Despite an underwhelming performance in 2014, prospects for the U.S. food and beverage industry are encouraging, says BMO Economics.

“Although margins and profitability fell short of lofty expectations in 2014, stronger demand growth, falling livestock prices, and still-low crop costs should help producers make up lost ground,” says Aaron Goertzen, economist, BMO Capital Markets.

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“The majority of our customers are confident in their prospects for the coming year,” adds Erica Kuhlmann, market executive and managing director, Food, Consumer and Agribusiness Group, BMO Harris Bank. “We’ve worked with many of our customers to help them through significant challenges over the past year, from high cattle prices to the ramifications of drought conditions. There’s a strong sense that a corner has been turned and a very productive period of growth lies ahead.”

On the cost front, back-to-back bumper harvests in the United States and solid global supply should keep crop prices well contained in 2015, even if yields fall back toward typical levels. Meanwhile, in the livestock space, hog and dairy prices have already taken a huge step back, down more than 30% from their mid-2014 highs.

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The outlook for demand is also relatively upbeat, with real consumer spending expected to grow 3.3% in 2015 as employment continues to expand and, eventually, as wage growth shifts into higher gear. “The profile of consumer spending growth is becoming more balanced, with less focus on durable goods such as autos and faster growth in non-durables such as food,” says Goertzen. “Lower pork and dairy prices should also create some wiggle room in household food budgets later this year, which should provide a lift to volume demand across most segments.”

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The industry’s longer-term outlook is also relatively promising. “Notwithstanding the lackluster recovery last year, industry profitability has actually grown at a relatively robust pace over the past decade, with operating profits up by an average of 7% per year between 2003 and 2013-not bad for a sector that specializes in consumer staples,” says Goertzen. “Looking ahead, a more moderate pace of global growth should help to limit upward pressure on commodity prices and help keep costs better contained. Also, while demographic trends point to subdued demand growth in the domestic market, new trade deals could widen access to emerging markets where populations and incomes are rising more rapidly and market penetration is still low.”

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