Farm income is expected to slide 25.5 per cent to US$116.1 billion this year from 2023, according to the U.S. Department of Agriculture, set for a second consecutive annual drop, as corn and soy prices plummet and production costs increase.

Higher interest rates have also piled pressure on farmers, leaving equipment dealers with bloated inventories, prompting some to offer discounts or even auction off machines at lower prices, forcing Deere and peers to cut production.

The world’s largest farm equipment maker now expects fiscal 2024 net income of about $7 billion, down sharply from its prior expectations of $7.50 billion to $7.75 billion.

Deere’s shares fell 3.2 per cent in early trading. Peer Caterpillar, which last month warned of weaker second-quarter sales, also slid one per cent.

The forecast implied “a very aggressive” downshift in production in the second-half of the year, Jefferies analyst Stephen Volkmann said.

Deere expects sales of large agriculture equipment to decline between 20 per cent and 25 per cent this year, compared its prior estimates for a roughly 20 per cent fall. Industry sales for large agriculture equipment was projected to fall about 15 per cent, at the low end of its previous forecast.

“There were some signs (that guidance might be impacted), but I was still surprised to see them cut guidance for the industry… It was a bit more broad-reaching than I would have expected,” M Science research analyst Alex Prudhomme said.

“Their guidance always implied that they were going to underproduce retail sales to work down inventory. Now that they’ve cut retail sales (targets) across all markets, they’re going to have to work a lot harder to achieve that goal.”

Net income for the second quarter fell 17 per cent to $2.37 billion, or $8.53 per share. Net sales declined 15 per cent to $13.61 billion. However, both beat Wall Street expectations.

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After meeting with Liberal Party legislators in London, Ont., Trudeau said the government asked the executives of the five largest grocery chains, including Loblaw, Sobeys and Metro, to come to Ottawa next week to explain how they will stabilize prices. The five companies, representing 80 per cent of the Canadian grocery market, have until Oct. 9 to come up with a proposal.

“If their plan doesn’t provide real relief … we will take further action and we are not ruling anything out, including tax measures,” Trudeau said.

“It does not make sense in a country like Canada that our largest grocery chains should be making record profits while Canadians are struggling to put food on the table.”

In 2022, Canada’s three largest grocers — Loblaw, Sobeys, and Metro — collectively reported more than $100 billion in sales and earned more than $3.6 billion in profit.

Trudeau, who is under pressure over a lack of affordable housing, said his government will remove the federal five per cent sales tax on the construction of new rental apartment buildings.

“There are many developers and builders that are not moving forward with building new apartments because the costs are simply too high,” Trudeau said, adding the measure will lead to the creation of many new apartment buildings.

Trudeau’s minority government is propped up by left-leaning New Democrats and a federal election is only due in 2025. But opinion polls show the main opposition Conservatives, who accuse Trudeau of driving inflation through high government spending, would win power and end eight years of Liberal rule if an election were held now.

Boosting competition

Several grocery executives denied profiteering charges in a parliamentary committee earlier this year. But the lack of competition in the grocery sector has also irked the federal competition watchdog, and in June, it said more players were crucial to combat soaring prices of essential goods.

Trudeau waded into that debate on Thursday and said his government will remove provisions in competition laws that companies use to defend big mergers, saying cost savings outweigh negative impacts on competition.

Soaring food prices have been a concern for European governments as well and in March the French government reached a deal with the country’s main supermarket chains to help shoppers cope with food prices.

But the Retail Council of Canada pushed back against Trudeau’s claims and blamed the surging prices on food manufacturers and producers passing on higher costs to the grocers.

The association’s spokesperson Michelle Wasylyshen said any “credible discussion” on restoring prices must include food processors, manufacturers and other relevant businesses within the supply chain.

Sobeys and Walmart Canada had no immediate comment, while Metro declined comment. Loblaw said the company was “always open to discussions about what more can be done across the industry.”

In July, Trudeau shuffled much of his cabinet to focus on issues like a housing shortage and the rising cost of living and on Thursday he reiterated that he had no plan to quit.

Conservative leader Pierre Poilievre on Thursday again blamed the housing crisis on Trudeau, and said he would introduce his own plan to get homes built to parliament when it reconvenes next week after the summer break.

