Sounds interesting! I will try go post a summary of the interview and/or point to the transcripts and video.
Although agricultural prices have generally decreaed for several months, coffee included, Starbucks (SBUX) announced today that it will hike the prices of some beverages by about 1% in the Northeast and the Sunbelt regions of the U.S. SBUX cites “the prices reflect competition in certain markets and higher costs for coffee, fuel and other commodities.”
Note that Starbucks stock was actually down today while the major indices experienced strong rallies.
For more detail see “Starbucks to raise prices in certain regions”
Global supplies of agricultural products are expanding, perhaps in response to past shortages. These forces are driving down prices and discouraging hedge funds from making bullish bets in agricultural commodities. According to Bloomberg in “Funds Reduce Bets on Rising Food Costs to Lowest in 27 Months: Commodities“, the bullishness of hedge funds has reached lows not seen in over two years.
Here is a key quote that describes the situation:
“World food prices tracked by the United Nations retreated for a fifth consecutive month in November, the longest decline in more than two years. The U.S. government said Dec. 9 that combined global inventories of corn, soybeans and wheat will be 3.2 percent larger than anticipated a month earlier. Cocoa capped its longest slump in 50 years last week on increasing supplies from Ivory Coast, the world’s biggest producer.”
DBA, the PowerShares DB Agriculturae Fund ETF, tells the story. the ETF has now sunk to 14-month lows. Today’s price marks the previous post-recovery high in 2009.
On Thanksgiving Day, NPR’s Marketplace included a follow-up segment to a story from 2009 on Jennifer Reese, a San Francisco woman who set out to determine when it is really cheaper to make things at home versus buying in the store. She has now published a book about her experience called Make the Bread, Buy the Butter: What You Should and Shouldn’t Cook from Scratch — Over 120 Recipes for the Best Homemade Foods.
Her general conclusion is that it is cheaper to do the “non-glamorous” things at home, but glamorous activities like raising chickens, goats, and turkeys cost too much in infrastructure to make it worthwhile. It is definitely cheaper to make your own bread and muffins but more expensive to make candied ginger. It is cheaper to buy lemonade than make it – not to mention all the effort it takes to squeeze the lemons. Reese also addresses convenience, food quality, and moral choices.
The book looks like a worthwhile read for those considering to beat higher food costs with homegrown and homespun creations.
The Swiss franc has had an incredible run over the past two years that has accelerated in 2011 as many traders and investors have sought “safety” from the European sovereign debt crisis. The Swiss National Bank has utterly failed in its varied attempts to fight currency appreciation over this time. (See “No Currency Peg Yet for the Swiss Franc As SNB Escalates” for the latest in this drama).
Source: dailyfx.com charts
A story out of Marketwatch provides a fascinating example of the impact of a much stronger currency: price deflation. In “Swiss supermarkets cut prices, cite franc strength” we discover Swiss shoppers are crossing the border to take advantage of their stronger currency to buy cheap goods in places like Germany and France. To win back the business, Swiss supermarkets are cutting prices and pressuring suppliers to lower their prices as well. Stories like these are important to watch as competitive devaluations continue to unfold across major currency countries.
Author disclosure: long USD/CHF
Last week, Imperial Sugar (IPSU) lost 59% of its value in one day after reporting extremely poor earnings. The stock has continued to sell-off over a week later losing an additional 20%. The reason? IPSU is experiencing the worst of all operating squeezes: higher input costs (sugar) and the inability to raise prices to accommodate those costs. In this case, competitive pressures are to blame.
From the earnings report:
“Our inability to increase prices in the face of higher raw sugar costs because of competitive pressures from domestic and Mexican sources was the principal driver of the quarter’s disappointing results,” commented John Sheptor, president and CEO of Imperial Sugar. “Raw sugar purchased during the quarter was priced largely against the March and May futures contracts, which peaked near $40 per hundredweight prior to the USDA import quota announcement in early April. The subsequent decline in the raw sugar futures market which occurred after the quota announcement was only temporary and the raw market has rallied back to near the same level. Our raw sugar costs in the fourth fiscal quarter should see little relief, while sales prices thus far in the fourth quarter have only improved modestly.”
Higher manufacturing costs also hurt operating results in the previous quarter.
Bloomberg reports that sugar prices are not coming down anytime soon. The International Sugar Organization says that current surpluses are not high enough to satisfy demands of importers for stockpiling. Production costs have also risen. See “Sugar to Stay High as Surplus Not Enough to Replenish Stockpiles, ISO Says.”
Retail bacon prices were $4.77 per pound in May and are expected to hit $6 per pound soon. In a somewhat tongue-in-cheek article, CNBC reports in “The Crisis We Should Be Panicking About: Bacon Prices“:
“The bacon community is outraged…I think they’ll make cutbacks other places — stop buying other things so they can afford bacon..Get some good tomatoes and lettuce and forget the other stuff…”
Bacon prices have increased because “…hog farmers have pared their herds due to high feed costs after corn prices hit a record near $8 a bushel last month.”
