An Economic Look at 2015

A LOOK AT THE FOOD
INDUSTRY
Insight gathered by
The Food Institute
April 29, 2015
On a month to month basis
Growth seems to be slowing
Source: FOOD INSTITUTE analysis of Census Bureau data.
Tides Are Changing For Retailers…Margin‐wise
But
Grocery Sales Come From Many Sources
Source: FOOD INSTITUTE analysis of Census Bureau data.
Restaurant sales are booming
Source: FOOD INSTITUTE analysis of Census Bureau data.
Are Restaurant Sales Really
Surpassing Grocery? No and Its Not Even Close
Source: FOOD INSTITUTE analysis of Census Bureau data.
CONCLUSIONS
Grocery store sales are somewhat sluggish
Grocery sales are not!
Supercenters, Clubs, Drug Stores and other
venues are lifting grocery sales
Retailer food margins are improving as
wholesale prices are outpaced
Grocery sales continue to surpass restaurant
sales despite what the press has said
CONTACT US FOR QUESTIONS
 Brian Todd/President
 201-791-5570 ext. 217
 Brian.Todd@FoodInstitute.com
Retail Food Price Outlook
The Food Institute Webinar: An Economic Look at 2015
April 29, 2015
Annemarie Kuhns
USDA, Economic Research Service
2014 inflation near historical average
Percent change in the annual Consumer Price Index (CPI) for food at home, 1995 ‐ 2014
Percent Change
7
6
20‐year average: 2.6%
5
4
3
2
1
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Source: USDA, Economic Research Service using Bureau of Labor Statistics data.
2
Annual percent change in food prices by category, 2014
Beef and veal
Pork
Poultry
Fish and seafood
Eggs
Dairy products
Fats and oils
Fresh fruits
Fresh vegetables
Sugar and sweets
Cereals and bakery products
Nonalcoholic beverages
Other foods
‐2.0
0.0
2.0
4.0
6.0
8.0
10.0
Percent Change, 2013‐2014
12.0
14.0
Source: USDA, Economic Research Service using Bureau of Labor Statistics data.
3
Percent change in major CPI categories, 2005 ‐ 2014
Percent change
40
35
30
25
20
15
10
5
0
Source: USDA, Economic Research Service using Bureau of Labor Statistics data.
4
Where a food dollar goes…
Finance & Other, 3.6
Insurance, 3.6
Agribusiness, 3.6
Energy, 6.3
Farm production, 14.6
Retail trade, 22.6
Food processing, 24
Wholesale trade, 13.9
Packaging, 3.1
Transportation, 4.7
Source: USDA, Economic Research Service, 2012
5
Potential for drought to impact food prices
• CA drought impact on food prices
– Potential to have long an lasting effects on fruit, vegetable, dairy, and egg prices
– Length and severity is not yet realized
– Crop decisions affect prices further down the line
• Drought conditions in Texas/Oklahoma impact beef and veal prices, but are improving
6
7
Energy prices and food prices
• The importance of energy prices depends on the food category
– More important as processing and transportation costs increase in share
• Diesel and electricity prices are key inputs to ERS CPI forecast models
8
Price of crude oil and change in Consumer Price Index (CPI) for selected food categories
120.00
Average annual price index, 1982‐84 = 100
400.0
105.00
350.0
90.00
300.0
75.00
250.0
60.00
200.0
45.00
150.0
30.00
100.0
15.00
50.0
0.00
0.0
Dollars per barrel
1994
1998
2002
Crude oil price (West Texas Intermediate)
2006
2010
Fresh Produce CPI
2014
Cereals and bakery products CPI
