Restaurant Commodity Outlook Webinar July 30, 2009

Transcription

1 Restaurant Commodity Outlook Webinar July 30, 2009 David Maloni Principal American Restaurant Association Inc American Restaurant Association Inc. This presentation is protected under U.S. copyright law. Please do not redistribute without permission from American Restaurant Association Inc. Thank you. *This data and these comments are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this entire presentation, including it s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. Covered Parties is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.

2 Commodity Update Part I Grain Price Inflation Update Ethanol and Biodiesel Feed Outlook Acreage, supply and price projections Part II Implications of General Grain Inflation for the Restaurant Industry Protein and dairy supply and price expectations

3 Grain Inflation Annual US Grain Prices, Source NASS Price e(bushel) Why? Inflated crude oil Limited acreage and crop shortfalls Biofuels US dollar Wheat Corn Soybeans

4 Ethanol Update As of July 14 th, per the Renewable Fuels Association, ethanol capacity in the US was roughly 12.7 billion gallons per year with an additional 1.8 billion gallons per year of capacity under construction. Current ethanol capacity has more than doubled since billion gallon at full capacity would utilize an estimated 4.5 billion bushels of corn. The 1.8 billion gallons of capacity under construction could utilize an additional 630 million bushels of corn. Is ethanol profitable? Margins have greatly improved as of late. Hedge positions i and DDG sales have likely l caused profitability to be better than the model suggests. Crude, corn and natural gas prices will impact margins going gforward. $ per gallon US Ethanol Producer Profitability Source ARA Ethanol profitability in notable trouble

5 Economic Incentive Roughly 5.5 billion gallons are mandated to be blended per the Clean Air Act. The rest is driven by economics does it make more money to blend gasoline with ethanol? Roughly 20% of the ethanol capacity in the US is reported to be idled. Gasoline blenders trading Renewable Identification Numbers (RIN s) to get around the 10.5 billion gallon mandate in 2009 and 12 billion gallon mandate in Ethanol imports will help as well. Ag Secretary Vilsack is in favor of increasing the blend percentage of ethanol in gasoline. This needs to be monitored. Decision is made by the EPA. Current USDA forecast is for 3.65 billion bushels of use from the 2008/09 crop. 4.1 billion forecasted for 2009/10. Do ollars per gallon Economic Incentive to Blend Gasoline with Ethanol 11/2/06 1/2/07 3/2/07 5/2/07 7/2/07 9/2/07 11/2/07 1/2/08 3/2/08 5/2/08 Source ARA 7/2/08 9/2/08 11/2/08 1/2/09 3/2/09 5/2/09 7/2/09

6 Inflated Grain Price Implications Total acreage for corn, soybean and wheat was a record high for the 2008/09 crop and will remain elevated for However, coming at the expense of other crops including vegetables, dry beans, etc. Therefore, food inflation occurring in items including canned tomatoes, iceberg lettuce, and potatoes California Tomato For Processing Contracted Price Ton Dollars Per Market has risen 64% in the last 3 years Sources: USDA, ARA

7 Wheat Outlook 2009/10 will experience beginning i stocks million bushels Watch world production totals, exports and the US dollar 2009 Dark Northern Spring wheat prices forecasted to average 30% below 2008 but still be 10% higher than the 5 year average dark northern spring wheat forecasted at $6.96, $10.44 in 2008, prior 3 year average of $ dark northern spring wheat forecasted at $7.36 Wheat Ending Stocks (May 31) as a Percent of Total Use Hard Red Hard Spring Soft Red White Duram Total 2008/09 10 Year Avg 2009/10

8 Soybeans Existing soybean supplies are historically tight. Ending stocks per use ratio less than 5%. Argentina farmer/government dispute. Drought reduced crop in Argentina 2009/10 soybean acreage forecasted at 77.5 million which is a record and 2.4% more than the prior crop. 2009/10 soybean harvest forecasted at 3.26 billion bushels- 10% more than last year and a record Soybean supplies should improve with the new crop. 2009/10 crop soybean meal forecasted at $290 a ton, 9% less than the 2008/09 crop World Soybean Ending Stocks as a Percent of Use Source USDA, ARA / / / / / / / / / / / / / / / /10

