Kraft Heinz Gets Downgrade as Rising Commodity Costs Loom — Financial Times’ Money Media

The Kraft Heinz Company’s current ability to generate ample revenue growth may not be enough to strongly offset rising commodity costs the company will face, a Wall Street firm said.

Piper Sandler downgraded the company, which owns Kraft and Oscar Mayer brands, to neutral from overweight in a research note, citing the commodity cost inflation that has swept the consumer goods industry. While the lasting effects of rising costs remain unclear, the firm said, Kraft Heinz lags its competitors in pricing power necessary to keep up sales momentum in such an environment.

“We continue to believe that KHC is better positioned to drive organic revenue growth than it has been in recent years,” Piper Sandler Senior Research Analyst Michael Lavery wrote. “However, with a 44% increase in its share price since late September, coupled with broad surges in commodity cost inflation, we now consider the risk/reward to be unattractive near-term.”

Kraft Heinz in its fourth quarter earnings results in February acknowledged inflationary pressures in non-key commodities, U.S. transportation and packaging, but not in the prices of its four biggest commodities. The company also had plans to deal with the costs, it said.

“The type of inflation that we're seeing and the level that we are seeing, we believe is manageable through not only the supply chain initiatives that we have, but also with the revenue management initiatives that we were describing,” Kraft Heinz Chief Financial Officer Paulo Basilio said on an analyst call in February.

Kraft will report its first quarter results on Thursday.

“KHC’s commodity ‘basket’ faces less pressure than those of some of its peers, but it still faces meaningful cost headwinds,” Piper Sandler said. The firm noted that prices have risen significantly over the past year for many relevant commodities, including 60% for soybeans, 150% for steel and 70% for diesel.

Assuming costs increases remain, Piper Sandler estimated they could pose a risk to Kraft’s earnings per share of 14 to 24 cents in both of the next two years, including offsets from productivity increases.

Raising prices, a go-to strategy for many companies in inflationary periods, will help Kraft, but will have downsides, Lavery wrote.

“Pricing power matters, and we estimate that further pricing would come with a potentially meaningful hit to volumes (not yet included in our estimates),” he said.

Kraft trails its peers in pricing power, according to Piper Sandler’s research, at a time when food companies with the greatest strength in pricing will fare best. By analyzing factors such as brand spend, gross margins and price elasticity of demand in certain CPGs, the firm found that Hershey and Mondelez had the greatest capability to raise prices without upsetting demand.

The Biggest Changes the CPG Industry Will See From the Biden Administration — Financial Times’ Money Media

President Joe Biden’s team moved quickly to turn the page from the Trump administration on a number of fronts after the inauguration, and executives can expect its vastly different policy agenda to reach into the food and beverage segment of the CPG industry.

 While it remains unknown which initiatives will ultimately come to fruition, experts say the administration has signaled its priorities for the sector. Themes that characterized the past four years, like deregulation and bellicose trade policy, will likely be replaced this term by urgency on climate, sustainability, health, tax reform, and consumer and worker protection.

Biden’s administration has already taken concrete steps on certain items within those categories where changes will be felt first.

“One area where we’ve already seen change is in meatpacking,” Ryan Nebeker, policy and research analyst for FoodPrint, told CPG Specialist. “Trump’s USDA was lenient towards meatpackers, who wanted less regulation and less scrutiny over COVID-19 outbreaks in their plants.”

 Before leaving office, the Trump administration had proposed a rule to permanently allow poultry plants to accelerate their slaughter lines, affecting meat-processors like Tyson Foods and Wayne Farms. Critics argued that waivers for sped-up lines already raised risks for workers and posed food safety concerns. On Jan. 25, Biden’s USDA chief withdrew the pending rule.

Such concerns with safety at food companies are set to take center stage, as “early signs point to the administration being much more aggressive than its predecessor at safeguarding workers,” Nebeker said. 

Protection requirements may extend to the consumer. One that may hold over from the Trump administration is the FDA’s New Era of Smarter Food Safety launched in 2020. The initiative aims to trace illness outbreaks with technology, manage food safety hazards linked to non-traditional retail channels like e-commerce, and ingrain food-safety considerations into food businesses’ daily operations.

 “Notwithstanding the resource constraints of those regulating food, smarter ways to deliver increased oversight of food business operations are likely to emerge alongside risk-based prioritization of regulatory resources,” Erica Sheward, director of the Global Food Safety Initiative at The Consumer Goods Forum, told CPG Specialist.

The administration’s concern with climate change will also affect the food and beverage industry early on, Sheward said.

