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Why Restaurant Investors Need to Watch Food Commodity Movements

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Food commodities

So far in 2015, food commodity costs have been favorable to the restaurant industry. But where do they stand as of July 2015?

Agricultural and livestock commodities such as corn, beef, pork, chicken, cheese, and coffee play an important role in the restaurant business. Volatility in commodity costs can have a negative or positive impact on a restaurant’s operating profit.

Food commodity costs account for roughly 30% of a restaurant’s revenue. For McDonald’s (MCD) and Darden’s (DRI), food costs account for about 34% and 31% of revenue, respectively.

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The above chart shows three major costs for restaurants. Food is the largest cost. Fluctuations in the demand and supply factors of these commodities impact prices and put pressure on food costs. This drives down margins and affects earnings. This is also negative for the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY holds about 4% of McDonald’s, 3% of Starbucks (SBUX), and 1.5% of Yum! Brands (YUM).

Series overview

In this series, we’ll look at how major food commodity prices have done so far in the month of July and in 2015 and what the outlook is for these commodities. We’ll first look at beef prices, which affect companies that sell burgers, steaks, and other beef varieties. Then we’ll look at how pork and poultry (chicken) prices have fared. Affecting all these commodities is corn, because it’s used as feed for livestock. Finally, we’ll take a look at coffee and cheese prices.

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