Corn report (PPC)
In the May 12 WASDE report the USDA revised its projection for the national average corn yield to 177 bushels per acre, down 4 from the earlier projection. Previously the USDA has only lowered the national average corn yield in the May report five times, the last time being 2013.
The USDA cited the slow start to the corn planting season for the revision to yields. Only 22% of the corn crop had been planted as of last week compared to the five-year average of 50%. For soybeans only 12% had been planted compared to 24% for the five-year average. The USDA did revise lower the demand for corn for domestic use and exports.
The revision to corn yields is appropriate given the crop conditions, but it is unusual for the USDA to make revisions so early. This sends the signal that the crop is behind and puts more pressure on growing conditions for the rest of the year. It also underpins higher prices as the season progresses in order to keep downward pressure on demand. Corn is such a high percentage of the COGS for poultry that chicken is also known as corn with wings.
Flu sticking around (PRGO)
2.3% of patient visits reported through ILINet were due to respiratory illness that included fever, plus a cough or sore throat, flat from the previous week. The percentage is just below the national baseline of 2.5% as seen in the chart below, but it has been steadily increasing for the past three months as seen in the chart below. This flu season is greater than last year’s nearly non-existent season and in the middle of the previous six years. The CDC estimates there have been at least 6.4 million flu illnesses, 65,000 hospitalizations, and 4,000 deaths this season. This year’s flu season would be a disappointment if it did not compare to last year. It pushes out the cough & cold upside to next year for PRGO, but we still have three other investment themes.
Record diesel (STZ)
The price of diesel fuel hit an all-time high in the U.S. last week at $5.55 a gallon a 20 cent increase from a week ago and 51 cents more than April prices. On the East coast prices hit $5.90, up 63% from the beginning of the year. Diesel inventories on the East Coast are more than 15% below typical levels. Several trade publications say diesel supplies on the East Coast are at the lowest in nearly 20 years and shortages are a concern.
It is a somewhat different story south of the border. Rising diesel prices have caused some of the larger trucking companies in Mexico to raise rates 3% to 5%. Diesel represents about 30% of the freight rate. Mexico imports 80% of its fuel from the U.S., but prices are lower in Mexico because of government subsidies to the trucking industry. Last week diesel cost $4.31 a gallon in Mexico, compared to about $4 a gallon last year. Fuel surcharges are still not common in Mexico. Constellation Brands ships its beer into the U.S. on rail, but rail uses diesel fuel as well.
POSITION MONITOR UPDATE (STKL, GO)
We raised Grocery Outlet and SunOpta higher on the long list following earnings results last week. The addition to the Russell 2000 index and the upcoming analyst day are upcoming catalysts for SunOpta. Grocery Outlet's traffic patterns have inflected and SSS are accelerating.
