Capacity utilization, factor substitution, and productivity growth in Canadian food processing sector

Abstract

The food processing industry has been confronted with unprecedented challenges as the costs of raw materials have risen rapidly, owing in part to the increased use of grains for ethanol. It is critical to comprehend how these trends affect the industry and potential coping techniques. This study estimates capacity utilization, which is a measurement that is well-suited to identify how input prices affect productivity in the short-run. The results show that capacity utilization decreased significantly after the year 2005 when raw materials input prices skyrocketed. TFP growth has also slowed significantly because of this. According to the estimated elasticities, the industry has little potential to deal with the cost challenge through factor substitution. Another conclusion is that capacity utilization has a positive elasticity with respect to the cost of raw materials. Because it is related to induced capital stock adjustment, which is only achievable in the long run, this is an indicator of how the industry will be affected in the long-run.