Breakfast Index and Profit Margins

By Brad Zigler

Things have piled up on my desk over the past couple of days. I guess that makes up for the lack of clutter on the airport baggage carousel. My bag has, once again, gone AWOL.

So, while I await its return, let's plow through the most recent brace of government reports.

First, there was the CPI report. On Wednesday, the Bureau of Labor Statistics said retail prices climbed 3.9% year-over-year through April. Food and energy prices lead the way with 5.1% and 15.9% annual growth rates, respectively.

Let's first check out food price inflation. Breakfast Index components actually fell at a 2.1% compound average rate implied by the last three months of futures closes:

Commodity	Contract Month	30-Apr-08 Price	31-Jan-08 Price	3-Month Change (%)	Annualized Change (%)
Cocoa	May ‘08	$2,882/tonne	$2,354/tonne	22.4	76.2
Milk, Class III	May ‘08	$18.12/cwt	$15.86/cwt	14.3	45.2
Butter, AA	May ‘08	141.00 ¢/lb	131.00 ¢/lb	7.6	22.9
Coffee	May ‘08	134.55 ¢/lb	140.70 ¢/lb	-4.4	-11.8
Sugar #11	July ‘08	11.81 ¢/lb	13.02 ¢/lb	-9.3	-23.9
Orange Juice	July ‘08	119.45 ¢/lb	142.35 ¢/lb	-16.1	-38.8
Wheat	May ‘08	$7.8725/bu	$9.4550/bu	-16.7	-40.1
Pork Bellies (Bacon)	May ‘08	75.40 ¢/lb	94.30 ¢/lb	-20.0	-46.5
Average				-2.8	-2.1

Keep in mind that the Breakfast Index reflects wholesale prices, which have the potential to be passed along in later CPI reports. With that in mind, you might want to wash down your dry toast with orange juice instead of cocoa in the coming weeks to pinch pennies.

Commercial food processors may be in need of some belt-tightening, too, if soybean crush margins continue to be squeezed as they were last week. The profit margin represented by November and December futures fell by a percentage point to 6% in the wake of a 7% uptick in soybean input costs. Soybean oil prices moderated this week, rising only 4.3% while bean meal - a staple animal feed - ticked up 7.7%.

Keep that in mind while you munch your cheap bacon. The culling of swine herds may soon end and new production will have to be fed at much higher costs.

The profit margins for the other inflation driver - oil producers - fattened over the week. According to yesterday's Energy Department inventory report, capacity utilization at U.S. refineries is still a relatively sluggish 86.6%. Producers' hopes for widening margins were finally realized with a 1% boost to the 8.9% level. That translates to a gross profit of $10.99 per barrel of crude oil at Wednesday's $123.62 input cost.

Refining margins haven't yet broken their downtrend for the year but, based on this week's price action alone, cracking oil paid off better than crushing soybeans.

Oil Refining Margins vs. Soybean Processing Margins

And for consumers? Well, the worst thing consumers could do now would be to drive themselves down to the diner for breakfast.

Some of that risk could have been hedged away by playing the crack spread with ETFs. Over the past week, the US Oil Fund (AMEX: USO) rose a modest 0.5% to $100.22 per share, while the US Gasoline Fund (AMEX: UGA) gained 1.5% to $58.79. The margin driver, however, was heating oil. The US Heating Oil Fund (AMEX: UHN) shot up 5% to $58.96 this week.