Despite dollar weakness, macroeconomic concerns contributed to what was a soft week for commodity prices. Grains, coffee, chicken and dairy all declined on the week with hogs, soybeans, and rice posting modest gains. Chicken wings were flat on the week but are now up 110% versus this time last year. The most important take away from this note is that BWLD is, in our view, going to have to add one incremental topic to its upcoming EPS call: chicken wing prices. The recent presentation at the TAG conference, incredibly, bore no mention of the company’s most important input cost.
GAS PRICES WATCH
As we near the high-traffic summer season, the topic of gas prices is continuing to feature in news reports and the conversations of everyday Americans. As the national average retail gasoline price is currently just below $4, having increased through 2012 to-date in an expeditious manner. Much of the resulting negative impact has been mitigated by the favorable weather that has boosted economic activity but weather is no longer a significant factor in the data.
COMPANY COMMENTARY ON GAS PRICES
WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.
BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.
CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.
DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.
SONC: We've seen a rising employment, declining unemployment – consumer confidence has improved somewhat, but at this point, I wouldn't say that we've seen a negative impact from gas prices that we can discern.
SUPPLY & DEMAND:
Beef
Supply: Producers are facing obstacles to ramp up herd sizes in still-elevated feedstuffs and gasoline prices.
Demand: On April 6th, beef prices hit an eight-month low as the “pink slime”, or lean fine-textured beef, controversy and economic concerns weighted on demand expectations. Today, prices are rising as speculation mounts that export demand for U.S. beef may increase.
A survey of cattle-industry leaders suggests the average price for cash cattle will continue its recent decline, down another 91 cents to $120.99 per cwt this week.
Comments: One interesting data point we read this week is that it takes the net revenue from roughly six calves to cover the development and production costs of each replacement heifer.
Coffee
Supply: According to the International Coffee Organization, coffee production for the season started in October will be 1.9% higher than estimated a month ago.
Demand: News reports during the last week highlighted the weaker dollar as lifting investor demand in coffee, cocoa, and sugar. J.P. Morgan said today that global coffee demand may accelerate to 2% in 2012/13 after falling by 1% a year earlier because of “adverse macroeconomic conditions”. We are not going with that call at this point, given our Macro Team’s outlook.
Comments: Falling coffee prices are good for company margins as long as demand is not falling so fast as to impact sales to a significant degree. Starbucks has its coffee needs locked into fiscal 2013.
Chicken
Supply: Egg sets placements continue to contract at around the same rate, -6%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production. As the chart below shows, supply is not showing any clear signs of picking up.
CORRELATION
CHARTS
Howard Penney
Managing Director
Rory Green
Analyst