WEEKLY COMMODITY CHARTBOOK

This week’s commodity chartbook shows significant gains in grains and chicken wing prices along with declines in beef, coffee, and chicken breast prices.  Below is some commentary pertaining to select commodities and the companies that have exposure to them.  Further on, we show the latest price charts of select commodities. 

 

SUPPLY & DEMAND DYNAMICS

 

Beef – WEN, JACK, CMG, TXRH

 

Beef prices impact the prices of most restaurant companies but WEN (20% of food and paper spend), JACK (20% of commodity basket), TXRH, and CMG are especially exposed.  Even companies that do not buy beef on the spot market are expecting significant margin pressure due to beef costs in 2012.  The chart of live cattle prices, in the “charts” section of this post, below, shows just how far prices have run. Grain prices gaining over the past couple of weeks do not bode well for investors hoping for a rapid snap-back.

 

SUPPLY

 

Last Friday, the biannual cattle inventory report on Friday offered no surprise; short supplies and higher prices look likely over the next few months, at least.  The impact of the 2011 drought is obvious in the numbers: cattle numbers in Texas are down by 11% from a year ago, and numbers in Oklahoma are down by 12%. Cattle and calf numbers in Florida, Mississippi, Nebraska and Wyoming were up by 5%, 6%, 4% and 5% respectively.

 

One point worth noting is that beef replacement heifers were up by 1% year-over-year.  A replacement heifer is a young, female bovine that is raised for the purpose of replacing and improving the cow herd.  This could suggest that producers in certain areas have begun to react to attractive prices by starting the process of expanding their herds.

 

DEMAND


Beef shipments strengthened for the week ended January 21st by 1,956 metric tons versus the week prior’s 13,128 as Mexico, Japan, and Canada purchased 5,100 MT, 3,000 MT, and 3,000 MT, respectively.

 

 

Chicken Wings – BWLD

 

Traditional chicken wing prices comprise 20% of sales, from a COGS perspective, for BWLD and we expect that the elevated level of wing prices will pressure EPS and bring estimates lower.  FY12 estimates have not moved materially over the last few months, despite a steep gain in wing prices.  4Q11 estimates have gained, and the stock price has traded well over the last few days.  Our thesis on the stock remains intact; we do not think the strong 4Q results which we and the market, obviously, are anticipating detract from our view.  FY12 estimates need to come down, management guidance and tone needs to be revised from prior discussion on FY12 outlook, and the company still does not have the right to grow (fully capitalized sales to investment ratio of 0.91). 

 

SUPPLY

 

Egg sets are still down ~5% versus a year ago as the food processor industry continues to search for profit.  At the same time, wing prices continue to move higher.

 

WEEKLY COMMODITY CHARTBOOK - egg sets

 

 

DEMAND

 

We believe that the food service industry will continue to focus on chicken to offset the elevated levels of beef prices in 2012. 

 

 

Wheat/Corn – WEN, TXRH, CMG, PNRA, DPZ

 

Grain prices have been climbing for the past two weeks.  Bernanke’s sustaining of dollar-bearish monetary policy does not bode well for investors looking for substantially lower feed costs. 

 

SUPPLY

 

Wheat is trading higher today as cold temperatures in Europe and Russia may damage the winter crop. 

According to the Congressional Budget Office, improving yields in the U.S. over the next ten years should lead prices lower from current levels.  In the near-term, however, lower yields in Argentina continue to support corn prices.  Adversely dry and hot weather conditions are being blamed for the reduction in the Argentine crop.

 

DEMAND

 

Demand for grains should remain strong as demand for proteins, globally, remains strong.  In terms of news flow, the supply side of the grains set up has been garnering more attention over the past week.

 

WEEKLY COMMODITY CHARTBOOK - commod

 

CORRELATION TABLE

 

WEEKLY COMMODITY CHARTBOOK - correl

 

CHARTS

 

Coffee

 

WEEKLY COMMODITY CHARTBOOK - coffee

 

 

Corn

 

WEEKLY COMMODITY CHARTBOOK - corn

 

 

Wheat

 

WEEKLY COMMODITY CHARTBOOK - wheat

 

 

Beef

 

WEEKLY COMMODITY CHARTBOOK - beef

 

 

Chicken – Whole Breast

 

WEEKLY COMMODITY CHARTBOOK - chicken breast

 

 

Chicken Wings

 

WEEKLY COMMODITY CHARTBOOK - chicken wings

 

 

Cheese

 

WEEKLY COMMODITY CHARTBOOK - cheese

 

 

Milk

 

WEEKLY COMMODITY CHARTBOOK - milk

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more