WEEKLY COMMODITY MONITOR

Milk and coffee prices roared higher this past week as wheat and corn bucked, for now at least, their upward trends.

Milk prices gained over 14% last week as the supply of cattle remains tight.  With corn prices up 92% year-over-year, maintaining a herd of cattle is increasingly difficult for farmers.  Natural disasters in New Zealand and weather factors throughout the wider region Down Under, coupled with strong demand from China and other Asian markets, has supported this rally in dairy prices.  CAKE is one of our best ideas to play commodity exposure on the short side.  On the most recent earnings call in February, management stated they are expecting to see dairy, fresh fish, and cheese (not contracted for by the company) to come down in the second half of the year.  Currently it seems like these items are heading higher and the company may have to become more aggressive with pricing.  As I alluded to in my post, "CAKE: PUNT AND HOPE", from 2/11, it seems likely that the company will have to raise prices.  The probability of this seems to grow with every passing week. 

The price of coffee is the most eye-catching of all the commodities we are monitoring: up another 6.6% and now up 106.4% year-over-year. Starbucks revealed on its latest earnings call that it has effectively locked in coffee prices for the year.  GMCR, according to the most recent earnings call, had locked in six months coverage at fixed prices.  The company stated that it will “adjust our pricing as necessary”.  PEET passed along increasing costs to its customers via price increases recently.  The retail and home delivery business prices increased in the fourth quarter, the foodservice business saw an increase in January, followed by the grocery business.  The company did not disclose its current hedging strategy for 2011 (as of 3Q10, we know PEET had locked in 40% of its 2011 coffee needs), but management said it expects coffee costs to climb nearly 30% YoY.

WEEKLY COMMODITY MONITOR - coffee

Beef prices remain high, gaining an additional 3% over the past week.  On a year-over-year basis, beef prices are up 22%. The increasing demand for proteins on a global basis, the impact of natural disasters, the upward trend in corn prices and, of course, the downward trajectory of the dollar, all serve to push beef prices higher.  As I have said before, concepts that can pass this on to consumers will fare best during 2011.

WEEKLY COMMODITY MONITOR - live cattle

Corn prices took a step back on a week-over-week basis but it is important to watch the overall trend which, as the chart below clearly shows, is higher.  Corn is a key input cost for the livestock and poultry businesses and, at +92% YoY, is likely to squeeze meat-producers’ margins for the foreseeable future.

WEEKLY COMMODITY MONITOR - corn

WEEKLY COMMODITY MONITOR - commod 39

Howard Penney

Managing Director