— Reporting for Reuters by David Ljunggren and Steve Scherer; additional reporting by Deborah Sophia in Bangalore; writing by Denny Thomas.

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Last month, Campbell Soup struck a $2.7 billion deal for Rao’s sauce maker Sovos Brands (all figures US$). Unilever bought premium frozen yogurt brand Yasso in North America, while Snickers maker Mars acquired healthy foods maker Kevin’s Natural Foods.

“There’s been a nice uptick in M+A (mergers and acquisitions) in the food industry in the first half of the year…,” said Michael Milani, executive managing director and principal at advisory firm Baker Tilly.

“It has been a big theme, and we expect that to continue in the back half of 2023 and into early 2024.”

This is despite higher borrowing costs straining companies looking for acquisitions.

The value of deals in the U.S. food and beverage industry slipped nearly three per cent to about $10.39 billion this year, according to LSEG data. But their volumes climbed 17.5 per cent to 248 as of Sept. 1, making the industry a bright spot in dealmaking.

The total number of deals across all industry sectors slid four per cent in the same period, data showed.

“Large food companies need to add more new concepts, new flavour profiles and new food items because their old brands — though still growing — are not growing at a meaningful rate,” Milani said.

The rise in deals comes as volume of sales at companies such as Kraft Heinz and Campbell fell for at least the past six quarters due to weak demand, while benefits from price hikes also fade.

“I would expect there to be a continued drumbeat of M+A,” said Sarah Henry, managing director and portfolio manager at Logan Capital Management, which holds shares in PepsiCo and Mondelez International.

Packaged food companies “are now faced with some difficult comparisons on organic (sales) and are seeking some strategic, category-specific M+A targets that will propel them through the next few years,” Henry said.

Cheerios cereal maker General Mills has pinned M+A as a key goal in the coming years, with executives saying it is a “good environment for M+A right now.”

For Mondelez, bolt-on acquisitions are the way to go, the Oreo maker’s finance chief Luca Zaramella had recently said at a Barclays conference.

Last month, Reuters reported that Twinkies snack cakes maker Hostess Brands was exploring a sale and that Mondelez and Hershey could be in the race to buy it.

J.P. Morgan analysts said they could be eyeing Hostess to expand outside of North America.

“Most of the large cap packaged food companies have … diligently reduced their debt and improved their balance sheet (through the pandemic)…so they have the risk capacity and risk appetite to pursue large-scale acquisitions,” CFRA Research analyst Arun Sundaram said.

“These packaged food companies need to continue finding ways to stay relevant … And so one of the easiest ways to do that is through M+A.”

— Reporting for Reuters by Deborah Sophia in Bangalore.

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The deal marks the conclusion of a drawn-out auction that started in February and attracted interest from several private equity firms. Reuters reported on Tuesday on a so-called earn-out agreement that was key to Roark clinching a deal for Subway.

For the full deal price to be paid, Subway’s cash flow would need to reach certain milestones over a period spanning two or more years after the deal closes, according to the sources. Without the earn-out, the deal is worth $8.95 billion, the sources said (all figures US$).

Earn-out structures, while uncommon in the consumer and retail sector, are increasing in frequency in a challenging market for mergers and acquisitions as a way to reconcile price differences.

The sources said the arrangement helped bridge a gap in the valuation expectations between Roark and the DeLuca and Buck families that own Subway, which started up nearly 60 years ago in Connecticut.

The families were hoping to fetch more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered it was worth less because they deemed its U.S. business saturated.

Roark prevailed over a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, whose final offer was for $8.75 billion including an earn-out, and $8.25 billion without, the sources said.

Roark, which owns other restaurant operators and franchises — including rival U.S. sandwich chain Jimmy John’s — will pay Subway’s owners a break-up fee equivalent to four per cent of the deal’s value should antitrust regulators thwart the deal, one of the sources said.

The deal contact allows for 12 months for the transaction to be completed, according to the sources.

Roark took the view that the restaurant market is too fragmented for the deal to raise competition concerns, the sources added.

Jimmy John’s has more than 2,600 restaurants in 43 U.S. states. Subway has more than 37,000 restaurants in over 100 countries, including 21,350 in the U.S. and 3,135 in Canada.

Roark and Subway, which announced the deal on Thursday, declined to comment on the terms.

Roark currently controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.