Source: USDA, Economic Research Service using data from the St. Louis Federal Reserve Economic Data (FRED) and U.S. Bureau of Labor Statistics.
9
Strengthening U.S. dollar
• Fastest rise in 40 years
• Increasing imports
Exports ↓
Imports ↑
• Decreasing exports
10
2015 inflation predicted to be near historical average
Percent change in the annual Consumer Price Index (CPI) for food at home, 1995 ‐ 2015
Percent Change
7
20‐year average: 2.6%
6
5
4
3
2
1
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: USDA, Economic Research Service using Bureau of Labor Statistics data.
11
2015 forecasts, by retail food category
Other foods
Nonalcoholic beverages
Cereals and bakery products
Sugar and sweets
Fresh vegetables
Fresh fruits
Fats and oils
Dairy
Eggs
Poultry
Pork
Beef and veal
0
1
2
3
4
Percent Change
5
6
7
Source: USDA, Economic Research Service.
12
Food categories to watch in 2015:
Beef and veal
• Retail beef and veal prices rose 12.1% in 2014 • Reductions in U.S. cattle inventory
‐ Herd sizes similar to the 1950s
‐ Texas and Oklahoma drought further delayed herd expansion
• Expectation of herd expansion in 2015
13
Food categories to watch in 2015:
Pork
• Effects from PEDv subsiding
• Farm‐level hog prices are expected to fall in 2015
• Retail pork prices are expected to rise 0.0 to 1.0 percent in 2015
14
Food categories to watch in 2015:
Fresh produce
• Fresh fruit prices are expected to rise 2.5 to 3.5 percent
– Citrus greening – Polar vortex
– California drought
• Fresh vegetable prices are expected to rise 2 to 3 percent
– Potential for further impacts from California drought
15
Food categories to watch in 2015:
Eggs
• Egg prices rose 8.4% in 2014 and expected to rise 2.5 to 3.5 percent in 2015
‐ Prices are seasonally driven
‐ Will the new law in CA requiring larger cages for birds have an effect?
16
Food categories to watch in 2015:
Non‐perishable food items
• Fats and oils and cereals and bakery products are expected to see below average inflation
– Large crop yields for soybeans and wheat
– Fats and oils are expect to rise 0 to 1 percent
– Cereals and bakery products predicted to rise 0.5 to 1.5 percent
17
Amber Waves:
Presents current ERS economic and policy research on agriculture, food, rural America, and the environment for policymakers, academics and the public.
• Via web connection or mobile app
http://www.ers.usda.gov/AmberWaves/
18
Resources for food price trends research
• ERS CPI Forecasts:
http://www.ers.usda.gov/data‐products/food‐price‐
outlook.aspx
• ERS California Drought Page:
http://www.ers.usda.gov/topics/in‐the‐news/california‐
drought‐farm‐and‐food‐impacts.aspx
• AMS Fruit and Vegetable Report
http://www.ams.usda.gov/mnreports/fvwretail.pdf
• IMF World Commodity Prices
http://www.imf.org/external/np/res/commod/index.asp
19
Thank You!
Contact Information: Annemarie Kuhns
amkuhns@ers.usda.gov
202‐ 694‐5351
OR
David Levin
David.levin@ers.usda.gov
202‐694‐5353
20
20
Food Institute Webinar
Assessing Market Risk in a Changing Economic Landscape
Steven McManaman – BMO Capital Markets – Financial Products Group
April 28, 2015
INTEREST RATE OUTLOOK
U.S. Interest Rate Environment: Opposing Forces
FUNDAMENTALS PRESSURING RATES HIGHER

