### 2004 INDUSTRY OUTLOOK FOR PROCESSED FOODS

Food Manufacturing Industry Definition

The food manufacturing industry (NAICS 311) transforms livestock and agricultural products into products for intermediate or final consumption. Subsectors in this category in clude animal food manufacturing (NAICS 3111), grain and oilseed milling (NAICS 3112), sugar and confectionary product manufacturing (NAICS 3113), fruit and vegetable preserving and specialty food manufacturing (NAICS 3114), dairy product manufacturing (NAI CS 3115), meat product manufacturing (NAICS 3116), seafood product preparation and packaging (NAICS 3117), bakeries and tortilla manufacturing (NAICS 3118), and other food manufacturing (NAICS 3119).

Establishments primarily engaged in manufacturing bevera ges and tobacco are classified separately in Subsector 312, Beverage and Tobacco Product Manufacturing and are not covered in this chapter.

U.S. Domestic Industry Overview

The food manufacturing industry is one of the United States’ largest manufacturing

s ectors, accounting for more than 10 percent of all manufacturing shipments. The processed food industry has experienced steady growth over the 1997

- 2003 period. In 2003, the value of food shipments was $461.6 billion, an increase of 9 percent from 1997

sh ipments of $421.7 billion (see chart). 1 In 2003, the ten largest U.S. companies in this sector were Altria (Kraft Foods), ConAgra, PepsiCo, Archer Daniels Midland, Cargill,

Coca

- Cola, Mars, Anheuser

- Busch, Tyson Foods, and Dean Foods.

Value of Processed Food Industry Shipments 1997-2003

400 410 420 430 440 450 460 470

1997 1998 1999 2000 2001 2002 2003

yearshipments (in $billions)

Shipments

1 This chart reflects growth in current dollars, not real dollars and does not account for changes in inflation.Demand for processed food products is less affected by economic upswings and

downswings than other industries since food is a necessary purchase. Historically, the industry has had a high level of merger and acquisition activity and consolidat ion and reorganization have continued, although at a slower pace than in the past. The processed food industry has become increasingly global, as companies in the industry have expanded production and distribution into foreign markets.

Technological cha nge has played an important role as production becomes increasingly automated and companies invest in new technology. Productivity gains from automation have increased output while leaving employment levels relatively stable. Investment in advertising an

d new product development is also significant.

Nature of the Industry

Processed foods are “value

- added” products, referring to the fact that a raw commodity or commodities are transformed into a processed product through use of materials, labor,
and tech nology. Any product that requires some degree of processing is referred to as a processed product, regardless of whether the amount of processing is minor, such as for canned fruit, or more complex, such as for snack foods.

Of the subsectors that make u p the food manufacturing industry, the largest four: meat products; dairy products; fruit and vegetable preserving and specialty food; and other food, made up 65 percent of total industry shipment values of $451 billion in 2001.

Other sectors included bak eries and tortilla manufacturing, which accounted for 11 percent, grain and oilseed milling (10 percent), sugar and confectionary (6 percent), animal food manufacturing (6 percent) and seafood products (2 percent).Food Manufacturing Industry, Value of Shipments by Sector 2001

27%

15%

12% 11% 11% 10% 6% 6% 2% Meat Product Mfg- $125
billion

Dairy Product Mfg- $65
billion

Fruit & Veg. Preserving & Specialty Food Mfg.- $52
billion
Other food Mfg- $51 billion

Bakeries and Tortilla Mfg- $49 billion

Grain and Oilseed Milling- $46 billion

Sugar & Confectionary Product Mfg- $25 billion

Animal Food Manufacturing- $26 billion

Seafood Product Preparation and Mfg- $8

billion

U.S. Census, Annual Survey of Manufacturers, 2001

Employment

E mployment in the industry increased slightly from 1.50 million in 1990 to 1.51 million in 2003. Better technology and increasing automation allowed companies to increase production while holding employment steady. The meat industry employed the largest

n umber of workers in 2003 employing 34 percent of total industry workers.

Industry Employment 2003 (thousands) %

Food Manufacturing 1518.7 100.0
Ani mal Slaughtering and Processing 515.4 33.9 Bakeries and Tortilla Mfg 292.5 19.2 Fruit & Veg Preserving and specialty 183.8 12.1

Other Food Products 152.8 10.0 Dairy Products 136.3 8.9 Sugar and Confectiona ry 83.8 5.5 Grain and Oilseed Milling 61.8 4.0
Animal Food 49.7 3.2 Seafood product prep and pkging 42.6 2.8

Source: Bureau of Labor StatisticsGeographically, the largest percentage of workers in the indus try is concentrated in

California, making up 11 percent of the food processing industry workforce in 2003. Texas, Illinois, and Pennsylvania employed significant percentages of the food processing workforce at 6 percent, 6 percent, and 5 percent respecti vely with the rest of the workforce fairly evenly distributed across the United States (see chart).