CNBC reports on food inflation in the context of the typical BBQ. If your typical BBQ is a cheeseburger, baked potato, and beer, you are paying 8.4% more this year than last year.
Other points from the video on year-over-year price changes:
Ground beef up 16.7%
Sirloin steak up 6.9%
Boneless chicken breast down 4.0%
American cheese up 3.6%
Head of lettuce up 14.9%
Tomatoes down 6.5%
White bread up 8.3%
Potatoes up 21.4%
Wine up 0.4%
Coca-Cola Company (KO) raised prices on soft drinks 2% earlier this year. Reports are coming out now that the company will raise prices again on July 31. This time it will be a 3-4% pop.
See “Coca-Cola to raise prices in July” for more details.
Thanks to improvements in crop production, monetary tightening, a slowdown in economic growth rates, and currency appreciation, the trend now appears to be heading down for core and headline inflation in Asia. Different countries are wrestling with different problems, but, overall, economists and analysts quoted in “Food Inflation Begins to Moderate in Asia” seem to be getting optimistic about the prospects for inflation.
The article includes some statistics on the huge difference in price trends on various food items in India:
“The cost of bananas in New Delhi is up 50 percent over the year, while paneer – a form of cottage cheese – has risen 26 percent to 145 rupees per kg.
Yet other food prices are falling. Staples such as tomatoes and potatoes, which peaked earlier in the year at levels that caused great stress to poorer families, have seen prices moderate in recent weeks.”
J.M. Smucker (SJM) announced today that “sustained increases in green coffee costs” have forced the company to hike prices on many of its coffee brands:
“The J. M. Smucker Company…announced today that it increased the list price for the majority of its coffee products sold in the United States, primarily consisting of items sold under the Folgers®, Dunkin’ Donuts®, Millstone®, and Folgers® Gourmet Selections® brand names. Prices will increase an average of 11 percent on impacted items.”
This price hike motivated AP to run a story summarizing the state of the coffee industry and market and the experiences with soaring costs – see “Coffee drinkers keep chugging, as prices rise“. AP notes that SJM has increased coffee prices four times in the past year. SJM’s stock performance suggests this pricing power has contributed to a strong bottom line.
Even fast food restaurants have determined that the market can accept some price hikes. In its latest earnings report, Wendy’s/Arby’s Group (WEN) provided an outlook that includes plans to implement “prudent” and “strategic” price increases to at least partially offset rising commodity prices, especially in beef (emphasis mine):
“We expect to generate strong sales growth at Wendy’s for the remainder of the year driven by exciting new product introductions, including hamburgers, chicken and salads, in addition to strategic price increases…Margins will be negatively impacted by increases in commodity costs primarily driven by unprecedented beef prices that are affecting the restaurant industry. We have reaffirmed our same-store sales outlook and expect to offset some of these commodity increases with prudent price increases, while protecting transactions and market share…”
WEN expects improved sales trends through the rest of the year, and this must help give them the confidence to raise prices.
The company’s confidence really shines through as management discusses future prospects further in light of higher commodity costs:
“Although we have revised our outlook for the year to reflect higher expected commodity costs, we continue to make significant strategic progress improving our core menu offerings including breakfast. We are also pleased with our progress developing Wendy’s international business, which represents a significant opportunity. The Arby’s turnaround is progressing nicely and we plan to resume our stock buyback program after the conclusion of the strategic alternatives process, subject to market conditions. As we’ve said before, 2011 is a transition year and we are confident that the investments we are making will position Wendy’s for 10% to 15% average annual EBITDA growth in 2012 and beyond…”
Disclosure: author owns WEN
Dean Foods (DF) is yet one more company demonstrating confidence in its ability to wield pricing power. DF reported earnings Tuesday that showed weak pricing in milk but a strong focus in raising prices to battle rising input costs (emphasis mine):
“…First, we have stepped up our agenda to reduce costs and improve profitability. Second, because input cost volatility is here to stay, we are focused on pricing to offset inflation through efficient pricing mechanisms. We are working hard to maintain, and where necessary, improve our pricing tools…”
I liked how the earnings announcement avoided direct mention of raising the prices of non-milk products.
The market liked the announcement too. The stock soared 11.5% on the day.
Pilgrim’s Price (PPC) is the second-largest chicken producer in the world. It emerged from bankruptcy at the end of 2009 just as the economy was finally recovering from the recession. Over a year later, the company continues to struggle, especially with soaring costs for feed and energy.
PPC disappointed the market with its first quarter financial performance. The report contained some important information on market prices and industry cost pressures as well as the prospect for higher prices in the future. Key quotes below (emphasis mine):
“Market prices for breast meat averaged $1.26 per pound, down 10% from a year ago, while market prices for wings fell 38%, to $1.00 per pound.”
