On the Costco (COST) conference call dated October 9, 2013, executive vice-president and CFO Richard Galanti had the following to say about their rotisserie chickens:
“keep in mind the return – I used the example of the rotisserie chicken in the past. We get more positive press out there from keeping that incredible giant chicken at 4.99 and over the last year, year and a half, the underlying poultry price have skyrocketed so we've – the underlying price has skyrocketed such that there's very little margin on it right now although it looks like there is some relief in terms of where pricing is going over the next few months based on poultry future's cost. It doesn't mean we're raising price, it means that we'll at least make a little margin. (source: Seeking Alpha. Costco Wholesale’s Management Discusses F4Q 2013 Results-Earnings Transcript. October 9, 2013. internet link here)”
The reference to poultry prices caught our attention because, in an October 2012 discussion on EconTalk with Russell Roberts, economist Steve Hanke mentioned that chicken prices are a useful way to measure inflation rates in countries that have discontinued reporting their internal data. There is much more to the discussion with Roberts and Hanke and it is recommended that you get the full story at the following link (Hanke on Hyperinflation). Hanke says the following:
“…when you get the big plunges they've [Iran] experienced in September [2012] and October [2012], of course that leads to the implied inflation rate being very high. And then I can go back and just look at the press and the price of a key commodity--chicken. And it matches up almost perfectly with the calculations I'm making from going from the black market exchange rate to the implied inflation rate. And I've done this with a number of countries.”
We’re not ready to make the connection with the price of poultry and inflation rates. However, we’d like to see if Dow Theory has the capability to anticipate what the downside targets could be if the price were to decline in the next several months. To get us started, we need an overall view of how poultry prices have vacillated in the past. Below is a chart of poultry prices from September 1983 to September 2013 (source: www.indexmundi.com):
The black ascending lined is the mean of the overall trend while the upper and lower blue lines indicated the extremes of the overall trend. On the far right hand side of the chart, we have indicated the points A and B where we’ll be doing our Dow Theory analysis of the current trend in the chart below.
Based on the latest data available, it appears that poultry prices are topping out as indicated at point B. If this is the case, then Dow Theory suggests that the following are the downside targets from point A:
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98.38
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94.32
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90.26
Additionally, the parabolic nature of the above trend increase in poultry prices suggests that declining back to point A is not out of the question. We aren’t clear as to what might bring about such a dramatic decline however we want to observe whether any substantive inferences are gained from this general overview when applying Dow Theory. We’ll re-examine this topic in several months to see if these projections are meaningful in any way.