9 Corn Existing corn supplies are adequate. 2009/10 corn acreage forecasted at 86 million, virtually even with last year. 2009/10 harvest forecasted at 12.3 billion bushels, 2% more than the current crop. Stocks should be adequate with the new crop. Ethanol use may gain steam Corn price forecasted at $3.65 a bushel, 8% less than the current crop US Corn Harvest, Source NASS Acres Source USDA, ARA

10 Structural Shift US Annual Average Farm Corn Price, Source USDA Ethanol 33 years World War II 29 years Exports open to Asia 34 years Pr ice(bushel) e

11 Feed Outlook Crude Oil, Corn, Wheat and Soybean Meal llars(barrel) Dol Hundred d Dollars (Bush hel) 30 0 Crude Oil Corn Soybean Meal Minn Wheat

12 Part II Implications of General Food Inflation for the Restaurant Industry Biggest Spends Beef, Chicken, Dairy and Pork Feed prices pressure protein and dairy prices. Output slowdowns occurring Higher protein and dairy prices coming? Attributes of successful supply chain operators.

13 Feed Outlook Estimated Cost to Produce One Pound of Chicken Do ollars Corn Soybean Meal 0

14 180, , , , ,000 80,000 60,000 Feed Outlook United States Feed Consumption of Corn, Source USDA 1970/ / / / / / / / / / / / / / / / / / / /2009

15 Protein and Dairy Production The Tipping Point In the spring and summer of 2008 there were signals that the chicken, hog, cattle and dairy industries had all accelerated plans to curb future supplies due to declining margins. Those signals have continued and output cutbacks are underway. Chicken Hogs Cattle Dairy The 6 week moving average for broiler egg sets as of the middle of July was 4% less than a year ago and the lowest for the date in 5 years. Broiler eggs are set roughly 10 weeks before being sent to slaughter for chicken output and are a solid indicator of coming chicken production plans. Hatcher flock forecasted to be 6% smaller by December Sow slaughter was strong last year but then waned. Signs are that sow slaughter is picking up. Sow prices have declined 30% in recent weeks. Sows are adult female pigs and a good indicator of the size of the breeding herd. The July 1 st US cattle and calf inventory was 1.5% less than a year ago. The July 1 st calf inventory was 1.4% smaller than last year. Cattle herd is typically y building at this point but expansion has been cut short in part by higher feed costs. Milk cow slaughter last year trended well above prior year levels. Milk cow slaughter has been strong lately. Milk per cow yield growth has been below average. A reduction in the milk cow herd will lessen the production of milk. Milk per cow yields typically grow at an annual rate of 1.5%. When margins suffer, farmers have a tendency to cut back on feed which can lessen milk per cow yields. Milk per cow yield growth so far this year has been around.5%.

16 Protein Output Expectations Change in Various Protein Production Million Pounds Pork Beef Chicken Source USDA Baseline Stats and ARA

17 Milk Output Expectations Annual lchange in Milk Production Million Poun nds

18 Is there Room for Food Inflation?

19 Somewhat from an export standpoint. Protein and Dairy Demand Do Do We Have a Problem? World production only slowly increasing but demand growth could soften some due to the struggling world economies. China is the world s largest consumer of pork accounting for roughly 47% of total world consumption (US 9%). US chicken leg gquarters typically yone of the least expensive 95 meat protein sources in the world. Beef exports may continue to expand but should remain 90 well below pre BSE discovery (Dec 2003) levels. 85 Forget about butter and cheese exports. Trade should be much lower. 80 Watch the dollar 75 Oh Other impacts; HN H1N1, Avian flu, etc. 70 Somewhat from a domestic standpoint. Per capital pork consumption could rise in 2009 and 2010 as more consumers dine at home. Food service demand is mostly poor but seems to be modestly improving as restaurants get more creative with feature activity. Feature activity will likely favor beef sales at times. Food that is an event could benefit. Low cost steaks, hamburgers, chicken wings. 12/6/2007 1/6/2008 US Dollar Index, Nearby Futures 2/6/2008 3/6/2008 4/6/2008 5/6/2008 6/6/2008 7/6/2008 8/6/2008 9/6/ /6/ /6/ /6/2008 1/6/2009 2/6/2009 3/6/2009 4/6/2009 5/6/2009 6/6/2009 7/6/2009

