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### U.S. Department of Commerce Industry Report

Food Manufacturing NAICS 311

Industry Definition

The food manufacturing industry (NAI CS 311) transforms livestock and agricultural products into products for intermediate or final consumption. Subsectors in this category include an imal food manufacturi ng (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 pr oduct manufacturing (NAICS 3115), meat product manufacturing (NAICS 3116), seafood product preparation and packaging (NAICS 3117), bakeries and tort illa manufacturing (NAICS 3118), and other food manufacturi ng (NAICS 3119).

Establishments primarily engaged in manufacturing beverages and tobacco are classified separately in Subsect or 312, Beverage and Tobacco Product Manufacturing and are not cover ed in this chapter.

Current Economic Indicators

The food manufacturing industry is one of the United States’ largest manufacturing sectors, accounting for more than 10 per cent of all manufacturing shipments. The processed food industry has experienced fa irly steady growth over the 1997-2006 period but experienced a slight d ecline from 2005 to 2006. In 2006, the value of food shipments was $538 billion, an increase of 27 percen t from 1997 shipments of $422 billion (see Figure 1). 1 Demand for processed food products tends to be less susceptible to fluctuating economic conditions than other industries.

In 2006, there were 28,000 establishments in food manufacturing. Large multinationals are a big presence in the industry but although they account for 36 percent of all the jobs in the industry, they represent just over 500 of the 28,000 establishments. Eighty nine percent of establishments employ fewer than 100 workers. 2

According to the Food Institute, there we re 99 mergers and acquisitions among food processing companies in 2006, up from 94 in 2005, but down from 168 in 2000. Acquisitions and mergers have already resulted in consolidation of some of the largest companies in the industry.

1 This chart reflects growth in curren t dollars, not real dollars and does not account for changes in inflation.

2 Bureau of Labor Statistics2 Figure 1

In 2007, the ten largest U.S. companie s in this sector according to Food Processing were Kraft Foods, Tyson Foods, PepsiCo, Nestle , Anheuser-Busch, General Mills, Dean Foods, Smithfield Foods, ConAgra Foods, and Cadbury Schweppes. Kraft Foods, the largest in the industry, employs 103,000 empl oyees, has more than 180 manufacturing and processing facilities worldwide, and reported net revenues of $37 billion in 2007. Kraft also manufactures some of the industry’ s leading brands, such as Oreo, Nabisco, Oscar Mayer, Philadelphia Cream Cheese, and Maxwell House coffee.

The industry invests heavily in technol ogy and increased automation and production improvements have allowed companies to increase output while relying on fewer employees. Employment in the industry declined 5% from 1996 to 2007, decreasing from 1.56 million to 1.5 million (see Figure 2). The Bureau of Labor Statistics expects overall wage and salary employment in f ood manufacturing to experience little or no change over the 2006-16 period, compared with 11 percent employment growth projected for the entire economy. 3

Geographically, the largest percentage of wo rkers in the industry is concentrated in California, making up 11 percent of the f ood processing industry workforce in 2005. Texas, Illinois, and Pennsylvania empl oyed significant percentages of the food processing workforce at 7 percent, 6 percent, and 5 percent respectivel y with the rest of the workforce fairly evenly dist ributed across the United States.

3 Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2008-09 Edition , Food Manufacturing3 Figure 2

Source: Bureau of Labor Statistics

The meat industry employed the largest number of workers in 2007 employing 34 percent of total industry workers.

Figure 3

Industry Employment 2007 (thousands) %

Food Manufacturing 1482 100.0 Animal Slaughtering and Processing 507 34 Bakeries and Tortilla Mfg 278 19 Fruit & Veg Preserving and specialty 173 12

Other Food Products 165 11 Dairy Products 129 9 Sugar and Confectionary 74 5 Grain and Oilseed Milling 61 4

Animal Food 51 3 Seafood product prep and pkging 44 3

Source: Bureau of Labor Statistics4 Nature of the Industry

Processed foods are “value-added” products, refe rring to the fact that a raw commodity or commodities are transformed into a processe d product through use of materials, labor, and technology. Any product that requires some degree of processing is referred to as a processed product, regardless of whether the am ount of processing is minor, such as for canned fruit, or more complex, such as for snack foods.

