Alberta Bakery Manufacturing Industry by syz14012

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									Agri-Business Expansion


Agri-Processing

Alberta’s Dairy Processing Industry Synopsis

Introduction
This profile of Alberta's dairy processing industry is intended to guide strategies that support industry
growth and to establish benchmark information on Alberta dairy product manufacturers. The information
came from secondary research and interviews with over 50 per cent of the dairy processors in Alberta.

Dairy Industry Defined
Dairy manufacturers process dairy products for wholesale distribution from raw milk, processed milk and
dairy substitutes. Products manufactured include, but are not limited to: fluid milk and cream products,
milk beverages, cultured milk products, cheddar and specialty cheeses, processed and packaged cheese,
ice cream and ice cream novelties, skim milk and whey powders, condensed milk, butter and butter
blends, and goat and sheep milk and cheese.

These products fall under the North American Industry Classification System (NAICS) code 3115, 31151,
and 31152.

The Canadian Market Situation
The dairy industry is the fourth largest sector of the Canadian agri-food economy after grains, red meats
and horticulture. In 2003, dairy farming generated $4.5 billion in total farm cash receipts. During the
same period, sales from Canadian dairy processors amounted to $10.4 billion in value, representing 14 per
cent of sales in the Canadian food and beverage sector. From 1999 to 2003, the compound annual growth
rate (CAGR) of the market was approximately 4.4 per cent.

Canadian per capita consumption of dairy products has remained relatively stable in recent years. Fluid
milk consumption continues to decline, especially the consumption of whole and 2% partly skimmed
milk. The consumption of 1% partly skimmed milk and skim milk continues to show slight increases.
Despite the trend away from higher fat milk, all categories of cream are showing increases mainly due to
increased consumption of specialty coffees and desserts. Butter consumption is also increasing slightly as
a result of shifts away from margarine. The use of mozzarella in prepared meals and fast food, and the
sale of variety grated cheeses are part of the reason for an increase in consumption of specialty cheeses.
However, ice cream consumption continues to slide. With ever increasing varieties and flavours, yogurt
has been able to increase its overall appeal and per capita consumption.

Canada's orderly marketing system is designed to provide sufficient fluid milk for the domestic consumer
market that accounts for about 45 per cent of the total milk available. It also encourages the production of
sufficient volumes of industrial milk and cream to meet domestic demand for manufactured dairy
products such as cheese, yogurt and ice cream, as well as certain planned exports. In its facilitative role,
the Canadian Dairy Commission helps build consensus within the industry, which characterizes the
overall approach to orderly marketing in Canada's dairy industry.

The dairy processing sector is concentrated and mature, with 15 per cent of Canadian plants owned by the
three largest processors in the country. Parmalat, Agropur and Saputo process 70 per cent of the milk
produced in Canada. The competitive environment in a commodity market forces the larger processor to

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focus on cost efficiencies rather than new product development. Private label products are strong
performers in the concentrated milk, fats, spread and powdered milk sectors.

The maturity of the market and retailer consolidation is forcing dairy manufacturers to be more active in
new product and package development. Although changes in consumer trends are creating product
innovation opportunities, it is also creating challenges to design packaging that make dairy products more
convenient and easier to consume away from home.

Product competition within retail categories is on the rise as the substitution of dairy products with non-
dairy products is being driven by consumer demand. Soy, potato and rice beverages are all examples of
substitute products that are competing for traditional dairy product space and consumer loyalty. As the
demand for functional foods and better-for-you products increases, dairy processors will face a higher
number of substitute products.

In 2003, Canadian dairy exports totalled 179 million kilograms, representing a decrease of nine per cent
when compared to the previous year. This decrease can be attributed to the December 2002 decision of
the World Trade Organization (WTO) Appellate Body, which mentioned that Canada’s practice of
exporting milk through the Canadian Export Milk (CEM) program constituted an export subsidy. Since
2003, following the WTO ruling and uncertainty in the market, Canadian exports have continued to
decrease, while the volume of imports has been increasing.

In 2003, imports under International Trade Canada’s Imports for Re-Export (IREP) totalled 59.1 million
kilograms, an increase over the previous year. Between 1997 and 2003, the use of the IREP has increased
by 782 per cent. The sharp increase can be explained by the fact that some companies have substituted
milk supplies, from the now defunct CEM, with imported dairy products that are then processed and re-
exported either as dairy products or as further processed products. The main products imported under the
IREP are butter and milk fats, whole and skim milk powder, cheese, milk protein concentrates and casein
products.

The Alberta Dairy Snapshot
Alberta has 31 commercial dairy manufacturers involved in the production of both traditional and
specialty dairy products. In addition, there are 56 Alberta further processors that hold Special Milk Class
Permits. These permits allow processors to acquire dairy ingredients such as butter, cream and cheese for
secondary manufacturing.

