Our FREE Investing Newsletter
    Get Exclusive Summer Sale Discounts

    By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails. All Hedgeye products and services are subject to Hedgeye’s Terms of Service available at www.hedgeye.com/terms_of_service

A look at last week’s price action in commodities most relevant to the restaurant industry.

Last week saw positive price action in most of the commodities we include in our commodity monitor as the dollar moved lower and much of the supply and demand data points were supportive of higher prices.  Corn moving higher is the most important call out for the restaurant industry as it likely points to higher protein costs as feed prices increase.  The ongoing drought in Texas continue to pressure corn, dairy and protein costs.  Cheese paused over the last week, trading slightly down as some of the commentary out of management teams this week seemed to point to sustained dairy inflation in the back half of the year. 



Coffee prices gained 1.5% week-over-week and rose today in London for the fourth day in a row, the longest winning streak since June, on concern that supplies may be limited as Vietnamese exporters delay shipments, according to Bloomberg.  Vietnam is the largest robusta grower and a lack of beans has caused shippers there to postpone or cancel as much as 60,000 metric tons of exports in the past two months.  Arabica prices in New York also declined for the fourth consecutive day as top producer Brazil delayed sales because of lower prices.  Arabica prices declined 9.8% in June as supply worries eased.


Below is a selection of comments from management teams pertaining to coffee prices from recent earnings calls.

PEET (8/2/11): “As we indicated, in our first quarter call, we had to buy a small amount of our calendar 2011 coffee beans at significantly higher prices and this coffee will roll into our P&L during the third and fourth quarter.”

“Higher priced coffee resulted in gross margins this quarter being 290 basis points below prior year. In our first quarter conference call, we indicated that in addition to the overall higher price coffee market, we had to buy a small amount of coffee this year at significantly higher prices. And as a result, we expected our coffee cost to be 40% higher in fiscal 2011.”

HEDGEYE:  Peet’s is a company with a very competent management team that manages coffee costs extremely well.  Its higher-end, loyal customer base makes the price elasticity of demand more inelastic than for other coffee concepts’ products.

SBUX (7/28/11):  “As I mentioned earlier, are absolutely a headwind for us in the full business and that's most acutely impactful on margins in CPG as it's a much more coffee intensive cost structure, as you know. I can tell you that the decline as I spoke about it earlier from about 30% operating margin in CPG this year down to the target 25% next year is really all explained by commodities. Absent commodity inflation we'd be at or improving our margin in the coming year.”

“As we had anticipated, in recent weeks, coffee prices have retreated significantly from a high of more than $3 per pound just a couple of months ago to levels now near $2.40 per pound. As prices have been falling we continue locking up our needs for fiscal '12 and now have virtually the full year price protected.” 

HEDGEYE: Starbucks is aligning itself with the right partners to gain more control of its coffee costs to provide investors with more certainty going forward and to protect its margins as global coffee demand continues to rise.

GMCR (7/27/2011): “However, what we've said is that should coffee prices or other material costs spike, we will certainly consider price increases as necessary. We certainly hope that we do not have to cover one again next year. But our objective long-term is attempting to maintain our gross margin as we would see input costs come along.”

HEDGEYE:  GMCR hedges out 6-9 months in advance.  Without a rising dollar and some stronger supply growth to counteract growing global demand, we expect sustained elevated prices.

Live Cattle

Beef costs gained 1.5% week-over-week as hot and dry conditions continue to strangle Texas farmers.  Farmers in the Lone Star State are beginning to turn water off in cotton crops and abandoning parts, or whole fields, of corn.  More than 99% of the state was in one level of drought or another by the last week of July.  Cattle feeding margins dropped further last week as cattle prices held steady at slightly over $108 per hundredweight, according to cattlenetwork.com.  Average feedyard closeouts now show losses exceeding $128 per head on cattle marketed last week.


Below is a selection of comments from management teams pertaining to beef prices from recent earnings calls.

RRGB (5/20/11): “Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins.” 

HEDGEYE: Live cattle prices are up +22.7% y/y.  See the price chart above.

JACK (5/19/11): Beef accounts for more than 20% of our spend and is the biggest factor driving the change in our guidance. For the full year, we are now anticipating beef cost to be up nearly 14% versus our previous expectation of 9% inflation. We expect beef cost to be up approximately 14% to 15% in the third quarter.

HEDGEYE: Live cattle prices are up +22.7% y/y.  See the price chart above.

WEN (5/10/11): We communicated to you back in March that we expected beef cost to rise approximately 10% to 15% and that we expected our total commodity costs to rise 2% to 3% in 2011. We are now forecasting that our beef cost will rise 20%.

HEDGEYE: There is moderate upside risk to beef price guidance for WEN.

EAT (4/27/11):  Well, consistent with what we've talked about in the last month or so as we visited many of you, beef continues to present the most significant inflationary pressure in our commodity basket.

MRT (5/4/11): Q: I wanted to revisit the overall expectations for your commodities basket, and I missed the part about beef, just wanted to verify that it was up in the 20% range.  A: no, no, no.  I said in the low double-digits. 

HEDGEYE: This is possible, even probable, for the year looking at average 2010 versus average YTD 2011 prices, and given the easier compares in the fourth quarter, but will require no sustained upturns from here.


Corn continues to be a concern for companies with exposure. The abandonment of corn crops in Texas due to the continuing drought is likely to support price in the immediate to intermediate term. 


Below is a selection of comments from management teams pertaining to beef prices from recent earnings calls.

AFCE (5/26/11):  On a full year basis, we now expect the Popeye’s system will experience an increase of 4% to 5% in food costs. This is up from our previous guidance of a 2% to 3% increase, primarily due to higher commodity costs in corn and soy, which impacts our bone-in chicken, as well as increases in the cost of flour and cooking oil.

HEDGEYE: Corn costs going higher are going to squeeze margins for food processors and, in turn, their clients.

Howard Penney

Managing Director

Rory Green