Tax Breaks Are Good-Faith Gestures, Not Determinants of Where to Build a Food Plant

April 26, 2016
Dozens of objective and subjective considerations enter into decisions on where to build a food plant.

Money talks, idle chatter walks, as polite society says. And the final stage of a new-plant siting decision or an existing-plant expansion usually is a discussion with local officials about the package of grants, tax abatements and training assistance they can provide a food or beverage manufacturer.

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Transportation, available land and a workforce with the skills and education needed to run a modern manufacturing facility are the top priorities for food and beverage companies. Nowadays, financial incentives play an icing-on-the-cake role, suggests Don Cunningham, CEO of Lehigh Valley Economic Development Corp., the Bethlehem, Pa., agency responsible for attracting businesses to eastern Pennsylvania.

Food manufacturers are one of Cunningham’s top priority sectors. He characterizes financial incentives as goodwill gestures of a community’s interest. “They may get minimal levels of incentives, but less than $2 million in tax breaks aren’t going to move the dial,” he says.

In some cases, good faith gestures are accompanied by a whiff of desperation. Consider New Jersey Economic Development Authority, which approved a $14.45 million tax incentive package last year to land a new headquarters and R&D center for Nestle Health Science. The tax breaks represent 20 percent of the project cost and will allow the Garden State to hold onto 60 Nestle management jobs already based there, plus 100 R&D positions currently in Minnesota.

Corporate offices can be built anywhere, ideally within a brisk walk from the CEO’s home. Food manufacturing facilities, on the other hand, need reasonable access to raw materials and customers and be serviced by solid infrastructure. Low-cost energy, a qualified workforce and long-term water availability also are priorities. When dozens of factors are weighed, a short list of shovel-ready sites remains.

State agencies often are the source of financial incentives, although the competition for a given project typically is between communities in the same state, according to Greg LeRoy, executive director of Good Jobs First, an advocacy group for economic development accountability. Strategies vary widely between states: New York leads the nation with $24 billion in grants and tax waivers, although that is spread over 743,964 projects. Pennsylvania’s largesse is $5 billion, but it is more concentrated and averages $514,456 per project, 61 percent more than New York's.

Rather than play the bidding war game, some development agencies are adopting strategies that emphasize the ripple effect of production on agriculture. The biggest state subsidy in 2015 was a $25.2 million package from Michigan to Clemens Food Group, which is building a pork processing facility in the state’s southwest quadrant. That will stimulate hog farming, which in turn will expand the livestock feed market.

A similar game plan on a grander scale is playing out in southeastern Ontario, the Canadian province that is home to about 3,000 companies generating $34 billion in annual food sales. Italian confectioner Ferrero Rocher commissioned a plant in Brantford 10 years ago. The maker of Nutella and hazelnuts enrobed in chocolate imports raw materials from Turkey, but fledgling hazelnut orchards in the province may provide long-term supply stability.

Hazelnuts are a new crop to the region, and the hardiness of the trees is uncertain. Nonetheless, provincial authorities are optimistic. Climate change could turn Ontario into North America’s breadbasket, suggests Jeff Leal, minister of the Ministry of Agriculture, Food and Rural Affairs. “It’s happening, and it’s happening quicker than people realize,” Leal says of global warming. Milder weather may be a factor in higher yields for oats and other existing crops, he intimates.

Baked goods constitute the province’s fastest growing food category. Annual sales gains of 3.5 percent are spurred by booming exports, much of it headed south of the border. The provincial government chipped in $5 million for a flour mill expansion under way at Parrish & Heimbecker Milling in Hamilton, Ontario. The $40 million project will be the first Canadian mill capable of blending multiple varieties of wheat, a common U.S. practice that plays to bakers’ just-in-time needs for custom blends.

One of several food production clusters in the province’s southeast, Hamilton — a.k.a The Hammer — is the industrial heart of Canada. Steel production is a shadow of its heyday, but the area is blessed with multiple transport options and proximity to U.S. border crossings. It also enjoys an abundance of an essential natural resource for both agriculture and food manufacture: located on the isthmus separating Lakes Ontario and Erie, Hamilton draws fresh water from both Great Lakes.

