WEEKLY COMMODITY MONITOR

Chicken gains on the week as the usual suspects reverse their direction and decline week-over-week.

 

This past week was a week of deflation for commodities.  Events in Japan, and the ongoing concerns regarding the implications of the tragedies,  have put pressure on commodity prices across the board.  Cheese, corn, coffee, and wheat, are all up between 40% and 90% year-over-year but declined sharply in the last week.  This will offer some encouragement for restaurant operators and shareholders that commodity inflation may be moderating.  Chicken (broilers and wings) gained on the week but year-over-year inflation is not a concern for the protein. 

 

Cheese prices declined 10% week-over-week.  As the chart below shows, cheese prices remain elevated and restaurant companies with exposure to cheese.  Below, I provide some commentary on cheese from both management teams provided during their most recent respective earnings calls:

 

 

 DPZ: 

"Yeah, so the forward curve and kind of looking at about three different sources right now have cheese actually easing a little bit through the rest of the year. We're at almost $2 right now. And so, our expectation is that we're going to see a little bit of easing, to give you on cheese. We've talked about this in the past, we've got a contract in place that basically reduces the volatility on cheese moves by about a third. So about two thirds of increases or decreases in cheese are passed through to our system.

 

I think the kind of consensus forecast out there right now for cheese are in the $1.70 to $1.75 range. And – you know so what you're looking at is kind of a $0.25 to $0.30 move and I think we've said in the past a $0.40 move in cheese is equal to a point at the store level P&L."


 

PZZA:

We expect the favorable impact of early year sales results to substantially mitigate the unfavorable impact of currently projected commodity cost increases, most notably cheese, throughout the remainder of the year.

 

DPZ is 95% franchised and, as such, management claims a degree of insulation from commodity costs.  Of course, to the extent that price needs to be taken and royalties slow, the company is not immune from inflation.  The downward move of cheese over the past week will raise hopes that a price increase can be avoided. 

 

Looking at the chart below, the trend in cheese prices seems to be levelling out.  Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, at it’s most benign, cheese price inflation would be 13%. 

 

WEEKLY COMMODITY MONITOR - cheese 316

 

Corn’s decline over the week was largely focused on corn importers in Japan delaying purchases in the wake of the disastrous events unfolding there.  Corn is a key input for the livestock and poultry businesses and, at +73%, remains a headwind on a year-over-year basis but has declined abruptly on the news from Japan.

 

WEEKLY COMMODITY MONITOR - corn 316

 

Chicken wing prices definitely deserve a callout this week.  While the gain in prices was muted, at +0.5%, it is possible that this signifies the end of a longer downward trend in chicken wing prices as concepts like DPZ shift to chicken and increase demand for the commodity.

 

WEEKLY COMMODITY MONITOR - chicken wing 316

 

WEEKLY COMMODITY MONITOR - commodities 315

 

Howard Penney

Managing Director


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more