Coffee prices bounced once again last week as fears mount that the approaching winter in Brazil may damage crops. Sugar dropped 5.1% over the past week, and the commodity is now down 24% year-to-date. In a bearish data point for global food costs, the weather bureau in India said that the monsoon rainfall in the country will be normal for a second consecutive year. Corn took a small step back last week but remains up 115% year-over-year. Wheat's price action of late is partly due to the substitution effect which I expect to continue as long as corn prices remain at these elevated levels.
Coffee prices have rebounded strongly of late and will likely cause concern among the coffee names that have been reluctant to raise prices of late, despite elevated coffee costs. Prices are now up 113% year-over-year. Starbucks has effectively locked in its coffee costs for the year. GMCR, according to its most recent earnings call, had locked in six months at fixed prices. The company said that it will adjust pricing “as necessary”. PEET passed on price to its customers during the first quarter. 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.
Wheat prices rose in step with corn over the last week, supported by news that about 38% of the winter-wheat crop was in poor or very poor condition as of April 17, up from 36% a week earlier and 6% a year earlier, according to the Department of Agriculture. Dry weather in the past week from central Kansas to Texas also hurt crops. 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.
The Hedgeye Energy team published an interesting note last week on gasoline consumption trends showing signs of a 2008 repeat. Specifically, once gasoline prices broke through the $3.60 barrier in 2008, year-over-year gasoline consumption declined for 30 straight weeks. The surging prices at the pump are causing demand destruction in the consumer economy. This is not lost on management teams; the concern expressed by DRI during its recent earnings call is telling and I expect BJRI and CAKE management to mention this topic during their earnings calls tomorrow. Restaurant chains with a high level of exposure to gas prices are likely to suffer as prices press towards $4. We are focused on companies with direct exposure to elevated gasoline prices, such as CBRL, and companies that have a high proportion of stores based in markets where prices at the pump are a strong factor (California), such as CAKE.
Chicken wing prices continue to plummet. BWLD is set to benefit further from the decline and year-over-year favorability looks, from the chart below, to be all but certain for the remainder of 2011.
Howard Penney
Managing Director