“With the early days of the Biden administration already witnessing the U.S. re-joining the Paris Agreement, it is predictable that climate change imperatives as they relate to food and drink will emerge first,” she said. That will involve studying the sustainability of important commodities as well as how traditional consumption patterns affect the planet, she added.

In agriculture, it could mean big changes, according to Nebeker. Biden campaigned on expanding USDA programs already in place that help to pay farmers to conserve land to harness carbon-storing capacity of well-maintained soils. The administration has also approved going further to pay farmers to care for their soil in ways that will sequester carbon, Nebeker said, noting that the policies are voluntary.

He also expects more widespread acceptance of climate-friendly production practices within the food and beverage sector.

“This will be an opportunity for the food industry to make new partnerships and embrace climate-friendly agriculture, but it’s important to make sure that these efforts also help small producers and local economies,” he said.

In terms of trade, an issue that dominated the previous administration, businesses will enjoy a more predictable environment under Biden though a hard line on China may endure, Khalil Manaf Hegarty, director of policy for ITS Global, told CPG Specialist.

Agricultural exports to China are expected to rise as the nation suffers a protein shortage due to the spread of African swine virus and high prices for Australian beef.

Protectionism against a number of food imports to the U.S., such as Malaysian palm oil, primarily over labor rights, should continue, however.

“So, for this reason we consider it highly likely that U.S. government procurement rules on food are likely to be tipped further in favor of U.S. suppliers and producers,” Hegarty said.

Overall, reduction of food and agriculture imports in favor of a domestically oriented focus is something Biden may share in common with the Trump administration in the interest of supporting U.S. jobs. Biden made clear he would carry through this campaign objective as president when he signed “Buy American” orders last week, Hegarty said.

In speeches, Biden’s United States Trade Representative Katherine Tai has also signaled she will prioritize U.S. businesses and the safeguarding of American jobs.  

“We know, for example, that Tai has extensive support from U.S. farm and agriculture groups, including larger groups such as the American Soybean Association and the U.S. Dairy Export Council, as well as numerous state-level organizations, so we can expect her to take a supportive position on the food and agriculture industry,” Hegarty, of ITS Global, said.

 All corporate eyes remain fixed on Biden’s tax plan and whether companies’ rate will increase after they paid lower taxes since 2017 thanks to Trump’s Tax Cuts and Jobs Act. Food giant General Mills, for example, recorded an 18.5% effective tax rate for fiscal 2020, compared to 31.4% for its fiscal 2016 year.

Biden seeks to raise the official corporate income tax rate to 28% from the current 21%.

While Biden has not targeted the food and beverage industry with his tax proposals specifically, one aspect will likely give certain sectors, including food, a heavier punch, Garrett Watson, senior policy analyst at the Tax Foundation in Washington, D.C., told CPG Specialist.

The 15% minimum corporate tax Biden wants would apply to corporations with more than $100 million in revenue that typically pay no federal income tax. The tax works by placing levies on book income rather than taxable income, affecting companies with substantial tangible investment.

“Generally, the trend that we see, industries that are in the tangible goods and services sector may be impacted more so than others particularly because of the minimum tax,” Watson said. “I think that may be one thing that folks may not be thinking as much about because the headline discussion is on the rate change itself.”

Taking into account the changes in tax measurement under Biden’s plan, taxes on food services companies could increase 7.7 percentage points to 31%, and on retail trade by 10.4 points to 36.1%, Watson said, citing research from Kyle Pomerleau of the American Enterprise Institute.

Biden’s tax proposals will have to make it through an evenly divided legislature, and certain elements are more likely to succeed, Watson said. The tax rate boosts have high odds of securing broad support, he said, because they have more historical analog in the past two decades.

For now, Congress is prioritizing tax relief in the $1.9 trillion stimulus proposal before considering hikes on corporations. Those will likely wait until the end of the year, and be packaged as funding sources for plans that necessitate spending increases, such as for infrastructure, climate innovation or health care.

 “The process to secure support on and get through the reconciliation process will be near the end of the year, and so it will be a lot of time in terms of seeing what that may look like and understanding the trade-offs of those policies,” Watson said.

“The other thing driving this is there’s I think a shared interest in not undercutting the recovery and acting too soon,” he added.

For one thing, the colors are much more distinct in SoHo. They’re brighter. Perhaps that’s a reflection on the people living here. But for many of the cast-iron buiildings that give SoHo it’s unmistakable character, the reason for their bright coloring is actually pretty obvious: whenever you construct anything from wrought iron, it’s going to look like, well, wrought iron.