Its experience of helping restaurant brands grow will be helpful, “especially in the U.S. market where it remains well below the peak it hit a few years ago,” said Neil Saunders, managing director of market research firm GlobalData.

Revamping operations

Tax considerations were part of the calculus to sell Subway. This is because the estate of co-founder Peter Buck, who passed away in 2021, donated his 50 per cent stake in the privately-held company to his philanthropic foundation under the terms of his will. This offers a shield from taxes on the sale of the stake.

Founded in 1965 by 17-year-old Fred DeLuca and his family friend Buck, Subway has been owned by the founding families since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.

The Milford, Connecticut-based company has been revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and splashy marketing campaign as it embarked on a turnaround plan that has helped sales grow.

Subway, which has closed thousands of U.S. locations since 2016, said a year ago that it wants to shift away from its current base of small franchisees that own just one or two shops, which tend to be family-run and sometimes barely scrape by.

The company saw a 9.85 per cent increase in same-store sales in the first half of 2023. Its 12-month earnings before interest, taxes, depreciation and amortization are around $800 million, according to the sources.

— Reporting for Reuters by Anirban Sen and Abigail Summerville in New York and Deborah Sophia in Bangalore.

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U.S.-listed shares of the company rose more than three per cent after it topped results estimates for the fourth quarter ended Dec. 31, led by soaring online sales and better-than-expected same-store sales growth at Burger King in the U.S. and Tim Hortons in Canada.

Restaurant chains are raising prices because they are paying higher costs for shipping, labour and commodities including chicken, coffee and cooking oils amid COVID-19 related disruptions.

The record inflation levels and staffing disruptions due to the omicron variant dulled profits at McDonald’s and Starbucks.

Burger King’s Whopper — made from a quarter-pound of grilled beef — is an “iconic” product that has “been on this core discount platform for too long,” Restaurant Brands CEO Jose Cil told Reuters in an interview.

The chain, which often caters to lower-income customers, removed the item from its two for $5 deal but could offer limited discounts on the burger in the future (all figures US$).

Burger King also said it would stop selling some less-popular menu items altogether, including sundaes, whipped toppings and chocolate milk.

Cil declined to provide timelines for overall price hikes in 2022.

Toronto-based Restaurant Brands reported total revenue of $1.55 billion, above estimates of $1.52 billion.

But U.S. comparable sales fell at Popeyes, in part because some locations have had to reduce operations by an average of one hour due to staffing shortages.

Popeyes’ sales had been soaring even through much of the pandemic after the 2019 launch of its fried chicken sandwich, which was so popular that most rivals — including McDonald’s and KFC — introduced their own similar product.

Restaurant Brands reported per share earnings of 74 cents in the fourth quarter, topping Refinitiv estimates of 69 cents.

— Reporting for Reuters by Deborah Sophia in Bangalore and Hilary Russ in New York.

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Packaged food companies are grappling with inflation as the U.S. economy rebounds, while spending heavily on freight and logistics to ease the strain on their supply chains due to the pandemic.

Conagra said it was facing rising costs of ingredients including edible oils, proteins and grains forcing it to increase prices on frozen goods by 3.5 per cent and on staple meals by 3.3 per cent.

The U.S.-based company sells over two dozen packaged food and snack brands in Canadian retail markets alone, including Pam, Chef Boyardee, Duncan Hines, Slim Jim, Aylmer, Orville Redenbacher, Gardein and Hunt’s.

Higher prices did not dissuade shoppers and the impact on demand had so far been “limited,” CEO Sean Connolly said, pointing to the company’s upbeat quarterly results.

“We didn’t just acquire new consumers, we kept them,” he said in the post-earnings call.

The company raised its full-year outlook for organic net sales, citing a stronger-than-expected consumer demand and additional pricing actions, accounting for elevated inflation levels. It raised its full-year gross inflation estimates to around 11 per cent from about nine per cent forecast earlier.

The company expects full-year sales growth of about one per cent compared with its previous forecast of about flat growth.

Net sales fell one per cent to $2.65 billion in the first quarter, edging past analysts’ expectations of $2.54 billion, according to Refinitiv IBES data (all figures US$).

On an adjusted basis, Conagra earned 50 cents per share, topping estimates of 49 cents per share.

— Reporting for Reuters by Deborah Sophia and Mehr Bedi in Bangalore.

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