Strong underlying US economic data
 Labor market strongest since tech boom of 1999
 Consumer confidence at highest levels since 2007
 Housing market continues to support GDP growth
despite headwinds
 Manufacturing continues to grow, but at a slower pace

Expectations for tighter Fed policy
MIX OF TECHNICAL AND FUNDAMENTAL FACTORS
PRESSURING RATES LOWER

Globally accommodative central banks widen yield
differentials

Bearish global economic and political developments
prompting persistent flight-to-quality / safe-haven bid in
Treasuries

Benign inflation expectations

Dovish Fed Commentary
Source: Bloomberg / BMO Capital Markets
Opposing forces limit trading ranges; positive fundamentals appear more
sustainable long-term, but near-term outlook murky
2
INTEREST RATE OUTLOOK
Recent Term Rate Performance
Short and Intermediate Term Rates
SWAP RATES FROM APRIL 2012 THROUGH APRIL 2015
2.75%
3Y Swap Rate
5Y Swap Rate
2.25%
7Y Swap Rate
1.75%
1.25%
0.75%
0.25%
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Source: Bloomberg / BMO Capital Markets
Yield curve flatter as fund flows depress longer-term yields
while short-term rates are buoyed by rate hike expectations
3
Source: Bloomberg / BMO Capital Markets
INTEREST RATE OUTLOOK
Long-Term History of US Yields
Recessions
5-Year Treasury Note
3-Month LIBOR
16%
14%
Continental
Illinois fails
Black Monday
Stock Market
Greenspan
Crash
becomes Fed
Chairman
12%
Yield
10%
8%
Euro
introduced
6%
Fed raises
rates by
2% over 6mo. period
NASDAQ
peaks at height
of dot-com
bubble
Asian
financial
crisis
2%
Banks bail out LongTerm Capital Mgmt.
1984
1986
1988
1990
1992
1994
1996
1998
Lehman files
for bankruptcy
Home sales
China joins the slow sharply
WTO
Budget impasse
leads to Partial
U.S. gov’t
shutdown
IMF provides
aid to Russia
4%
0%
1982
Federal
Reserve raises
rates amid U.S.
boom
Orange County,
CA declares
bankruptcy
2000
2002
9/11
Attacks
2004
Bernanke
becomes Fed
chair
2006
Structural changes driving long-term rate movements
4
Source: Bloomberg / BMO Capital Markets
2008
Euro-anxiety drives
T-Bond yields to
record lows
Fed begins
Operation
Twist
Fed
implements
QE1
QE2
QE3
2010
2012
2014
INTEREST RATE OUTLOOK
U.S. Labor Market Showing Improvement
PRIVATE SECTOR JOB CREATION
US UNEMPLOYMENT RATE
UNEMPLOYMENT RATE & WAGE GROWTH
KEY FACTORS
● US labor market strongest since dot-com bubble in terms of recent string
of Nonfarm Payroll gains
● Wage growth remains substandard, potentially due to a “wage hangover”,
resulting from the 2007-2009 recession
 End of extended unemployment benefits and persistently high
“under-employed” also limiting wage gains
● Job opening data (numerical and anecdotal) signals rising pressures on a
growing range of skill sets
Headline employment data continues to improve while
secondary data further signal an improving job market
5
Source: Bloomberg / BMO Capital Markets
INTEREST RATE OUTLOOK
Dissecting U.S. Inflation
CORE CPI GOODS AND SERVICES
COMPONENTS OF CPI SERVICES LESS ENERGY
Core CPI goods
60.00%
Core CPI services
% of Total CPI Services less Energy
3.50
2.75
YoY %
2.00
1.25
0.50
-0.25
2010
2011
2012
2013
30.00%
20.00%
10.00%
Components
2014
HEADLINE VS. CORE CPI
COMMENTARY
16
50yr Avg
Feb-15
Mar-15
14
Headline CPI
4.16%
0.00%
-0.10%
Core CPI
4.09%
1.70%
1.80%
12
Headline PCE
3.63%
0.30%
TBD
Core PCE
3.53%
1.37%
TBD
10
% Change YoY
40.00%
0.00%
-1.00
● As the labor market improves, core services CPI should follow suit
● Service sector comprises nearly half of GDP while goods make up just less
than a quarter, reinforcing that service sector inflation should be the primary
focus
8
● Since the Fed expects the impact of lower energy costs to be temporary
anyway, the overall decline in inflation expectations likely will not last
6
4
● Moreover, the Fed has expressed it need only be “reasonably confident” that
inflation will move back to the 2% target over the medium term before it moves
to raise rates
2
0
Headline CPI
‐2
Core CPI
‐4
'65
6
Shelter
Water/Sewer/Trash
Household Operations
Medical Care
Transportation
Recreation
Education
Other
50.00%
'70
'75
'80
Source: Bloomberg / BMO Capital Markets
'85
'90
'95
'00
'05
'10
'15
Lack of headline inflation may mask
building price pressures
INTEREST RATE OUTLOOK
5.00%
Base Case: 3M
LIBOR Fwd Curve
LIBOR Does Not
Move
Rate Hikes Delayed
Current Fed Forecast
4.00%
3‐Month LIBOR (%)
Economic Upturn Scenarios
Economic
Downturn
Scenarios
Base
Case
Mapping Possible Future Interest Rate Scenarios
3.00%
2.00%
1999 - 2000 Rate
Hike Cycle
1994 - 1995 Rate
Hike Cycle
2004 - 2006 Rate
Hike Cycle
1.00%
0.00%
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Market expectations for pace and magnitude of Fed tightening
benign relative to Fed projections and previous tightening cycles
7
Source: Bloomberg / BMO Capital Markets
Apr-20
CONTACT DETAILS
