Corn is the big standout week over week, trading at $7.66 per bushel yesterday.
Corn has been trading softly over the past few weeks but moved up 14.1% in the last week to bring the item to +122% YoY. Regarding proteins, this is certainly a meaningful move that will likely support meat prices going forward. For a number of weeks now the commodities we monitor have been mixed in terms of the direction of the weekly price action. While corn and wheat have gained strongly (14% and 7%) on the last week, dairy costs have decreased by similar respective magnitudes.
In this note, I'm raising the red flag on the chicken producers, SAFM, TSN and PPC due to the surge in corn prices. As you can see from the table below the surge in corn is happening at the same time chicken prices are getting weaker.
As the chart below shows, corn prices have bounced sharply following a brief decline in the second half of March. An increase in global demand is expected to provide sustained support for corn prices. For restaurant companies with a high level of 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.”
SAFM, J.P. Morgan Insurance Conference, 3/30/11:
“Corn and soybean mill prices remain significantly higher than historical average and we think there are going to be instances and times up from now through the growing season that they could spike higher.”
“The year 2006 was the year of avian influenza and 2008 was $8 corn and the collapse of our export market in the fall. That – 2010 – 2011 will be another year like 2008 right now.”
Wheat prices are also rising with corn and this is, as with corn, largely attributable to global demand. Corn and wheat prices in Asia are likely to continue to rise for the next number of weeks due to tight supplies in exporting countries. Wheat crop conditions in the U.S. are also a concern. Interestingly, the surge in corn prices is also pushing wheat higher as the corn surge spurs a livestock-feed swap.
Chicken wing prices continue to decline. While this is helpful for BWLD margins, the NFL lockout hearing today is even more important. Today, NFL players are asking a federal judge to grant an injunction preventing the NFL lockout and forcing the league to resume operations. It seems more likely that the injunction will be granted with a stay than without but a denial of the injunction would put the NFL in the driver’s seat and the prospect of a NFL-less fall could become more real. We know which side BWLD is cheering for!
Dairy costs have declined significantly over the past week and this is providing some relief for CAKE (which is not hedged on their dairy costs), DPZ and PZZA. On a year-over-year basis, dairy prices are up but the step down over the past few weeks has been meaningful.
Howard Penney
Managing Director
