Food and beverage economic update: Vaccine rollout creates optimism
The FCC Quarterly Economic and Financial Market update reviews the global and Canadian economic environment so businesses can make well-informed decisions. Overall, the rollout of the COVID-19 vaccines and the lessening restrictions create optimism for the Canadian and global economies.
Canada’s GDP is expected to grow 6.2% in 2021, supported in part by commodity exports.
High GDP growth expectations are good news for food and beverage manufacturers - with more money in people’s bank accounts, consumer spending should increase in Q3 and Q4.
Supporting GDP in the latter part of the year will be a rebound in household consumption and service industries. Year-over-year, Q3 GDP growth is being pegged at 6.5%.
New businesses may flood the market thanks to opportunities related to consumer product shortages, and that includes food manufacturing.
The value of the Canadian dollar is projected to average 81.3 U.S. cents in 2021, which could impact exports, as Canadian products are not as competitive on the global scale with a higher dollar.
The stronger dollar, however, is beneficial to manufacturers importing inputs from the U.S.
Challenging the food and beverage sector is rising inflation and the likelihood of resulting interest rate hikes, increasing the cost of borrowing.
CPI inflation in Canada should average 2.3% in 2021, peaking above 3% into summer before lowering in the fall.
Although the Bank of Canada overnight rate is likely to remain unchanged at 25 basis points in 2021, expect them to climb in 2022. Long-term interest rates could rise in response to inflationary pressures.
For Canadian food exporters, ongoing shipping and transportation challenges could raise a concern through the summer.
A container shortage, especially for those trading with Asia, has caused the Baltic Dry Index to leap 11.8% year-to-date, causing sea freight rates to soar to five-year highs.
In 2020, nearly 10% of Canadian agriculture and food sales — excluding fish — came from exporting to Asia. Manufacturing capacity in China has surpassed pre-COVID levels, causing trade imbalances atypical of the North American supply chain.
Operating without COVID worker restrictions, the Port of Shanghai is an estimated 60% more productive than the Port of Los Angeles, and Asian producers consequently are paying premiums to expedite the return of containers and ships.
Empty twenty-foot equivalent (TEU) as a percent of total exported TEUs have been rising for years but reached their highest levels in 2021, with Port of L.A. hitting a whopping 75%, and Port of Vancouver 49%.
For Vancouver’s port, the percentage of TEU containers exported empty rose to 43% in Q1 2021, up significantly from 25% the same time a year ago.
The port is also taking longer to unload and load a train — five days versus the optimal three — but subsiding North American supply chain disruptions should gradually ease shipping issues.
Exporters have already felt the effects of higher shipping costs over the Pacific and delays at ports.
A strong GDP that is expected to continue strengthening is good news for Canada’s food and beverage manufacturers – money in people’s bank accounts means consumer spending should increase in Q3 and Q4. At the same time, rising inflation and the likelihood of resulting interest rate hikes could increase the cost of borrowing.
Article by: Richard Kamchen