Of the sub sectors that make up the food manu facturing industry, the largest four: meat products; other food; dairy products; other food; and grain and fruit and vegetable preserving and specialty f ood manufacturing, made up 68 percent of total industry shipment values of $510 billion in 2006. Other sectors included grain and oilseed milling, which accounted for 10 percent, bakeries and tortilla manufact uring (10 percent), animal food manufacturing (6 percent) sugar and confec tionery product manufacturing (5%) and seafood produc ts (2 percent).

Figure 4

Market Overview and Demand

According to the Department of Labor , average annual food spending per person increased 18 percent during 2000 to 2006, from $5,158 to $6,111. Total spending on food makes up about 13 percent of a household’s total averag e annual expenditures. Of the $6,111 in food spending, $3,417 was spent on food at home and $2,694 was spent on5 food away from home. Consumers spent the largest portion of their food at home spending ($1,212) on the “other food” category which includes sugar, sweets, fats and oils, miscellaneous foods, nonalcoholic bevera ges, and prepared food (see Figure 5).

Figure 5

Most supermarkets now offer prepared meal s. There is high demand for convenience food and ready to serve products such as snack foods, snack bars, and frozen food that are popular with double income households and cons umers who are generally short on time. The aging U.S. population and rising per cap ita incomes should cause this trend to

continue.

As the U.S. population becomes increasingly ethnically diverse, consumer demand for food products also diversifies. The Hispanic population continues to grow rapidly and processed food companies are developing new products for this population. Some retailers and supermarkets now cater specifi cally to Hispanic popul ations. Also, many traditionally ethnic food products are crossi ng over to the mainstream population.

Other factors affecting demand for processed food in the U.S. market include concern about dieting and obesity, allerg ens, and increased interest in sourcing locally and use of quality ingredients..

Organic food is another market segment that has grown rapidly (an estimated 20% per year through the 1990s accord ing to USDA) due to increased consumer interest in healthy products. Organic food can now be found in traditional supermarkets, natural food stores, and other retail markets. USDA issued Federal standa rds for organic food in6 October 2002. In accord with the standards, a certified organic processed product must use at least 95 percent organic ingredients to be labeled or represented as organic. The Organic Trade Association reports that sale s of organic food were $16.7 billion in 2006, making up nearly 3% of total food sales. Sa les growth was strongest for organic meat, dairy, fruits and vegetables, and bread a nd grains. The Organic Trade Association anticipates growth of 18 pe rcent a year for the organi c food industry through 2010.

Distribution

Retail food sales at warehouse clubs and super centers has increased steadily since their introduction in the 1980’s and have taken away some sales share from traditional supermarkets which still sell 58 percent of all retail food. The leading U.S. grocery retailers are Walmart and Kroger, while top warehouse clubs include Sam’s Club, Costco, and BJs.

Figure 6

Technology

Food manufacturers continue to invest in greater automation in manufacturing processes. Budgeted spending for plant equipment, upgrad es, computers, and automation remains at steady levels and manufacturer s are adding additional processe s to address concerns with ensuring food safety. Increased use of au tomation and innovation in the manufacturing process has limited employment in the manuf acturing sector to some extent.7 According to Food Engineering , key issues for plant manufacturers include plant technology improvements and automation, co nsolidation, energy costs and usage,

consumer demand for healthier and mo re nutritious products, and continuous improvement programs. 4

Use of radiofrequency ID (RFID) tags is st ill limited in the food ma nufacturing industry due to its prohibitively high cost. The techno logy consists of tagging pallets with RFID tags to track goods through the supply chain from the factory floor to the store. Although it is currently not used on a widescale basi s on individual products, it could be headed that direction if technology costs drop. Walmart required its top 100 suppliers to have RFID technology in place to track pallets in 2005. And according to a 2006 Food Engineering Survey, 40 percent of respondents indicated that their companies either had initiated or were investing al ready in RFID-tag initiatives.