The dairy industry is a highly controlled and regulated industry. Milk production and sales are regulated
through a Supply Management System (SMS). It is designed to provide a balance between the demand
for fluid milk and the supply of industrial milk. Alberta currently holds 6.9 per cent of the national Milk
Sharing Quota for industrial milk. Industrial milk is distributed to manufacturers within a cascading class
system in which priority is given to the production of Class 2 products (yogurt, sour cream and ice
cream), then Class 3 products (specialty cheeses and cheddar cheese). Generally, there is sufficient milk
to satisfy all of the processor demand, but there is also a production quota cap imposed by the SMS.

                     Figure 1: Size Distribution of Alberta Dairy Product Manufacturers,
                                        Based on Number of Employees (2004)




                                                                                                              2
                                            29%                                        13%
                                                                                             1-25, small
                                                                                             26-100, medium
                                                                                             100+, large


                                                                          58%


                           Source:              Alberta’s Agricultural Processing Industry Directory 2004,
                                                Info Canada Business Data Disk, and Statistics Canada
Alberta’s dairy industry is recognized as a mature industry. Three key dairy processing companies,
Parmalat Canada, Saputo Dairy Products Canada and Agropur Cooperative, dominate the Canadian
market and are firmly established in Alberta’s market. Lucerne Foods Ltd. (A Division of Safeway) and
Foothills Creamery also have a strong provincial market share. Saputo is Alberta’s largest dairy
processor, with five facilities.

An estimated 87 per cent of the dairy manufacturers in Alberta are small to medium-sized enterprises
(SMEs), with staff levels less than 100. Although they account for only 13 per cent of Alberta’s dairy
processors, the larger companies with more than 100 employees dominate the sector and the market.
These are state-of-the-art manufacturing plants that in most cases are producing large volumes of
traditional dairy products. The small and medium sized companies utilize the industrial milk supply to
manufacture a wide variety of both traditional and specialty dairy products. These include butter, ice
cream, yogurt, specialty cheeses and organic products.


Alberta to Canada, Industry Benchmarks
                      Table 1: Dairy Products (except frozen), NAICS 3115, and/or 31151, 2003
         BENCHMARK                                                        ALBERTA                CANADA             ALBERTA
                                                                                                                    SHARE IN
                                                                                                                    CANADA
                                             2                                 1
         Manufacturing establishments                                     45                     422
                                            2
         Number of employees (2002)                                       1,200                  17,538             6.8%
                              2
         Value of shipments                                               $1.007 billion         $10.4billion       9.7%
         Shipments growth 1990 to 2003                                    99.0%                  44.3%              -
                                                              2
         Total value of food and beverage shipments                       $9.5 billion           $73.7 billion      12.9%
                                                          2
         Share of food & beverage mfg shipments                           10.6%                  14.4%              -
                                        2
         Manufacturing value-added                                        $188 million           $2.5 billion       7.5%
                                    3
         Value of exports (31151)                                         $10.2 million          $292 million       3.5%
                                    3
         Value of imports (31151)                                         $5.2 million           $393 million       1.3%
                                                                      2
         Investment in capital machinery and equipment                    N/A                    $207.7 million     N/A
         Retail ACNielsen data (31151)                                    N/A                    $4.8 billion       N/A
                                                                                   4
         Under-utilized capacity                                          40%                    N/A                N/A
                                                                  2
         Average annual per capita expenditure (2001)                     $225                   $237               -
         Gross Domestic Product (current $)2                              $187.2 billion         $1,290.2 billion   15%
         Population                                                       3.2 million            32 million         10%




1
  Statistics Canada records 45 processors in 2003, while 2004 AAFRD estimate of processors is 31.
2
  Source: Statistics Canada.
3
  Source: Statistics and Data Development Unit, AAFRD.
4
  Based on 16 of 31 respondents of Alberta companies interviewed in 2004-05 by AAFRD.
                                                                                                                               3
The dairy industry is Alberta’s second largest food processing sector, generating over $1 billion in
manufactured shipments in 2003. This total represents about 10.6 per cent of total food and beverage
shipments. The growth in value of shipments is estimated at 5.2 per cent, when compared to the previous
year. In the 2002-03 dairy year (August to July), 6.2 million hectolitres of milk were produced, with about
3.4 million hectolitres or 55 per cent going into fluid milk products (milk, cream and milk beverages).
The remaining 45 per cent went to industrial uses (cheese, butter, yogurt, ice cream and other processing).
Although fluid milk shipments, the largest product category, have remained stagnant over the last several
years, the dairy industry’s total annual average growth rate (AAGR) from 1990 to 2002 is recorded as 2.2
per cent. This growth may be partly attributed to a rise in consumer demand for cheese, yogurt and ice
cream.
  Figure 2: Alberta Dairy Products: Sales of Manufactured and Value-Added Goods, NAICS 3115 (1990–2004)

                                Alberta Value of Dairy Products Shipments and Value-Added 1990 - 2004
           Value of Shipments
            and value-added




                                1,500
               (million $)




                                1,000                                                                      Sales of manufactured
                                                                                                           goods/shipments
                                 500                                                                       Value-Added
                                   0
                                        0

