Commodities, in general, went higher over the last week as the dollar weakened slightly. Corn and chicken wing prices posted the largest week-over-week gains while cheese and pork prices were the decliners.
STOCK THOUGHTS
Chicken Wings – BWLD
Buffalo Wild Wings’ stock has been volatile of late, trading below $60 as recently as one week ago and now trading at $66. Wing prices remain a concern for the stock in 1Q12. Following comments from Sanderson Farm’s earnings call yesterday, we are confident that the first half of 2012 will represent a difficult commodity environment for BWLD. Corn prices are likely to remain elevated for 2012 and food processors like SAFM are being forced to cut production in order to turn profit margins positive. SAFM assured listeners to its earnings call that the industry would cut production by however much is necessary in order to turn a profit. The food service industry seeking to shift mix away from beef products may also provide some support for chicken prices.
Beef – WEN, TXRH, JACK, CMG
Beef prices gained week-over-week as incremental data points pertaining to the price of beef support high prices. On the demand side, exports of US beef were up a record 27% year-over-year at the end of September. Japan and Korea were responsible for most of this growth. There could be further growth from Japan as the country looks to ease age restrictions on U.S. beef imports to the country that were implemented in 2003 due to BSE. Supply side dynamics are equally bullish in that a shrinking U.S. herd and elevated feed costs point to tighter supplies in 2012. It is estimated that cattle numbers in Texas have decreased by 600,000 or 12% of the state’s roughly 5 million cows.
Coffee – SBUX, DNKN, GMCR, PEET, THI, CBOU
Coffee costs are dropping below last year’s line for the first time all year. 2011 has been difficult for coffee retailers from a cost perspective; Starbucks and others increased prices during the year, but the stronger brands like Starbucks did so successfully. Economic concerns have kept a lid on prices recently and retailers will be hoping that Brazil, the world’s largest coffee producer, is heading for an increase in its harvest size next year. Spot market prices heading lower would not pass on to the consumer immediately, however, as contracts and inventories are worked through, but will provide a boost to the coffee stocks.
Dairy – CAKE, TXRH
Cheese prices moved lower over the past week despite beef prices and milk prices increasing. Cheese remains up 18%
year-over-year but that number has moderated throughout the quarter, providing some relief to The Cheesecake Factory. Dairy will likely have a negative impact on CAKE’s gross margins in 4Q11.
CORRELATION TABLE
CHARTS
Coffee
Corn
Wheat
Beef
Chicken – Whole Breast
Chicken Wings
Cheese
Milk
Howard Penney
Managing Director
Rory Green
Analyst
