Is Inflation About to Spread More in the Food Industry?

Inflation seems to have taken a back seat to headlines these days, but it has found a firm table to sit at in the food industry. Food giant ConAgra (NYSE:CAG) recently reported a 42% drop in fiscal first quarter earnings due to a 15% jump in the cost of goods.  Now, inflation concerns are spreading to other food giants.

On Thursday, analysts at William Blair reduced their ratings on Chipotle Mexican Grill (NYSE:CMG) and P.F. Chang’s China Bistro (NASDAQ:PFCB) to market perform.  The downgrade was due to food-cost pressures on next year’s earnings growth. William Blair explained that short-term profit estimates on Chipotle “may prove too aggressive, particularly for Q4 and Q1.”

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Shares of the fast-casual diner are down more than 2% on the inflation worries.  As the chart above shows, Chipotle has been outperforming competitors such as McDonald’s (NYSE:MCD) and YUM! Brands (NYSE:YUM) by super-sized amounts. Although Fed Chairman Ben Bernanke says inflation will prove temporary, the food industry is expecting higher inflation.  ConAgra recently raised its inflation expectations to 9%-10% for its consumer foods segment. William Blair also explained that higher beef costs are set to hurt both Chipotle and P.F. Chang’s.

Going forward, investors will need to monitor inflation closely.  Yesterday, YUM! Brands gave evidence that inflation will indeed spread to other food companies.  Furthermore, commodity inflation is only part of the problem.  YUM! Brands explained that commodity inflation is to run about 8%, while labor inflation runs at 20%.  Companies like YUM! Brands, McDonald’s, and Chipotle are expanding into growing China in search of sales growth.  However, rising costs and a China slowdown are threatening the move.  For investors seeking more detailed professional analysis on other commodities (NYSE:RJI) and related investments, we invite you to try our premium service free for 14 days.