Our weekly roundup of key commodity price action and company-specific food cost commentary.
There was an interesting divergence over the past week between milk and cheese prices. Cheese prices have flat-lined since early June while milk prices have continued on an upward trajectory. Whether or not dairy prices are set to continue higher or flat-line, the current, historically high, level of dairy prices is sure to weigh on margins for CAKE, DPZ, and PZZA. Grain prices, while still at elevated prices, and up significantly year-over-year, declined last week as warmer weather in Canada and the U.S. may help the development of the spring crop. Despite declining on two of the past three days, coffee costs are up over 4% week-over-week.
Coffee
Coffee prices have been pressuring the coffee retailers into raising prices over the past couple of quarters and, as the chart below indicates, it will likely be some time before year-over-year inflation in coffee markets subsides. On two of the past three days, prices have come down thanks to reduced concern that frost may damage crops in Brazil – the top coffee producing country. Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls:
- PEET (5/3/2011): We believe we're better off lowering our earnings guidance by $0.10 this year and continuing with the plans we have in place than we would be curtailing spending activity or taking extraordinary pricing action that would be inconsistent with our long-term business interests, and the more sustainable long term cost of coffee we foresee. As a result, you will see throughout our call today that we have a very strong performing fundamental business, but we have to buy some unusually high priced coffee in the short term, then we're not going to do unnatural things in reaction to an unnatural market environment short term.
- Hedgeye: prices were sliding as the dollar caught a bid but, over the last couple of weeks prices have swung higher again. While it seems that prices may have been “unusual”, this elevated level of pricing may persist for longer than expected.
- GMCR: (5/3/11): Before closing, I also want to touch on rising coffee costs and the effect of our business. Like others in the industry, we are closely watching coffee prices. When we announced our last price increase in September of 2010, coffee prices had increased roughly 30% from $1.45 to $1.90 per pound over the course of roughly three months. Since then, costs have continued to escalate, recently hitting historic highs of more than $3 a pound, a nearly 60% increase since September. In attempt to offset rising green coffee costs, as well as increases in other input costs, we are currently in the process of raising prices for all packaged types. We expect that consumers will see an increase of approximately 10% at the point-of-purchase as the result of this price increase. We expect to see the full benefit of this price increase during our fiscal fourth quarter of 2011. We generally fix the price of our coffee contracts three to nine months prior to delivery so that we can adjust our sales prices to the marketplace.
- Hedgeye: Coffee has backed off the “historic” high of more than $3 per pound but is still at $2.60 plus and up over the last couple of weeks. Demand remains strong; without a rising dollar, expect price to continue to pressure retailers.
- SBUX (4/27/11): Regarding coffee costs, as I have indicated previously, we have fully locked our coffee costs for 2011 and are price-protected for a couple months into fiscal 2012. As we progress through the balance of 2011, we will progressively take actions to secure our coffee needs and lock coffee costs for additional months into 2012. While we expect that the costs we pay for coffee may be higher in '12 than they are in '11, we remain confident that we can offset those increased costs and preserve our long-term earnings growth targets.
- Hedgeye: SBUX is confident that it can pass on price and offset coffee inflation with other efficiencies. It is interesting that it expects higher coffee prices in 2012 than in 2011, which would somewhat contradict PEET’s assertion that in May that prices at the time had been unusual. SBUX expects worse prices to come.
Wheat
Wheat costs declined 4.1% week-over-week, bouncing over the past couple of days as buyers (China is said to be one) took advantage of the dip in price. The initial decline was widely attributed to easing concerns surrounding supply given signs that the global economy may slow. In addition, Russia, once the world’s second-largest shipper, will lift an export ban on July 1, adding to speculation that global supplies will be ample. Below is a selection of comments from management teams pertaining to wheat prices from recent earnings calls:
- MCD (4/21/11): And so if the commodity markets move significantly from here and the main ones obviously looking at beef, looking at corn, wheat, coffee, et cetera, our guidance reflects where the markets are today. If they stay around these levels, the 4% to 4.5% [commodity guidance for 2011] should be locked in. If they move dramatically up or down, then we'll have to reflect that as we move forward.
- Hedgeye: inflation guidance may have to be adjusted higher.
- PNRA (4/27/11): In this expense line, we expect margin unfavorability to continue to grow on increased all-in cost inflation throughout the year -- and because we haven't taken and we don't currently plan to take pricing in our dough sales for franchisees this year.
- Hedgeye: wheat inflation could possibly subside in the back half of the year as comparisons become less unfavorable for buyers. This will be more likely, of course, if the dollar strengthens.
- DPZ (3/1/11): We’ve got wheat locked down for the year.
Chicken Wings
Chicken wing prices are continuing to tick higher, rising 2.5% last week. BWLD is a name we are cooling on (not based on COGS!) but the next quarter, we expect, will still be strong. Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls:
- BWLD (4/26/11): For cost of sales, the traditional wing market continues to be favorable and the price of chicken wings for the first two months of the second quarter is averaging about a $1.02 per pound, which is lower than any quarterly price since 2003. It compares to last year’s average price for the second quarter of $1.51. Our Boneless Wings contract is extended through March of 2012 at flat pricing to 2010.
- Hedgeye: Traditional wings count for 20% of restaurant sales and boneless wings count for 19%.
Howard Penney
Managing Director
Rory Green
Analyst