Source: U.S. Department of Labor, Bureau of Labor Statistics, 2003 State Employment for Food Manufacturing

Consolidation is Slowing

According t o the Food Institute, there were 415 mergers and acquisitions in the food manufacturing industry in 2003, which reflects the fact that the industry continues to consolidate. The slow economy resulted in less activity than in past years, down from a high o f 813 mergers in 1998. The Economic Research Service of the United State Department of Agriculture (USDA) notes that consolidation or mergers can be in a company’s interest in order to take advantage of more efficient manufacturing plants and
close ineff icient ones, or quickly expand a firm’s product lines by acquiring market share

in a mature domestic market.

Consolidation among food retailers increased from 27 mergers and acquisitions in 2002 to 42 in 2003. Despite increased consolidation, prices have remained low due to discount
retailers such as Costco and Wal

- Mart that sell large volume food products. Also, more consumers are buying from restaurants and take out establishments, which compete with food retailers. According to USDA, in 2002, 46 perc ent of the food dollar was spent on 2003 Employment in Processed Food Industry by State

>10% total employment

5

- 10% total employment

1

- 5% total employment >0 but <1 % employment 0 employmentfood away from home while spending for food at home was 54 percent. Competition

between warehouse clubs, traditional retailers, and restaurants has kept the rise in food prices below inflation levels.

Food Prices

Accord ing to USDA, in 2002, families spent only 10 percent of their household disposable income on food; 6 percent on food consumed at home and 4 percent on food consumed away from home. The consumer price index (CPI) for food rose 2.2 percent in

2003. Due to sustained economic growth, consumer demand for food is expected to increase with rising disposable personal income. Consumer demand, marketing costs, and commodity prices can have an effect on food prices.

Consumer Trends

Demographic factors affect de mand for processed food products in the U.S. market. The Hispanic population continues to grow rapidly and processed food companies are developing new products for this population. Convenience products and snack foods are also popular and cater to double income households and consumers who are generally short on time. Frozen foods are doing particularly well due to their convenient and quick preparation. Snack bars that are positioned as portable meals are in demand by
consumers with little time for a si t down meal.

Other factors affecting demand for processed food in the U.S. market include concern about dieting and obesity, which are generating interest in weight

- loss food products and
low

- carbohydrate options due to the popularity of the Atkins diet. The sports and fitness market is growing, and products that offer nutrition and energy benefits are popular.

Organic food is another market segment that is growing rapidly due to increased consumer interest in healthy products. Organic food can now be f ound in traditional supermarkets, natural food stores, and other retail markets. According to DataMonitor, the U.S. organic market is projected to reach a value of $30.7 billion by 2007 with a five

year annual compound growth rate of 21.4 percent between 2002 and 2007. USDA estimates that organic product sales were more than $11 billion in 2003 and will reach almost $22 billion in sales in 2010. Although USDA and DataMonitor figures differ, both indicate the rapid growth of this segment of the processed food industry. Popular organic products include fresh produce, nondairy beverages, breads and grains, packaged foods, and dairy products. In response to rapid growth in the industry, USDA issued new Federal standards for organic food in October 2002. In accord with the new standards, a certified organic processed product must use at least 95 percent organic ingredients to be labeled or represented as organic.

U.S. Processed Food Trade

The U.S. processed food industry is a major participant in the global economy, active in both exporting and foreign direct investment. In 2003, the U.S. processed food industryexported $26.7 billion of product and imported $23.7 billion. Weakness of the U.S.

dollar contributed to the growth of food exports. The processed food industry’s trade surplus has been narrowing over the last several years and in 2003, dropped to about $3

billion. 2

U.S. International Trade in Processed Food

1997-2003

0 5 10 15 20 25 30

1997 1998 1999 2000 2001 2002 2003

year($ billions) Exports

Imports

Balance

Source: U.S. Dept of Commerce, U.S. Treasury, International Trade Admin.