                                              2

                                                     4

                                                            6

                                                                   8

                                                                          0

                                                                                 1

                                                                                        2

                                                                                               3

                                                                                                      4
                                      9

                                               9

                                                      9

                                                             9

                                                                    9

                                                                           0

                                                                                  0

                                                                                         0

                                                                                                0

                                                                                                       0
                                   19

                                            19

                                                   19

                                                          19

                                                                 19

                                                                        20

                                                                               20

                                                                                      20

                                                                                             20

                                                                                                    20
                                                                        Year


  Source: Annual Survey of Manufacturers, Statistics Canada and Statistics and Data Development Unit of AAFRD
  NOTE: NAICS 3115 includes dairy product manufacturing and ice cream and frozen dessert manufacturing. 2002 and 2004 data
  suppressed due to confidentiality


Key Findings
   • Dairy manufacturers most frequently stated that market development through expanding to high-
      end retailers and specialty distributors, and pursuing well-developed market channels would
      strengthen their market position.
   • Driven by an increasing market demand by consumers seeking better-for-you (BFY) products
      such as yogurt, quality indulgent products such as high fat ice cream treats and specialty products
      such as ethnic cheeses, manufacturers see considerable opportunities to expand into niche
      markets and build consumer loyalty.
   • Increases in the cost of fluid milk as a raw material over the last decade has restricted the
      competitiveness of dairy products and the growth in value added.
   • Dairy product exports from Canada and Alberta have been significantly restrained since the
      December 2002 decision of the WTO Appellate Body which ruled that Canada’s practice of
      exporting milk through the CEM program constituted an export subsidy.
   • Less than 10 per cent of Alberta’s dairy processors or further processors are using programs such
      as the Import for Re-Export Program (International Trade Canada) and Duty Deferral Program
      (Canada Border Services Agency).
   • Alberta manufacturers encounter a high level of competition from outside Alberta borders.
      Imports of cheese from the United States and Europe, or butter from New Zealand and Australia,
      are often cost competitive even with the tariffs applied on the imports.
   • Controlling operating costs and lean manufacturing are critical for producers as they strive to
      offset high input costs, increase production runs and provide lower inventory flow costs.
   • Small to mid-sized operations have the opportunity and ability to pursue niche markets through
      specialization, product and package innovation, and unique value-added items as these products
      are more labour intensive, less likely to be mass produced and require shorter plant runs. This

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        allows small to mid-sized operations to differentiate themselves from large corporate dairy
        processors.
    •   There is a critical shortage of skilled workers in the industry and over 13 per cent of the dairy
        processors interviewed suggested this challenge will increase in the years to come. In addition,
        the lack of a stable, unskilled workforce is a major industry challenge.
    •   Dairy processing is considered a higher-risk business due to the high capital investment required
        for operation. The dairy industry's slow growth rate, high cost of ingredients and other escalating
        business costs (e.g. Workers’ Compensation Board, fuel and freight costs) are driving return on
        investment down. Thus, there is little or no incentive for new market entrants.
    •   Whereas large dairy manufacturers stated they are more interested in volume production to gain
        competitive edge through economies of scale, the majority of mid-sized companies focus on
        developing niche markets while trying to increase efficiencies and reduce per-unit cost to remain
        competitive. The majority of small companies are content with servicing local or regional
        markets.
    •   Companies viewed advanced research and development as a method to become and/or remain
        competitive by meeting evolving consumer and industry trends. Regardless of size, companies
        stated product innovation is pivotal in advancing market share.


Industry Resources

Government Contacts
Alberta Agriculture, Food and Rural
Development (AAFRD)
Agri-Business Expansion Division
Livestock Products Branch
Tel: 780-427-7325
Web site: www.agric.gov.ab.ca

Dairy Agencies/Associations
Canadian Dairy Commission (CDC)

The Dairy Processors Association of Canada (DPAC)

The Dairy Farmers of Canada (DFC)

Alberta Milk

Alberta Dairy Council

Tradeshows
American Dairy Products Institute/American Butter Institute Annual Conference
www.adpi.org/

American Cheese Society Conference
www.cheesesociety.org/displayconvention.cfm

International Dairy Deli Bakery Association Annual Seminar & Exhibition
www.iddba.org/conf.htm

Worldwide Food Expo
www.worldwidefood.com

Publications and e-Journals
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Dairy Foods Magazine
www.dairyfoods.com

Cheese Market News
www.cheesemarketnews.com
Cheese Reporter
www.cheesereporter.com

Web Sites
www.agr.gc.ca search “dairy”

www.cdc.ca/cdc/

www.milkingredients.ca

www.dairyinfo.gc.ca

www.dairyfarmers.org

www.albertamilk.com

Gathering and analysis of marketplace information contributed in part by InnoVisions and Associates. Information in this
document is provided solely for the reader’s information, and while thought to be accurate, is provided strictly "as is"
and without warranty of any kind, either expressed or implied.




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