Trade shocks put food and beverage margins under pressure: 2026 mid-year update

Each year, we revisit our Annual Food and Beverage Report to assess how sales and margins are evolving. The first half (H1) of 2026 was stronger than expected at the aggregate level: Canadian food and beverage manufacturing sales reached $88.1 billion, up 4% from the first half of 2025. That headline masks sharply different subsector results, however, and the outlook for the second half has become more challenging as geopolitical risks and trade measures add pressure on both revenues and costs.

Sales growth masks sharply different sector performance

Food manufacturing sales increased 4% year-over-year in the first half of 2026, but the gain was far from broad-based. As Table 1 shows, the increase was driven by higher prices rather than volumes: nominal sales rose 4%, while volume estimated from real sales were flat. Grain and oilseed milling led the sector, up 28%, followed by fruit and vegetable processing and animal food manufacturing, both up 7%. Dairy sales increased 4% and meat sales rose 2%. In contrast, sugar and confectionery manufacturing declined 8%, while bakeries and other food manufacturing were each down about 1%.

Beverage manufacturing was weaker, with sales down 3%. Brewery sales declined 7% and distillery sales fell 12%, while wineries were a notable exception, up 13%. These differences matter for the outlook: some industries entering the second half with weaker sales are also among those facing the new U.S. trade restrictions.

Table 1: Food and beverage manufacturing sales growth by subsector, H1 2026 vs. H1 2025

Sources: Statistics Canada, FCC Economics

Cost pressures are becoming more complicated

The cost environment facing food and beverage manufacturers has become more complex in recent months. The U.S.-Iran conflict has disrupted energy flows and shipping through the Persian Gulf, adding volatility to crude oil, fuel and freight costs. For Canadian food and beverage manufacturers, the effects are mainly indirect, through transportation, agricultural production, packaging, imported ingredients and distribution. These pressures vary by subsector, but they show how external events can quickly affect operating costs across the food supply chain.

As shown in Figure 1, higher energy, freight and raw material costs account for most of the increase from the pre-war year-over-year forecast (-3.7%) to the pre-tariff forecast (0.5%). The further increase from 0.5% to 1.9% reflects the additional cost pressures associated with the latest trade measures and Canadian counter-tariffs.

Figure 1: Trade and geopolitical shocks are pushing costs higher

Sources: Statistics Canada, FCC Economics

While geopolitical developments are affecting transportation and energy markets, trade measures are creating a separate set of challenges by influencing both production costs and access to export markets.

Trade barriers are hitting both revenues and costs

The latest trade measures change the risk profile for food and beverage manufacturers. On the export side, a 50% U.S. tariff creates a substantial price disadvantage for Canadian producers. Import restrictions are even more severe because covered products can no longer enter the U.S. market. The new Section 338 tariffs apply to covered goods regardless of CUSMA origin status.

Alcohol is one of the most impacted products by those new tariffs. Canadian distillery exports to the U.S. totaled nearly $1 billion in 2025, representing 46% of the industry’s gross revenue. That exposure matters for a sector where sales were already down 12% year-over-year in the first half of 2026.

Dairy is also exposed on both sides of the border. Just over $95 million in whey exports went to the U.S. in 2025, compared with more than $78 million shipped to other markets, making the U.S. the destination for about 55% of Canadian whey exports. Although the exposure is smaller than for distilleries, restrictions could still affect affected dairy processors. At the same time, Canadian processors rely on U.S.-sourced dairy and protein ingredients now covered by Canada’s counter-tariffs.

On the imports side, Canada imported approximately $1.1 billion of U.S. agricultural and food products now covered by the countermeasures in 2025 (Table 2). Most of these imports consist of products used in food processing and manufacturing, although the list also includes a range of consumer goods sold directly at retail. As a result, the effects may be felt throughout the value chain, from ingredient suppliers and food processors to retailers and consumers.

Table 2: Products covered by Canada's counter-tariffs and Canada's reliance on U.S. suppliers, 2025

Those counter-tariffs could have an even broader impact. Beyond direct food ingredients, approximately $6.8 billion of tariffed U.S. imports consist of products that may be used by food and beverage manufacturers, including containers, industrial materials, machinery and equipment and packaging materials such as plastic bags, paperboard containers, paper service articles, glass containers and light-gauge metal containers, with particularly important use in beverages, bakeries, fruit and vegetable processing and dairy. Because these products are also purchased by other industries, their full value cannot be attributed to food and beverage manufacturing. Nevertheless, they represent an important indirect channel through which counter-tariffs could influence costs across the sector.

If the measures remained in place for a full year, the base-case assumptions would imply $260 million to $500 million in potential tariff costs. However, the federal government's $7.5 billion support package and existing business support programs could help offset some of these pressures and firms may also change suppliers, renegotiate prices, use inventories, seek tariffs remission or pass part of the increase to their customers.

What could this mean for margins?

Food and beverage manufacturers continue to face a challenging operating environment, but recent trends suggest resilience in profitability. As shown in Figure 2, the sector’s gross margin index increased 1.9% in 2024, declined 1.2% in 2025, and is forecast to rise 2.1% in 2026 before easing slightly by -0.9% in 2027.

These margin estimates reflect the combined effects of higher energy, transportation and input costs, as well as the impact of trade measures on both production costs and export opportunities. As a result, the figures should be interpreted as the outcome of multiple overlapping pressures rather than the effect of tariffs alone.

The direct impact of the new trade measures appears limited in 2026 because most take effect only in September. The effect could become more noticeable if the measures remain in place through 2027, when higher input costs and reduced export opportunities would affect manufacturers for a full year.

The impact could be more pronounced in the subsectors most exposed to the new trade measures, particularly those that rely heavily on affected export markets or tariffed imported inputs such as Distilleries. Their ability to redirect exports, find alternative suppliers or pass higher costs through to customers will influence the final impact on margins.

Figure 2: Trade pressures weigh on the margin outlook

Sources: Statistics Canada, FCC Economics

Bottom line

Food and beverage manufacturing remained resilient in the first half of 2026, with sales up 4%. However, growth was largely driven by higher prices rather than stronger volumes, and performance varied significantly across subsectors.

The operating environment is becoming more challenging. Energy and freight volatility, U.S. trade restrictions and Canadian counter-tariffs are creating additional uncertainty around production costs and export opportunities.

The average impact on profitability appears modest in 2026 but could become more pronounced if the measures persist through 2027, particularly in the most exposed subsectors. Manufacturers’ ability to diversify markets, find alternative suppliers and adjust prices will be central to protecting margins.

Ulrich Zombre

Senior Economist

Ulrich leads development of the FCC Food and Beverage Report and delivers a range of analyses tailored to the evolving needs of the sector. With more than 15 years of career experience, he’s worked in areas such as food and beverage, fruit and vegetable production, and value chains.

Before joining FCC in 2026, Ulrich worked at Natural Resources Canada and the Quebec Ministry of Agriculture, Fisheries and Food, where he led research on the food processing sector. He also served as a public policy consultant to the World Bank. Ulrich holds a PhD in economics from L’Institut Agro Montpellier.