Almost half of the world’s top 50 food processing firms are headquartered in the United States (21 out of 50 in 2003 according to Prepared Foods)

. Acquisitions and mergers have resulted in consolidation of some of the largest companies in the industry. In 2003, 15 of the top 25 food and beverage companies worldwide were U.S. companies. Major foreign comp etitors were Nestle (Switzerland), Unilever (England), Diageo (England), Groupe Danone (France), Kirin Brewery (Japan), Asahi Breweries (Japan), Snow Brand Milk Products (Japan), Heineken (Netherlands), Cadbury Schweppes (England), and Nippon Meat Packers (Japan).

According to USDA, global food consumption patterns are changing, leading to increased trade and demand for processed food products. Improvements in transportation, higher income, and consumer perceptions of quality and safety are important fac tors affecting sales of processed food. Income growth in developing countries has resulted in increased demand for meat products which may in turn drive demand for imports of products such as animal feed. In countries with low

- income levels, consumers ne ed to meet basic calorie requirements and any increases in income lead to consumption of carbohydrates, which are high in calories. In higher income countries, consumers are able to meet their basic calorie needs and, thus, demand for food is driven by ta ste, cultural trends, quality, and convenience. In developed countries, higher income growth has led to more demand for high value added and better quality processed food products. Increased demand for these items can be met domestically and/or by increa sing imports.

2 This chart reflects growth in current dollars, not real dollars and does not account for changes in inflationStandards for food safety vary across countries with wealthier countries often having

stricter food safety regulations. Consumers in these countries are willing to pay more for increased food safety. Differing standards for food safety ca n affect trade patterns since producers may find adhering to an exporting country’s regulations costly. Alternatively, when domestic regulations are strict, domestic producers may face increased costs of production relative to importers and thus have an i nterest in applying the same sets of standards to their competitors. In response, countries are working within international organizations and multilateral trade agreements to move towards mutual recognition of systems and harmonization of standards.

T op International Markets for Processed Food Products

In 2003, five foreign countries accounted for 62 percent of U.S. processed food exports: Canada (21%), Japan (15%), Mexico (15%), Korea (7%), and China (4%).

In 2003, five countries accounted for 53 perc ent of U.S. imports of processed food products: Canada (31%), Mexico (7%), Australia (6%), New Zealand (5%), and Italy (4%).

The 1994 North American Free Trade Agreement (NAFTA) is one factor that spurred trade growth and foreign direct investment in proce ssed food between Canada, the U.S., and Mexico. The United States is the largest source of foreign direct investment in Mexico’s processed food industry. Because U.S. food processing affiliates in Mexico export only about 25 percent of their sales to the U.S., demand is dependent on the status of the Mexican economy. Increased trade and foreign direct investment between Mexico, Canada, and the United States, due to NAFTA, have created a regional food market and can mean more efficiency in providing food to consumers due to extended growing seasons, expanded consumer choice, and increased food quality.

U.S. Trade Patterns in Food Manufacturing (NAICS 311) in 2003

(millions of dollars; percent)

Exports

Region Value Share, %

NAFTA 9,608 36

La tin America 2,192 8 Western Europe 2,464 9 Japan/Chinese Economic Area 6,566 25
Other Asia 3,193 12

Rest of World 2,677 10

Total 26,700 100

Top 5 Countries Value Share, %

Canada 5,561 20

J apan 4,129 15
Mexico 4,046 15

Korea 1,862 7
China 1,116 4Imports

Region Value Share, %

NAFTA 8,869 37
Latin America 2,682 11 Western Europe 4,726 20 Japan/Chinese Economic Area 1,464 6
Ot her Asia 2,781 12
Rest of World 3,178 13

Total 23,700 100

Top 5 Countries Value Share, %

Canada 7,319 30
Mexico 1,549 6
Australia 1,375 5

New Zealand 1,101 4 Italy 1,068 4

Values may not sum to total due to rounding Source: U.S. Department of Commerce, Bureau of the Census

According to the U.S. Department of Agriculture, the best markets for processed food exports in the top five countries are the following:

Canada : Snac k foods, organic foods, seafood, pet food, processed meat

Japan : Pork, beef, tuna, crab, pet food, cheese, flatfish, prepared whole tomatoes, chocolate confectionary, fresh and frozen berries, frozen desserts, frozen pizzas

Mexico : Meat, fish and seafood, frozen desserts, sauces, snack foods, healthy foods, and food ingredients

Korea : Red meat, poultry meat, seafood, processed potatoes, frozen vegetables, sauces, confectionary, bakery products, pet food, processed fruits and vegetables