Issues Affecting the Industry

Rising Commodity Prices : A dramatic jump in food commodity prices worldwide has had an impact on the industry, which uses commodities such as grains and vegetable oils as inputs to many of its products. Rising food commodity prices particularly impact small producers. For example, small bakeries and bagel companies are often unable to absorb the big price increases of inputs such as wh eat and flour and must ultimately raise the final prices of their products whereas larg er producers are better able to absorb commodity price increases. A number of factor s have contributed to this run up in prices, including slowing production, rapid growth in demand, increased demand for biofuels feedstocks, and adverse weather conditi ons which have affected crop yields. 5

Food Safety : In the last year, concerns over food sa fety have increased as the industry has been hit by several high profile and large sc ale recalls, as well as faced questions regarding the quality of input s from suppliers in foreign countries. Government and industry have responded to try to address th e issue. The Food and Drug Administration which regulates about 80 percent of the na tion’s food products, issu ed a Food Protection Plan in 2007 to safeguard the nation’s f ood supply against unintentional and deliberate contamination. The plan focuses on risk ba sed interventions and rapid response when problems are identified. The food industry also responded by pressing for more funding of FDA and issuing best practices guidance to its industry members on securing supply chains. The Grocery Manufactur ers Association created its own food safety website for the industry. It also created an action plan for its members designed to protect consumers from unsafe imported products by calling on the industry to adopt four “pillars” of food safety. The approach focuses on prevention a nd a stronger public-pri vate partnership to address food safety issues. Walmart has take n the step to become the first U.S. grocery chain to require its food suppliers to certify compliance with inte rnationally recognized private Global Food Safety Initiative Standard s. Internationally, food safety has become

4 “State of Food Manufacturing, The Continuous Quest for Improvement,” by Kevin Higgins, Food Engineering, September 2, 2006

5 “Global Agricultural Supply and Demand: Factor s Con tributing to the Recent Increase in Food Commodity Prices,”by Ronald Trostle, USDA ERS Report No. (WRS-0801) May 20088 a top issue as well. For example, th e Asia Pacific Economic Cooperation Forum (APEC), created a Food Safety Forum in 2007 to address food safety issues among its

members.

Energy Costs /Corporate Responsib ility/Environmental Sustainability : Higher energy costs are causing concern among manufacturer s in the industry who are increasingly looking for ways to conserve energy in manufacturing processes to reduce costs.

Concerns about the environment and sust ainability are also having an impact on producers. Many are increasing their recyc ling efforts and redesigning packaging to lessen the impact on the environment.

World Market and Trends

The U.S. processed food industry is a major participant in the gl obal economy, active in both exporting and foreign direct investment. More than a third of the world’s top 50 food and beverage processing firms are headqu artered in the United States (19 out of 50 in 2004 according to Food Engineering )

. Major foreign competitors were Nestle (Switzerland), Unilever (England), Groupe Danone (France), Diageo (England), Kirin Brewery (Japan), SABMiller (South Africa) , Cadbury Schweppes (England), Heineken (Netherlands), and Asahi Breweries (Japan).

In 2007, the U.S. processed food industry e xported $38.7 billion of product and imported $34.7 billion. This marked the second year of a trade surplus for th e industry after being in a deficit for the prior two years (see Figure 7).

Figure 7

2000 2001 2002 2003 2004 2005 2006 2007

25 26.5 25.2 26.8 25.9 28.8 32.2 38.7

18.9 19.6 21.1 23.8 27.7 29.8 31.8 34.7

6.1 6.9 4.1 3 -1.8 -1 0.4 49 Imports

In 2007, five countries accounted for 52 per cent of U.S. import s of processed food products: Canada (27%), Mexi co (8%), China (7%), Australia (5%), and New Zealand (5%). Increased demand for processed food imports has occurred as the population has grown and become more diverse, and as a re sult of rising incomes. Imports are also important to supply seasonal fresh fruits a nd vegetables when domestic production is

low.

Figure 8

U.S. Trade Patterns in Food Ma nufacturing (NAICS 311) in 2007 (millions of dollars; percent)

Imports

Region Value Share, %

NAFTA 12,323 35 EU 25 5,630 16 Latin America 7,251 21

Other Asia 4,845 14 Japan/Chinese Economic Area 3,050 9 Rest of World 1,621 5 Total 34,720 100

Top 5 Countries Value Share of Total, %

Canada 9,484 27 Mexico 2,839 8 China 2,489 7 Australia 1,709 5 Italy 1,603 5

Fruit and vegetable preserves and specialty foods made up th e largest share of the $34.6 billion in overall processe d food imports in 2007 (19%). This was followed by Meat products and meat packaging products (17%), grain and oilseed milling products (15%), miscellaneous foods (14%), and sugar a nd confectionery pro ducts (13%).10 Figure 9

Exports

Processed food exports have grown steadily since a slight downturn in 2004. In 2007, five foreign countries account ed for 61 percent of U.S. processed food exports: Canada (23%), Mexico (18%), Japan (10%), China (6%), and Korea (4%).

