2006 Annual Capital Spending Outlook

March 29, 2006
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.

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.

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.

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."

In addition to its new plant and other capacity projects, Campbell Soup is spending heavily on an ongoing implementation of an SAP enterprise resource planning system in North America. Sara Lee, too, is spending heavily on information systems technology and processes, primarily to standardize systems across North America.

Despite still watching its debt, Del Monte budgeted approximately $2.9 million on capital projects and other expenditures in connection with environmental compliance for existing businesses - "primarily for compliance with air emissions regulations, wastewater treatment systems and remediation activities."

Also, it's not just big companies that are investing. Ruiz Food Products Inc. rehabilitated a 265,000-sq.-ft. vacant building in Denison, Texas, for processing Mexican frozen hand-held foods. The warehouse opened last October, and the manufacturing facility began making product this January.

Kettle Foods has experienced a great couple of years making its signature chips out of its Salem, Ore., home base. Following double-digit growth over the past 10 years, Kettle is building a new plant to serve the eastern half of the country. Ground breaking is slated this month for 70,000 sq. ft. of manufacturing space in Beloit, Wis. When production begins toward the end of the year, the plant is expected to process 50 million lbs. of Russet potatoes each year, boosting overall company production by 50 percent.

"Demand is particularly high on the East Coast, where consumers still struggle to find our products on store shelves," says Tim Fallon, president/GM North America. "Building a plant in Beloit allows us to keep pace with demand while reducing the environmental impact of fuel and distribution." Kettle also is increasing capacity by 30 percent at it flagship Salem facility with $2 million in new fryers.


C. Larry Pope served notice last September to competitors in the processed meats business. The president/COO of Smithfield Foods said in a presentation to analysts he's betting $354 million Smithfield can become the leader in the category.

While not all of that funding is allocated to the current year's budget, that's how much Smithfield Foods and its subsidiaries have in expansion projects under way. They include a $100 million new plant in Kinston, N.C., and major expansions of the following:

Subsidiary Investment Location Products
John Morrell $92 million Sioux Falls, S.D. Sausage, ham and precooked bacon
Farmland Foods $68 million Denison, Iowa Cooked ham, sausage and hot dogs
Curly's $23 million Sioux City, Iowa Precooked ribs and beef
Northside $20 million Cummings, Ga. Precooked sausage
Gwaltney $15 million Smithfield, Va. Precooked bacon
Northside $14 million Arnold, Pa. Precooked sausage
Patrick Cudahy $13 million Sioux Center, Iowa Precooked bacon
John Morrell $9 million Springdale, Ohio Smoked sausage and lunchmeat

"Deli products to precooked ribs and beef and cooked ham and sausages to precooked bacon … there's a theme here," Pope explained at the time. "The theme is we're committed to this 2-billion-lb. processed meats business. We're committed to putting [forth] the resources and being the most efficient producer of these products in the marketplace.

"Here's how we see our processed meats business growing over the next several years: relatively stable [but] minor growth in the traditional products, and the value-added and convenience products growing dramatically … dramatically. When we go to the category [of] convenience and fully cooked products, our margins double and triple. We are moving this raw material from that 1- to 2-cent [margin] category to this 8- and 10-cent [margin] category, which gives us a profit margin five or six times what we can get from the fresh category. That is where those products are going."

New R&D centers for Tyson, Heinz, Wrigley

Capital spending will benefit not just the plant operations people. The lab coats have come out ahead, too.

The past 12 months saw new research and development facilities for some of the food industry's biggest names. Tyson Foods is nearing completion of its Discovery Center, a $52 million new building across the lawn from its Springdale, Ark., headquarters. In addition to R&D, it will include a pilot plant, training and consumer testing. It should total 184,000 sq. ft.

H.J. Heinz Co.'s new R&D center north of Pittsburgh opened last September.

Last summer, Wm. Wrigley Jr. Co. unveiled a $45 million product development lab and pilot manufacturing plant a few miles away from its Chicago headquarters. The two-building complex, designed for 250 workers, totals 193,000 sq. ft.

Also last summer, H.J. Heinz Co. dedicated a $13, million, 100,000-sq.-ft. R&D center just outside its hometown Pittsburgh, home to more than 100 chefs, food technologists, researchers, experts in nutrition and quality assurance and package designers.


Food processors are delaying their purchases of new equipment for new product production lines until they see that the products are indeed successful, according to empirical observations by officials at The Frain Group.

The Franklin Park, Ill.-based provider of used food processing and packaging equipment notes that its rental business grew 40% in 2005. A Frain Group spokesperson says customers have told them that the high failure rate of new products - estimated at 80%  - has left processors with idle machinery investments.

Another reason processors use pre-owned equipment is to gain better control over the time pressures they face. In addition, while used equipment is less expensive to purchase than new machinery, renting it can provide an even more compelling economic benefit.

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