• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here


    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Wheat and corn lead the way as commodity prices, in general, rebound from last week’s slowdown.

If last week bucked the trends in the commodities we follow in our weekly monitor, this week reestablished them.  Wheat and corn were highly notable last week as the grains saw price declines of 7.2% and 8.5%, respectively.  Corn, in particular, is highly important for the broader food and restaurant industries as a feed for livestock.  While the week-over-week gain in live cattle prices was tame, at +0.7%, if corn prices can remain elevated I expect beef prices to follow suit. 

As the chart below shows, corn prices have rebounded sharply over the past week and remain significantly above the levels of 2010.  In terms of news flow, it seems that the grain is set to continue on its upward trajectory, supported by an expected increase in global demand.  In particular, China, which only last year became a net importer of corn, is expected to increase imports of the grain over the next couple of years.  For restaurant companies with high exposure to protein costs, increasing corn prices are a concern.  Below is some commentary from management teams on corn prices:

CMG, 4Q10 Earnings Transcript, 2/10/11:

“Though we have contracted for most of our corn for our salsa for the year, reports of continuing or even worsening supply shortages of corn will only add to inflationary pressure on the meats that we serve.”

JACK, 1Q11 Earnings Transcript, 2/24/11:

“There are some Act of God provisions that will get us north of our contract bands, but at a reduced rate from what the current market pricing is ... And then also grain, corn, wheat and soybean impact, and there are input costs for a number of the proteins. And that's really what's driving up beef at this point.”


Wheat prices rose in step with corn over the last week, supported by dry weather in the plains of the United States and on signs that demand from Japan may be unaffected by the March 11 earthquake.  For companies like Panera, which does have wheat costs largely locked in for 2011 roughly flat versus 2010, prices remaining this elevated could result in a price increase in the back half of this year.


Cheese prices declined 9.3%, week-over-week.  As the chart below shows, cheese prices have come down significantly over the last two weeks (~10% and 9%, respectively).  Below, I again provide some commentary from management teams from their most recent earnings calls with their views on cheese prices and the implications for their businesses. 


"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."


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 leveling out.  Nevertheless, even if cheese prices were to trend horizontally throughout the rest of the year, inflation over the first half of the year, at least, would remain a significant headwind for restaurant companies with exposure.



Howard Penney

Managing Director