Retail sales of food products increased relatively quickly in many developing and lowermiddle income countries through the late 1990s and demand in Asian markets is expected to increase significantly into th e near future. As developi ng countries experience income increases, demand for processed food grows, especially for higher valued food products such as meat. In developed countries, increased demand comes for convenience and specialty food products.11 Figure 10

U.S. Trade Patterns in Food Ma nufacturing (NAICS 311) in 2007 Exports

Region Value ($millions) Share, %

NAFTA 15,819 41 Japan/Chinese Economic Area 7,656 20

Rest of World 5,021 13 Other Asia 3,964 10 Latin America 3,579 9 EU 25 2,707 7 Total 38,746 100

Top 5 Countries Value Share, %

Canada 8,900 23 Mexico 6,919 18 Japan 3,835 10 China 2,312 6 Korea 1,503 4

Source: U.S. Department of Comme rce, Bureau of the Census Meat products and meat packaging products made up the largest share of the $38.7 billion in overall processed food exports in 2007 (33%). This was followed by grain and oilseed milling products (22%), miscellaneous foods (14%), and fruit and vegetable preserves and specialty foods (10%).

Figure 1112 According to the U.S. Department of Agricu lture, processed food exports with good sales potential in the top five largest export countries are the following:

Canada : Beverages (cocktail mixes, flat water), dry grocer y (icing products, baking mixes, tortilla shells), frozen foods (fruit, pizza, yogurt), perishables (prepared salads, sausages ), prepared foods.

Mexico : Poultry, meat, dairy, fresh vegetabl es, processed fruit and vegetables, breakfast cereals and mixes, pr ocessed meat, wine and beer.

Japan : Pork, beef, cheese, snack food (exclu ding nuts), frozen vegetables, fruit juice, berries, tree nuts, wine, pe t food, cakes, waffles, pie, salmon

China : Nuts and dried fruits, seafood, poultry, re d meat, frozen vegetables, infant formula, baby food, dairy products, fresh fruit (cherries, pear s), Mexican food

Korea : Beef, pork, poultry, citrus, chocolate, whey, wine, fish and seafood, bread, cakes, pastry, nuts

Trade Policy

The U.S. processed food industr y still faces re latively high foreign tariffs on many of its products and also on some of its inputs, such as sugar.

The North American Free Trade Agreement (NAFTA) eliminated most Mexican and Canadian tariffs on U.S. processed food e xports, which were as high as 20% on such products as chocolate and pres erved meats before NAFTA to ok effect. U.S. firms now have a price advantage over competitors who have to pay an average tariff of 24% in Mexico’s market. Sectors that have part icularly benefited include milk and cream products, breakfast cereals, pr epared meats, and processe d fruits and vegetables.

NAFTA had an influential role in increas ing exports and impo rts between Mexico, Canada, and the U.S. NAFTA has allowed processed food firms increased operational flexibility regarding how to meet “just in time” delivery requirements of customers, particularly along border regi ons of NAFTA countries. Also, NAFTA investment provisions that guarantee equal treatment for foreign and domestic investors have proven

beneficial and have resulted in increased U.S. direct invest ment in Mexico and Canada’s processed food industry.

Pending free trade agreements could be benefi cial in bringing down high tariffs in the industry. For example, in Korea, the averag e current tariff for produc ts such as sauces and condiments is 8 percent. However, they have also been subjec ted to arbitrary annual adjustment tariffs as high as 45 percent. Under the Korea Free Trade Agreement, these

tariffs would be eliminated within 5 to 10 years.13 The U.S. processed food industry still faces non tariff barriers in many markets that act to restrict trade in processed food. These incl ude issues such as onerous certification, registration, and labeling require ments, differing food standards, shelf-life requirements, intellectual property right protect ion, and customs procedures.

Industry Shows and Trade Events

All Candy Expo May http://www.allcandyexpo.com/

All Things Organic April http://www.organicexpo.com/08/public/enter.aspx

Fancy Food Show June and January http://www.specialtyfood.com/do/ fancyFoodShow/LocationsAndDates

Food Marketing Institute (FMI) Leader ship Education Forum and FMI Show May http://www.fmi.org/events/

Institute of Food Technologists (IFT) Annual Meeting and Food Expo June/July http://www.am-fe.ift.org/cms/

National Restaurant Association Show May http://www.restaurant.org/events/

Last updated June 2008