So the colors of SoHo as they’re known, or at least as they ought to be known, the colors that are just a street photographers dream come true (where else can you find so many amazing backdrops?), are actually the result of many, many coats of bright paints. And they light up a photo in ways even a flash cannot.

What Might Start a Market Meltdown? — US News & World Report

Reports of sky-high market valuations bombard investors daily as the cyclically adjusted price-earnings ratio or Shiller P/E rises to levels it last reached before famous historical market crashes. Expensive valuations like these don't have the power to start financial meltdowns, but they can exacerbate one if it comes.

The CAPE ratio often causes consternation because an astronomical ratio usually precedes or accompanies a famous market crash. Perched ominously at 30, the CAPE is higher than its pre-1929 Black Tuesday and financial crisis levels. It has also spiked higher only once, before the devastating dot-com bubble, to 44.2 in 1999. Worse, the CAPE averages 17 historically.

Tomer Cohen of Five Roads Capital says a high CAPE makes him cautious because it signals increased risk in markets. The current lofty reading, the result of a market with low volatility and high prices for 18 months, are prompting investors to "become optimistic and push up valuations beyond reasonable levels," he says.

Typically, what happens in these cases is an external catalyst comes along, acting as a "pinprick to bubbly asset valuations," and stocks have a long way to fall, says Nathan Edwards, a certified financial planner at IMG Wealth Management in Jacksonville, Florida. In 2000, the precipitating event was collapsing share prices of dot-coms in the tech sector. In 2008, trouble arose in the housing market.

So which match might torch high valuations in the current market now? There are several possibilities, including the chance that nothing will stop the market's torrid rise – not yet, at least.

Catalysts for a correction. A slowdown in earnings, the lifeblood of the market's years-long rise, could spur tremendous damage, but earnings of U.S. companies fared exceptionally well in the second quarter, with the Standard & Poor's 500 index climbing 10.2 percent, the second highest year-over-year growth since the fourth quarter in 2011. It was also the first time the index had two consecutive quarters of double-digit earnings growth since the third and fourth quarters of 2011.

The possibility of a stall seems unlikely to Edwards, who believes low interest rates, which encourage capital investment, will continue to bolster earnings, though Federal Reserve Chair Janet Yellen has hinted at the possibility of a forthcoming rate hike.

Though strong earnings can linger for some time, eventually they will fall into line with reasonable growth expectations. As of Aug. 11, 63 percent of S&P 500 companies that had issued guidance reported negative forecasts, short of the 75 percent five-year average. If earnings slow down, it won't be in 2017, as analysts project 9.4 percent growth for the full year.

Tech stocks, with their dominance in the market, are a concern as well. "Our current economy and stock market is more globally sensitive and more technology-dependent than in previous eras," says Temple University business law professor Tom Lin, who notes that 10 tech companies contributed half of S&P 500 gains for the year. Facebook (FB), which has a P/E ratio of 36.5, and Netflix (NFLX) with a P/E of 210 led the list.

Rising inflation also could set off sparks. "Higher inflation (possibly labor driven) would increase bond rates to more competitive levels and increase debt burdens enough to reduce economic expectations," Edwards says. While inflation rates have been falling each month from February through June, July's rate jumped to 1.73 percent, the highest level for that month in three years.

Then there's heightened tensions and the possibility of armed conflict with North Korea, which might toy with investor psychology, triggering a sell-off. That may already be happening. Trump's threats of "fire and fury" against the authoritarian, militarized nation drove a 1.64 percent decline in the S&P 500 that week.

Without a catalyst, the market also could revert to more reasonable prices gradually, potentially allowing years of further gains. For instance, the CAPE ratio touched today's elevations in 1997, but three more years of gains passed before a downturn occurred in September 2000.

Stick to the basics. As markets get riskier, predicting when a correction will strike is anyone's guess, but this is where tried-and-true investing strategies pay off.

Venture capitalist Paul Arnold, founder and partner of San Francisco-based Switch Ventures, recommends investing in companies with real revenue, good margins and attractive valuations. "Essentially, real businesses and bets that can weather a downturn," he says. International Business Machines Corp. (IBM), for example, has dropped 14.5 in price percent year-to-date and has an attractive 11.8 P/E ratio, and Intel Corp. (INTC), which declined 1.2 percent, trades with a P/E of 13.7. "It sounds simple, but these fundamentals are forgotten by many," Arnold says.

A diversified portfolio can also enhance protection, says Kajal Lahiri, professor of economics at the University at Albany. He suggests investing in stocks and real estate, as well as government and corporate bonds, because of the uncertainty about policy from Washington. He also recommends exchange-traded funds, reputable mutual funds and exposure to China through U.S. companies that will benefit from China's global infrastructure investment, such as Caterpillar (CAT), Honeywell International (HON) and General Electric Co. (GE). All do business in China and are "smart bets for the medium run," he says.

