for much of the growth, but people also value convenience, and that’s the niche Love Beets sought to address 20 years ago when the UK-based firm started operations. The company relied on a New Jersey copacker when it began U.S. sales, then invested $25 million in a Rochester, N.Y., production facility that came on line in 2016.

“We’re getting close to maxing out,” reports Daniel Cross, managing director. “It is clear there are more people eating beets. We’re just scratching the surface.”

Love Beets is part of the growing wave of foreign direct investment in the U.S. generally and food manufacturing in particular. Investments in food, beverage and tobacco production topped $171 billion in 2016, up from $58 billion five years earlier, according to the Organization for International Investment.

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