Benefit From Cheaper Pork

My last two pieces have focused on sliding costs and companies that are positioned to benefit from deflationary cost pressures. In other words, it's more than oil prices that have been sliding, but not all prices have altered course to that vector or, for your inner maths geek, that negative slope line. More than a year ago, I started keeping close tabs on the protein complex -- beef, pork, chicken and shrimp prices. Aside from enjoying a nicely grilled piece of meat, those commodities are key inputs for restaurant stocks, ranging from the much-beleaguered McDonald's (MCD) to the newly public and super tasty Shake Shack (SHAK) as well as Chipotle (CMG), El Pollo Loco (LOCO) and dozens of others. There have been two driving factors behind protein demand. First in the Western world we have seen a shift in eating habits toward low carb, Paleo, gluten-free and other, healthier diets that are more protein-centric. Second, in the developing economies, rising living standards have shifted eating habits from rice-based diets to ones that include more protein. It's very similar to what Colgate (CL) told me a while back -- that consumers in the emerging economies shifted from tooth powder a few times a week to every day, and eventually started to mix in toothpaste. Eventually, as their incomes allowed, brushing became a near daily event. We are seeing the same development with protein, resulting in greater global demand. This time last year, beef and pork prices were on the cusp of breaking out to the high side, given herd constraints and a breakout of swine flu, respectively. We've seen both reverse over the last few months, with pork prices dropping almost 30% year over year and more than 50% from the peak last July. Beef prices, on the other hand, have come down more than 20% from September 2014, but year over year they are still up 10%. Comments from Chipotle as recently as six weeks ago suggest that higher beef prices will be here for the balance of 2015 as the beef herd attempts to grow in size. Year over year chicken prices have climbed, which I attribute to greater demand associated with beef prices moving higher. But last week, the U.S. Department of Agriculture (USDA) reported highly pathogenic avian influenza H5N2 was found in a commercial turkey flock in Arkansas. The news comes on the heels of the USDA's confirmation earlier this week that the same strain of the virus was found in two commercial turkey flocks in Missouri. It should come as no surprise this negative report hurt all of the poultry stocks -- Tyson Foods (TSN), Pilgrim's Pride (PPC) and our own Sanderson Farms (SAFM). Clearly, this virus is something to monitor as the situation develops, but historically these outbreaks tend to be short in duration and offer great buying opportunities. One thing to note, with pork prices now well below those for beef and chicken, we could see consumer preferences shift more toward pork and pork products. Both the incremental demand and lower prices should be helpful to Hormel Foods (HRL) and the meat business at Kraft Foods (KRFT). A steep drop in cheese prices also bodes well for Kraft, a company that is showing signs of becoming a dividend dynamo company. TheStreet's March Madness Open House Has Begun! Get an all-access pass now to see everything TheStreet has to offer.

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