Commodities rolled off sharply week-over-week but, given the magnitude of the year-over-year gains most foodstuffs have registered, there is still significant cost pressure for food and restaurant companies.
Following the spate of 1Q11 earnings over the past few weeks, the overarching message is that commodity inflation is going to meaningfully impact the bottom line in 2011. It is interesting to note that corn posted another gain last week in the face of a broad-based drop off in commodity prices. This is a bullish sign for protein prices given that feed costs can be expected to rise as grain costs go higher.
Corn
Corn prices outperformed last week. Five consecutive days of price gains made the longest streak since December. Adverse weather is delaying sowing from North Dakota to Ohio as approximately 63% of the U.S. corn crop was sown as of May 15th, below the five-year average of 75%. AFCE, CMG, MCD, JACK and TSN are just a few companies that have highlighted corn prices, and the impact of higher corn prices on protein costs, as being bullish for food costs and negative for margins.
Beef
Beef prices are a concern for many restaurant companies, particularly in QSR. WEN increased its commodity guidance for
2011 to 5% to 6% from 2% to 3% largely due to higher beef prices. While prices fell off 1.3% over the past week, corn prices moving higher supports beef prices over the longer term. However, TSN reported recently that meat demand has been "much improved" but prices may have climbed to a level at which consumers are no longer willing to buy.
Chicken Wings
Chicken wing prices seem to go down every day that ends with a “y”. The chart below says all that needs to be said; year-over-year, wing prices are down -37% versus the other foodstuffs we follow (excluding chicken) being up an average of +39%. BWLD continues to benefit from this. Of course, all good things must come to an end; SAFM expects stubbornly high chicken supplies to come down this summer. Sanderson Farms Chief Executive Joe Sanderson said recently that the number of eggs set in incubators, an indication of future supplies, are so far not mimicking increases in recent years that occurred in May. The likely result, according to Sanderson, is fewer chickens in July, August, and September.
Howard Penney
Managing Director
