August 12, 2016

Pizza Sales Drive Domestic Cheese Price Rally

 |  By: Fran Howard

For some reason, Americans are choosing to eat at home rather than visit their local restaurants. Part of that could be due to this summer’s excessive temperatures and that summer is grilling season, notes Sarina Sharp, agricultural economist with the Daily Dairy Report. Somewhat surprisingly, though, it appears many consumers are choosing to buy takeout pizzas to eat at home this summer, she adds.

Some analysts think the cause of the recent shift toward spending more on meals eaten at home than in restaurants could be more persistent than this summer’s sweltering heat and that the restaurant industry could be headed into a recession. According to a Stifel research note, the industry faces a challenging 18 months due to softer same-store sales and higher labor costs caused by growth in the overall number of restaurants and a tight labor market. The firm goes on to say that a continued decline in same-store restaurant sales could be the forerunner of an overall economic recession.

That said, overall restaurant sales are still higher than year-ago levels, they just are not growing as fast. The National Restaurant Association's Restaurant Performance Index (RPI) fell 0.3 points from May’s level to 100.3 in June, and the current situation index dipped below 100 for the first time in five months. “A level below 100 indicates contraction in the restaurant industry,” notes Sharp.

Dominos and Papa John’s remain popular

While many publicly traded restaurant firms are posting disappointing second-quarter earnings, two major pizza chains—Domino's and Papa John's—reported strong year-over-year same-store sales. Domino’s second-quarter U.S. same-store sales climbed 9.7%, while Papa John’s rose 5.6%.

“Both temperatures and demand for pizza are remarkably high this summer. Perhaps that’s why the CME spot Cheddar barrel market stands on its loftiest perch since late 2014,” notes Sharp. As of early this week, the CME block cheddar price had climbed more than 52 cents from its low in mid-May.

Historically, consumers have tended to eat more butter and cheese in restaurants and drink more fluid milk at home. Pizza sales that continue to outpace sales at other-types of restaurants are probably net good news for the dairy industry, notes Sharp.

In June, U.S. consumers spent $66.9 billion, or 5.4% more than a year ago, on food to be eaten at home, according to USDA's Economic Research Service. And for the first time since January 2016, consumers spent more on food at grocery stores than they did at restaurants, according to the data.

“The shift seems to be a matter of preference rather than thrift,” adds Sharp. “Wages are up, the unemployment rate stands near multi-year lows, and overall consumer spending climbed a robust 4.2% in the second quarter.”