China : Red meat, pou

ltry meat, dairy products, processed fruit and vegetables, snack foods, salmon, crab and crabmeat, tree nuts, fish paste, roe and urchin, egg products, pet
food

Major Trade Shows for the Processed Food Industry

The following are major processed food trade shows supported by the U.S. Department of Agriculture. To search for future events, go to USDA’s website at: http://www.fas.usda.gov/scripts/agexport/EventQuery.asp

• U.S. Food Export Showcase & Food Marketing Institute's (FMI) Annual Exposition (Processed Foods)

May 3

- 5, 2005 Chicago, Illinois

Number of visitors: 30000USDA Contact: Sharon Cook
USDA Trade Show Office 1400 Independence Ave. SW Stop 1052

Room 4939

- South Building Washington, DC 20250
Phone: 202

- 720

- 3425

Fax: 202

- 690

- 4374
Email: Sharon.Cook@usda.gov

• Taipei International FoodShow 2004

June 17

- 20, 2004

Khaliaka Meardry
USDA Trade Show Office 1400 Independence Avenue, SW Washington, DC 20250

- 1052
Phone: 202

- 720

- 3065

Fax: 202

- 690

- 4374
Email: Khaliaka.Meardry@fas.usda.gov

• Abastur 2004

September 29

- October 1, 2004

Teresina Chin

Room 4642

- South Bldg 14th Street & Independence Ave., S.W. Washington, D.C. 20250

- 1052

Phone: 202

- 720

- 9423
Fax: 202

- 690

- 4374

Email: Teresina.Chin@fas.usda.gov

• Foodex Japan 2004

March 8

- 11, 2005 Tokyo, Japan
Number of visitors: 93637

Khaliaka Meardry
USDA Trade Show Office 1400 Independence Avenue, SW Washington, DC 20250

- 1052
Phone: 202

- 720

- 3065Fax: 202

- 690

- 4374
Email: Khaliaka.Meardry@fas.usda.gov

REFERENCES

Changing Structure of Global Food Consumption and Trade/WRS

- 01

- 1 , Economic

Researc h Service, U.S. Department of Agriculture.

The Outlook for Food Prices in 2003 , USDA Food Price Outlook.

Organic Food Industry Taps Growing American Market , Agricultural Outlook/October 2002, Economic Research Service/USDA.

U.S. Farm Sector Overview , Econo mic Research Service, U.S. Department of Agriculture, March 31, 2003.

U.S. Food Sector Linked to Global Consumers , Regmi, Anita and Greg Pompelli, FoodReview, Spring 2002, Economic Research Service, USDA.

USDA Agricultural Baseline Projections to 2011 , Int eragency Agricultural Projections Committee, February 2002.

Food Price Inflation to Moderate in 2002 and 2003 , Agricultural Outlook/October 2002, Economic Research Service, USDA.

Canada Exporter Guide Annual 2002, Gain Report #CA2132 , 11/22/2002, Approve d by Gary C. Groves, U.S. Embassy, Prepared by George Myles and Marion Bailey, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/GainFiles/200211/145784692.pdf

Mex ico Exporter Guide Annual 2001, Gain Report #MX1171 , 10/1/2001, Approved by Chad Russell, U.S. Embassy, prepared by Kate Deremer, U.S. Department of Agriculture. Available at: http://w ww.fas.usda.gov/GainFiles/200110/130682070.pdf

Korea Exporter Guide Annual 2002, Gain Report #KS2046 , 9/19/2002, Approved by Susan Phillips, U.S. Embassy, prepared by She Won Kim, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/GainFiles/200209/145783927.pdf

Japan Exporter Guide U.S. Food Exporter’s Guide to Japan 2002, Gain Report #JA2514

, 3/29/2002, Approved by David Miller, U.S. Agricultural Trade Office, Tok yo, prepared by Promar Japan and the U.S. Agricultural Trade Offices, U.S. Department of Agriculture. Available at: http://www.fas.usda.gov/gainfiles/200203/135683861.pdf

“U.S. Firms Invest in Mexico’s Processed Food Industry,” Food Review, Volume 22, Issue 2, Economic Research Service, USDA. Available at: http://www.ers.usda.gov/publications/foodrev iew/may1999/frmay99g.pdf“Globalization of the Processed Foods Market,” Agricultural Outlook/January

- February 1997, Economic Research Service/USDA.

“Food Manufacturing,” J. Michael Harris, U.S. Food Marketing System, 2002/AER

- 811,

Economic Research Serv ice/USDA.