Takeaway: Dairy prices rising is a negative for $CAKE, $TXRH, $CMG, $SBUX, $DPZ, and $PZZA

A weak dollar over the last week was partly behind the higher commodity prices, generally, on a week-over-week basis.  Coffee prices remain favorable year-over-year, while grains, proteins, and dairy costs are likely to squeeze un-hedged restaurant operators over the next couple of quarters.  On the short side, we are targeting stocks like BLMN and TXRH where we think commodity inflation will be difficult to mitigate from a top-line perspective should our stance that, for each company, top line growth should come in below expectations.


Summary View

Dairy prices are up ~20% versus a year ago as concerns mount over shrinking herd sizes in the United States.   A CME report released this week indicated that the percentage of dairy cows being moved to slaughter is growing and some estimate that a new record high could be achieved when the January 1 inventory report is released by the USDA.  We see this as a negative for CAKE, TXRH, CMG, and SBUX (SBUX has guided to dairy headwind in FY13).  PZZA have their cheese costs hedged but to the extent that dairy prices continue higher, the company’s commodity costs could rise from here.   


Beef prices were flat over the last week as weak economic data and a decline in year-over-year slaughter numbers for cattle YTD.  This article explains that this lesser rate of slaughter is not as bearish a sign as it may seem, given the longer term context and extreme slaughter rates in 2011. 


Longer-term, our view is that beef prices are likely to remain at elevated levels.  Higher feed costs are reducing the number of cattle on feedlots versus a year ago and herd sizes remain depleted after the last two years of drought.  It seems that supplies of beef are set to remain tight for at least a couple of years.  This is a negative for BLMN, TXRH, CMG, JACK, and WEN, among others.


Grains were mixed over the past week largely as a result of the details within the USDA Grain Stocks report released last Friday.  Corn and wheat futures traded sharply higher on the report, which indicated that ending stocks for 2011/12 were below and at the low end of estimates for corn and wheat, respectively.   Soybean stocks were above estimates and the September WASDE projection; soybean prices have declined -1.2% over the last week.  Overall, grain prices remain elevated and, along with energy prices, are squeezing food processor margins.  Ultimately, this is leading to higher costs for food retailers, restaurants, and consumers. 





Refinery and pipeline shutdowns are increasing concern that supplies are not adequate to meet demand.  Gasoline and other commodity-based expenses are squeezing the American consumer.  As we have written in recent posts, we view this inflation as having a negative impact on growth in consumer spending and believe that consensus expectations for same-restaurant sales growth are – in many cases – overly optimistic.  Gas prices are up 11% year-over-year.












COMMODITY CHARTBOOK - crb foodstuffs










COMMODITY CHARTBOOK - chicken whole breast


COMMODITY CHARTBOOK - chicken broilers












Howard Penney

Managing Director


Rory Green



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

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more