A string of nearly perfect crop seasons, lower crop prices and accelerating consumer demand have sent earnings skyward for the U.S. food and beverage manufacturing industry, according to a new report issued by BMO Harris Bank. According to the report, first-quarter industry earnings reached an all-time high of $54 billion. With another bulky-looking harvest around the corner, the industry looks set for an even stronger performance ahead.
“After recovering from a tough start to the decade, the industry is now gaining momentum to drive earnings forward,” said Erica Kuhlmann, market executive and managing director of the Food, Consumer and Agribusiness Group at BMO Harris Bank. "An expected rise in rates over the longer term, trade challenges due to the strength of the U.S. dollar, and a potential rebound in commodity prices may negatively affect operating performance. But overall, the future is positive."
Aaron Goertzen, senior economist of BMO Capital Markets said the 1.6% drop in food prices over the past year looks to be jumpstarting growth in real consumer food spending. “Stronger demand growth, coupled with today’s generous margins, should push food and beverage industry earnings even further into uncharted territory.”
The outlook over the next few years is also broadly encouraging, according to the report. Although agricultural prices are expected to trend upward over time, they are unlikely to rebound in the near term as bulky crop stockpiles and large livestock herds should restrain market momentum, the report added.
On the demand front, a healthy labor market and sturdy household balance sheets are expected to propel real consumer spending by a respectable 2.7% in 2016 and 2.5% in 2017; should support real food demand as long as grocery prices remain in check. At present, interest payments consume just 1.4% of industry revenue. With low yields and spreads currently extending all the way across the term structure, the report suggested producers have a valuable opportunity to lock in current low financing costs. However, the anticipated increase in interest rates will maintain upward pressure on the U.S. dollar and perpetuate current trade challenges in some segments.