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Check, Please: Drought Is Now a Part of Eating Out

18 October 2012 in Trading Ideas

If you’ve noticed the latest trip to your favorite restaurant served up a steeper bill and smaller portions than it normally does – welcome to the effects of one of the worst droughts in recent memory.

A recent Los Angeles Times article highlights the hit that local and national restaurant chains are feeling after an arid summer hit crop yields and held down livestock growth, pushing up food prices. (Wholesale food costs already surged more than 8% last year.)

To counter those effects, restaurants have been forced to change menus, cut portion sizes and even consider cutting staffs.

Some of the more notable examples:

  • The Olive Garden’s Never-Ending Pasta Bowl, which cost $8.95 for the past five years, jumped to $9.95 in late August, partly because of rising food costs.
  • A McDonald’s (MCD) Big Mac cost $4.33, on average, this summer. Up from $4.07 a year earlier.
  • Buffalo Wild Wings (BWLD) said it would boost its menu prices by an average 4% at company-owned restaurants to offset soaring wing costs.

According to the article, analysts expect overall food costs will rise by 5% to 20% by the end of the year.

The Rising Food Prices motif, which focuses primarily on fertilizer makers, crop processors and sellers of seeds, is up 0.1% in the past month, compared with the S&P 500’s decline of 0.1%.

And it’s not just quantity – one Los Angeles restaurant consultant told the Times that more eateries in the city have turned to cheaper cuts of meat, such as skirt and flank steaks, on menus, along with more curry and rice dishes. And pickled items – which are less expensive than fresh foods – are turning up as well.

Interest in meeting water demand is, of course, not a short-term concern, with some experts projecting demand will grow 40% by 2030, in large part to satisfy agricultural needs. That this may present an investment opportunity for companies focused on new fresh-water technologies and irrigation development is the thesis behind the new Water Shortage motif.

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