"Tricky and volatile times are ahead because some correction in the stock market is inevitable," Lahiri says. "When the federal government is dysfunctional, stocks soar, but not without gyrations."

New Bill in Congress Could Help Launch a Gold Rush in Space — Christian Science Monitor

Anew measure in Congress would help pump money into a fledgling industry that says it could soon mine rare resources from where they are plentiful – asteroids – and form the building blocks of a space economy.

The lack of clarity regarding property rights to minerals mined from asteroids has made it hard for the companies developing the space mining technology to get financing from investors. The bill, which passed the House in May, would change their prospects by requiring the president to assign a federal agency to oversee the industry and grant property rights to companies for the materials extracted in outer space.

“We like to believe it is the first time there will be social license to develop the space frontier,” says Sagi Kfir, legal counsel for Deep Space Industries, one of two asteroid-mining companies in the United States. “This is a very big deal – this is as big as it gets."

The chunks of rock flying through space contain water and resources valuable for sale earth, such as gold, iron, nickel, and cobalt. They also contain plentiful platinum-group metals, which are used in an estimated 1 in 4 industrial goods on Earth, according to Planetary Resources, the other US asteroid-mining company.

In addition to getting access to more rare minerals, a priority for the companies is to sustain the expansion of human life off of earth, which they believe is inevitable.

“That’s the importance of this piece of legislation: it opens up the possibility to look out toward space,” says Mr. Kfir. “It’s like it’s 1491 and someone in Amsterdam is saying, ‘Do you really think that there’s something beyond the edge of the ocean that we can see?’ "

Some observers say more work will be necessary because the US is not the only country interested in space. “There does need to be some international component because outer space is governed by international law and there is a treaty regime in place and the US is bound by the obligations of the outer space treaty so an international aspect would be appropriate,” says Joanne Irene Gabrynowicz, space law professor at the University of Mississippi School of Law and editor in chief emerita of the Journal of Space Law.

Meagan Crawford, director of public relations and communications for Deep Space Industries, agreed that international cooperation will have to occur in addition to building a regulatory framework at home.

“It’s a great first step but not the only,” she says. “Because space doesn’t belong to the US. It belongs to the whole world. So it’s a great way to get the international community talking about it.”

The mineral value of a single asteroid can range from the millions to trillions of dollars, according to Asterank, a database of more than 600,000 asteroids created by Space Resources, another asteroid mining company backed by Google co-founder and chief executive Larry Page and Google chairman Eric Schmidt. But bringing back more platinum than the Earth can yield in an entire year would crash the market, Ms. Crawford says. Deep Space Industries does not plan to sell space resources on Earth for 25 to 30 years, she says, because it costs too much to make it economically viable.

“It didn’t pass the test for me for a lot of years,” says Molly Macauley, vice president for research and senior fellow at Resources for the Future in Washington. “I really changed my way of thinking in part because these wealthy entrepreneurs are interested and there are a lot of commodities on asteroids that we could use, especially in space. It wouldn’t make any sense at all to bring water back from space. But if you’re going to use it in space then it makes sense.”

Water from asteroids can not only sustain astronauts, but be divided into gas and methane for use as fuel. Customers needing the resources in space could include public space agencies, such as NASA, or companies with plans for long-term human settlements, such as Elon Musk’s private rocket firm SpaceX.

“You can derive all the material to develop reliable space infrastructure in space and a space economy by space resources,” Kfir says. “In other words, New York City wasn’t built because they brought a bunch of concrete on the Mayflower.”

Kfir also says space development could solve environmental issues that earth faces. For instance, solar satellites could provide renewable, unlimited energy by directing sun energy to earth.

“You need space resources in order to develop that because you can’t lift it from a rocket – it’s just too expensive,” he says.

The House passed the property rights bill, introduced by Rep. Bill Posey (R-Florida), on May 21. It now awaits Senate action.

The space mining bill is not without detractors.

One of them, Rep. Alan Grayson, (D-Florida) who voted against the bill, says it did not appropriately address the issues of passenger safety and corporate responsibility.

“Specifically, this bill essentially would require passengers on commercial space flights to sign away their legal right to sue if they are injured,” Mr. Grayson says in a statement. “It would provide virtual immunity to the commercial space industry, and prohibit Americans injured due to corporate malfeasance or carelessness from securing adequate redress for their injuries.”

Other congressmen oppose it because they have NASA facilities in their districts and have said it would take away part of NASA’s mission.