“Export demand remained very strong during the quarter, with volume rising 90% to an all-time record for the period and sales increasing by a similar amount. The company attributed export gains to the lower value of the dollar as well as chicken’s value proposition versus higher-priced beef and pork in international markets.”
“…the company has recently succeeded in negotiating additional price increases with some of its retail and foodservice customers in response to continued increases in feed costs.”
“Despite now having covered nearly all of our anticipated grain needs through the end of 2011, we are facing at least $500 million in higher feed costs this year. Our customers recognize that the unrelenting upward march of corn and soybean meal is placing extreme pressure on chicken producers and that there must be some sharing of the cost burden in order to ensure a viable business model. To achieve that, we will continue to look at further price increases and will execute structural changes in our book of business with regard to fixed versus market-based pricing…”
Note: PPC declined 9.5% in response to the first quarter’s earnings results.
Panera Bread (PNRA) will be raising prices and expects the increases to stick. In narrowing guidance for sales growth from 4.0% to 6.0% to 5.0% to 6.0%, PNRA stated the following:
“This target assumes transaction growth of 2.5% to 3.5% and average check growth of approximately 2.5%. The increased average check growth target is primarily a result of an incremental 1.0% price increase the Company intends to take to offset increased inflation in the latter part of 2011. The incremental price increase and increased inflation are expected to offset each other at the operating margin line and have no impact on the Company’s earnings per diluted share target.”
PNRA is one of the best run operations in the casual dining segment, so it is no surprise they have been able to manage costs and pass along price increases without skipping a beat. The stock has been making fresh all-time highs for almost a year now.
“Agflation” remains strong.
The price of lambs is up 58% to $2.20/pound, a record high. Wool prices are also at 20-year highs.
While demand for lamb has been strong, supply has suffered, especially amongst Australian and New Zealander farmers. In “Sheep growers benefit from low supply, high demand“, Yahoo! Finance reports through AP:
“Australia has about 70 million sheep, down from 170 million 20 years ago. The drop has been blamed on the ending of a government support program and extended drought followed by recent flooding…In New Zealand, sheep numbers have dropped from about 70 million to 40 million, and many producers have switched to dairies and beef production.”
“The campaign to be launched in 2011, titled 2+2+2= Rebuild, asks that each producer increase the size of their operation by two ewes per operation or by two ewes per 100 by 2014, increase the average birthrate per ewe to two lambs per year and increase the harvested lamb crop rate by 2 percent. This program provides an attainable, challenging, measurable and realistic plan for increasing sheep numbers in the United States and maintains jobs and infrastructure – past studies have shown that for every 1,000 head of ewes, 18 jobs are created. Importantly, the program will provide approximately 315,000 more lambs and 2 million pounds of wool for the industry to market.”
In February, the average retail price of a broad selection of meets lept upward. In “Beef prices soar“, CNNMoney reports the following year-over-year price jumps according to market research firm FreshLook Data:
- Beef up $3.87, 12.4% – beef is America’s #1 source of protein in sales ($74.3 billion in 2010, 59.6 pounds per capita), but the inventory of cattle has dropped to 92 million, a level last seen 53 years ago.
- Chicken up 3.9%
- Turkey up 5.4%
- Veal up 6.7%
- Pork up 10%
The article also contains some interesting statistics and descriptions of the beef business. In particular, beef producers are blaming rising input costs for the prices they have passed on to consumers:
“‘There’s inflation in everything we buy to run our business,’ said Bill Donald, president of the National Cattlemen’s Beef Association, an advocacy group for beef producers.”
The Hershey Company announced a comprehensive increase in prices today “across the majority of its U.S., Puerto Rico and export portfolio” in response to a broad-based increase in the company’s input costs:
“A weighted average price increase of approximately 9.7 percent across the Company’s instant consumable, multi-pack, packaged candy and grocery lines is effective today. These changes will help offset part of the significant increases in Hershey’s input costs, including raw materials, packaging, fuel, utilities and transportation.”
HSY expects these price hikes to benefit the company’s financial results in its 2012 reporting year.
The NY Times printed a mostly anecdotal article about companies hiding price increases in smaller packages in “Food Inflation Kept Hidden in Smaller Bags” (reprinted by CNBC). The article chronicles one shopper’s slow awakening to the shrinking packages all around her as she tries to stretch the family budget to keep the same food on the table. Examples of shrinking products include a can of Chicken of the Sea albacore tuna, Doritos, Tostitos, Fritos, “fresh stack” packages of Nabisco Premium saltines and Honey Maid graham crackers, Procter & Gamble “Future Friendly” products, and the unwrapped Reese’s Minis.
We have printed similar stories of companies using shrunken packages as a method for passing on stealth price increases (see category “Disguised Inflation“):
- November 28, 2009: “Food packages are shrinking, but prices remain the same“
- January 25, 2010: “Stealth inflation“
- November 11, 2010: “Inflation hidden in higher unit costs“