20 Protein and Dairy Wholesale Price Expectations Market appreciation/depreciation will likely be mixed. Chicken Key restaurant items such has boneless skinless chicken breast (8-15%) and wings (10-25%) could average higher than 2008 levels depending on production cutbacks and demand is expected to see 5-10% increases in chicken breast prices. Wing prices to remain at similar levels. Pork Overall pork prices could be modestly lower (0-5%) if exports continue to suffer could experience significant pork market inflation for bellies and ribs due to production cutbacks. Sows prices may remain deflated so long as deferred hog futures remain deflated. Beef Beef prices could be similar to less (0-5%) in 2009 compared to 2008 depending on demand. Watch the dollar regarding grinds and trimmings. Middle meats watch overall choice production. Beef prices expected to be modestly higher in 2010 depending in a large part to the dollar and the economy. Dairy Milk, cheese and butter prices are expected to average substantially below (15-25%) 2008 levels due to notable deflation in the international dairy markets. Look for 15-30% higher prices in 2010 however. Temporary Inflation? It is my belief that we have entered into a structural upward shift in food prices which started with grain. If the economy stabilizes or improves, look for higher prices, perhaps across the board, in If the economy worsens then all bets are off Watch crude oil, dollar and feed costs.

21 Key Protein and Dairy Factors to Monitor Weekly ARA Chicken Feed CostRatio versus Weekly Chicken Breast Index Choice Percentage of Cattle Grading Choice and Prime 64.00% 62.00% 60.00% 58.00% 56.00% 54.00% 52.00% 50.00% 3.40% 3.20% 3.00% 2.80% 2.60% 2.40% 2.20% 2.00% Prime 2009 Ratio Avg Ratio Chicken Breast 2009 Chicken Breast 2009 Prime 5 Year Avg Prime 5 Yr Avg Choice 2009 Choice CME Block Cheese vs. International Cheese CME Block International Cheese

22 Contracting What s a restaurant chain to do? Contracting Tools Spot- day to day Cash Forward- locked in contract Derivatives- futures, options, o.t.c.'s Suggestions Use the market to dictate contracting not the fiscal budget. Manage risk, do not just try to beat the market or last year. Use all of the tools available and get educated You can hedge cheese, beef products, pork products, energies, fuel surcharge risk, grains and soybean oil Tools are available to cap the upside and let you participate i t in the downside. Work through your suppliers when possible.

23 Summary Several factors expected to cause relatively elevated grain/feed prices to persist Rising world demand US biofuel policy US dollar Implications of higher grain prices for the restaurant industry Biggest Spends Beef, Chicken, Dairy and Pork- tipping point for the protein industries is upon us. Beef, pork and chicken production all forecasted to decline in 2009 Milk production to decline as well Slowed demand could temper any increases or cause decreases with some products and beyond could be much different. Watch crude oil, ethanol, feed and the value of the US dollar.

24 Thank You David Maloni is the Principal and Chief Commodity Analyst for American Restaurant Association Inc., a food commodity research, consulting and risk management organization founded in 1996 specifically directly to the US food service industry supply chain. His proficiency is directed to the protein, dairy, grain and biofuels markets and their impacts on the US food service industry especially in relation to restaurant and hotel buying. David is also a nationally distinguished food commodity market analyst, consultant and author with his expertise featured in The Weekly Commodity Report, The Food Commodity Outlook Report as well as several news sources and publications. David is a series 3 licensed commodity trader and the Principal and founder of ARA Trading Inc., a commodity brokerage directed to the US food service industry to assist clients in managing food commodity market and contracting risk American Restaurant Association Inc. This presentation is protected under U.S. copyright law. Please do not redistribute without permission from American Restaurant Association Inc. Thank you. *This data and these comments are provided for information purposes p only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this entire presentation, including it s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. Covered Parties is defined as American Restaurant Association Inc., ARA Trading and the employees of both companies. Commodity trading involves risks, and you should fully understand those risks before trading.