With the Canadian dollar fluctuating between 70-80 cents to the U.S. dollar, the region is drawing interest from U.S. food companies. But currency exchange rates are subject to dramatic shifts and are unreliable predictors of operating costs for a plant that will be in operation for 30-plus years. Long-term water availability, on the other hand, is on many food executives’ minds.

“Water definitely is an issue,” one site selection consultant agrees. Some food clients are asking site specialists to take a closer look at Canada and the Great Lakes states. One even requested an evaluation of tribal reservations because of the iron-clad water rights they enjoy.

Poverty is a chronic problem on many reservations. Ironically, that can be a site selection advantage. The federal New Markets Tax Credit program provides an incentive for capital projects in economically distressed areas with high unemployment — a description that mirrors that of many rural communities.

Douglas, Ga., doesn’t have a reservation, but poverty levels qualify it for the program. Premium Peanut LLC tapped into it to build a $50 million shelling operation that came on line in January. It is the first new U.S. shelling plant in 12 years, according to Karl Zimmer, Premium’s CEO, and the more than $6 million in investor tax credits it generated was “absolutely critical,” he says. The facility is expected to stabilize the market for Georgia peanut farmers who previously faced uncertainty over whether there would be a buyer for their crops.

Northeastern Indiana doesn’t qualify for the New Markets Tax Credit. Strong economic recovery has brought cities and towns “back to functionally full employment,” and the food sector “is doing great,” according to John Sampson, president and CEO of the Northeast Indiana Regional Partnership, the coordinating group for 10 counties in and around Fort Wayne.

Self-inflicted wounds

Collaboration with schools and training centers to ensure long-term availability of skilled and semi-skilled workers is a priority for organizations like Sampson’s. Workforce development is one of the region’s strongest selling points, he says, but quality of life and available social services are rising in importance for many employers.

Gov. Michael Pence didn’t do anything to enhance Indiana’s image in that regard last year when he signed a so-called religious freedom law widely viewed as discriminatory to gay people and others. Just as North Carolina currently is feeling the fallout from similar legislation, Indiana experienced negative repercussions. Angie’s List, for example, immediately canceled expansion of its Indianapolis headquarters when the Indiana bill was signed, citing problems it presented in recruiting and retaining talent.

“Quality of place was not looked upon as a top-tier consideration in the past, but in some cases it’s now in the top three,” says Sampson. “It is becoming increasingly important to consider, ‘Is this a community where millennials feel comfortable and will move to?’” If they have dependents with disabilities, they want to live in communities with a strong support network, he points out.

Food is one of the most stable manufacturing sectors, though pay scales trail. In Sampson’s region, food workers earn 71.2 cents for every dollar earned by manufacturing workers overall. Pay also is lower than average wages in all types of jobs. Nonetheless, food manufacturing remains one of the top targets for Sampson’s group.

“Backward” policies and discriminatory laws are not an issue in Pennsylvania, Lehigh Valley’s Cunningham asserts. Like his counterparts in Indiana and Ontario, his group is trying to align training and education programs with workforce development. “There’s a much deeper concern about the availability and skill levels of workers,” he says.

Nine of 2015’s 19 major projects in his region involved foreign firms investing in manufacturing capacity and drawn to the area’s proximity to New York, Philadelphia and the rest of the eastern seaboard. Available land, water availability and solid wastewater treatment infrastructure helped lure Bimbo Bakeries to the area in 2014, and French pastry maker Norac is building a facility in Forks Township.

Just as U.S. food companies are focused on international markets for future growth, foreign firms increasingly are eyeing the U.S. for the same reason. Financial incentives to build in a particular community are illegal in many European countries. In the case of Norac, the company accepted a $238,000 package of grants and tax credits but has shown no interest in a $2.4 million low-interest loan for equipment purchases.

Turning one’s nose up to financial assistance is un-American, but state and local taxes only constitute about 2 percent of a business’s cost structure, LeRoy of Good Jobs First points out. Instead of blank checks, economic development authorities should focus on building an infrastructure that will support the long-term viability of food manufacturers and other job creators.

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