BMO Capital Markets - Financial Products Group
Steven McManaman
Managing Director – Head of
U.S. Corporate Origination
Financial Products
115 South LaSalle Street
37th Floor
Chicago, IL 60603
Tel.: +1-312-845-4010
steven.mcmanaman@bmo.com
8
Caroline O’Kelly
Director
Financial Products
115 South LaSalle Street
37th Floor
Chicago, IL 60603
Tel.: +1-312-845-4010
caroline.okelly@bmo.com
APPENDIX
Disclaimer
This material has been prepared with the assistance of employees of Bank of Montreal and BMO Harris Bank N.A. (collectively “BMO”) who are involved in
derivatives sales and marketing efforts. Accordingly, it should be considered to be a solicitation of derivatives business generally and not a research report
that reflects the views of disinterested research analysts.
Notwithstanding the foregoing, this material should not be construed as an offer or the solicitation of an offer to sell or to buy or subscribe for any particular product or
services (including, without limitation, any commodities, securities or other financial instruments).
We are not soliciting any specific action based on this material. It is for the general information of our clients. It does not constitute a recommendation or a suggestion
that any investment or strategy referenced herein may be suitable for you. It does not take into account the particular investment objectives, financial conditions, or
needs of individual clients.
Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your
unique circumstances, or otherwise constitutes an opinion or a recommendation to you. BMO is not providing advice regarding the value or advisability of trading in
commodity interests, including futures contracts and commodity options or any other activity which would cause BMO or any of its affiliates to be considered a
commodity trading advisor under the U.S. Commodity Exchange Act. BMO is not undertaking to act as a swap advisor to you or in your best interests and you, to the
extent applicable, will rely solely on advice from your qualified independent representative in making hedging or trading decisions. This material is not to be relied upon in
substitution for the exercise of independent judgment. Any recipient of these materials should conduct its own independent analysis of the matters referred to herein,
together with its qualified independent representative, if applicable. The recipient should seek advice based on its particular circumstances from its own independent
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obligation to correct or update these materials. These materials do not contain all information that may be required to evaluate any transaction or matter and information
may be available to BMO and/or its affiliates that is not reflected herein.
“BMO Capital Markets” is a trade name used by the BMO Investment Banking Group which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO
Nesbitt Burns Inc. in Canada, BMO Capital Markets Corp. in the U.S. and BMO Capital Markets Ltd. in the U.K. “Nesbitt Burns” is a registered trademark of BMO Nesbitt
Burns Corporation Limited, used under license.
BMO Harris Bank N.A. is not a registered swap dealer. As a result, BMO Harris Bank N.A. is not subject to the regulations applicable to registered swap dealers.
Borrowers entering into swaps with BMO Harris Bank N.A. will not be covered by the protections afforded by such regulations, including risk disclosure and other
informational requirements, margin segregation requirements and other provisions.
“BMO (M-bar rounded symbol) Capital Markets” is a trade-mark of Bank of Montreal, used under license.
9
Lou Biscotti - WeiserMazars:
Louis J. Biscotti has been a leader in the field of accounting for
more than 40 years, focusing his practice on improving company
growth and profitability. Lou’s clients represent a variety of
industries, but he is particularly well known for his work in the
manufacturing and distribution sector, especially the food
industry. He has helped many of these firms to grow from small
emerging companies into organizations worth hundreds of millions
of dollars.
Prior to joining WeiserMazars, Lou founded Biscotti, Toback &
Company, a full service CPA and business advisory services firm,
which was among the top twenty firms on Long Island. Lou’s
multi-disciplinary background, a combination of CPA, MBA and
advanced study in Manufacturing, Systems Analysis, Management
Consulting, Strategic Planning and Technology, including
designation as a CITP (Certified Information Technology
Professional), has made him nationally recognized as an
accounting and business management specialist. Biscotti, Toback
& Company was the premiere food industry accounting firm in the
Northeast and was honored as one of “The Best of The Best” by
national industry publications Inside Public Accounting and
Accounting Today.