Crawford says they plan to harvest materials in prospecting missions within five years. They would have the ability to sell water for human habitation and fuel by 10 years, and to begin building colonies from space materials in 20 to 25 years.

“As for space pirates, I’m sure there will be space pirates,” Kfir says. “We have to give Han Solo something to do.”

Dallas Symphony's Conductor Jaap van Zweden Leaves for New York Philharmonic With No Replacement in Sight — Dallas Observer

Hard to believe it was 10 years ago that the Dallas Symphony Orchestra heralded the arrival of a new conductor with billboards and banners implying the man only frowned and only stood in dark lighting. But in that time, talk about the orchestra evolved from “They’re playing Mozart this weekend? Sounds interesting,” to “Jaap’s conducting what? Take my money.”

​Now we watch the formidable conductor known for imparting an unprecedented power and musicality to the DSO depart for the New York Philharmonic, no replacement in sight. (DSO has started the search, but has remained secretive about any progress.) Fortunately, Jaap van Zweden had some parting words to share.

​“When you are a great orchestra it’s one thing, but remaining a big name needs a lot of work," van Zweden says. "I mean I go to big orchestras — Berlin Philharmonic, I go to Concertgebouw Amsterdam, New York, Chicago — they work really hard to keep their level and this is the thing that this orchestra is realizing now."

When he arrived, he felt that the orchestra was not using its talents to the fullest extent. So they drilled down into details, different styles, building the sound in the strings, repeating passages and going over how to make them better every day. The great orchestras, he said, all worked that hard at some point in their history.

​The assiduity of Van Zweden in concert with the potential of the players proved a magic combination. Over the years, they welcomed the world’s greatest: Yo-Yo Ma, Joshua Bell, Renee Fleming.

​That type of energy has reverberated around the Dallas arts scene in recent years, overshadowed as it sometimes is with sports and financial endeavors. Van Zweden knows he’s leaving at a pivotal time, but he exuded optimism for the energized city.

​“I think that we put a lot of seed in the ground for a national profile and I think that the years to come if things are going well," he said, "and I’m 100 percent sure that this will happen, that Dallas will be recognized as one of the big cities in the U.S. where the arts scene is a huge thing.”

The vast undertaking, lofty expectations and wide regard for his predecessor the new director will meet shouldn’t be intimidating at all.​

Van Zweden had some simple advice, though: Be yourself.

“He or she is going to do it completely different probably and that’s fine," he said. "That’s life. I would never imitate anybody and I hope that my successor is not going to imitate me because it’s impossible."

Van Zweden takes his signature obsession with detail and developing talent to the top of the league next season: the New York Philharmonic. There he’ll follow in the footsteps of giants like Leonard Bernstein, Zubin Mehta and Gustav Mahler, and he’s aware of the enormousness of the task.

“Yes, of course I’m thrilled, but also humbled because these people have all proved that they were the right choice and I still have to do that,” he said. “To be humble is the best place for me now.”

​New York will also point him in some different directions musically. With more adventurous artistic tastes, the city will allow for more freedom for experimentation and new music. Already, he played Philip Glass with the orchestra, and he will perform a contemporary violin concerto next season.

​New music is a sticking point for some of his critics. Van Zweden’s favorite composer is Richard Wagner, the 19th century German known for tempestuous, sprawling operas, and his repertoire seems weighted with late romantics Mahler and Bruckner. Van Zweden doesn’t think the critics have done their homework, though. In Dallas, he often had to balance new music with more recognizable works on the program. As music director of a radio symphony in the Netherlands he did a contemporary piece every two weeks, and he has performed a long list of world premieres and music by living composers over the past 15 years.

“So if somebody writes like he doesn’t do contemporary music, then I’m not going to react at all. I’m just going to say they can wait,” he said. “So dealing with toughness is fine as long as it is fair.”

The New York Philharmonic releases its 2018/19 program Tuesday. Van Zweden plans to head there next week to conduct Wagner’s "Die Walküre," then return to Dallas to perform Mahler’s Symphony No. 2 before hitting a world tour to China, Japan, Taiwan and other countries with the philharmonic in two weeks.

He hasn’t played extensively with them yet, he said, but already he feels a strong chemistry and looks forward to meeting the family behind the orchestra on the tour. Dallas Symphony announces its new season next week, but said that, fortunately, the city will continue to see him from time to time.

​“In the coming years when I will return here there is one thing I can assure you —  that when I fly in and I fly in this airport I will feel always at home here,” he said. “I never felt Dallas as my second or third home but my other home, and this is going to stay.”