On Sunday, everyone who watched the Super Bowl compared and contrasted the latest tranche of commercials designed to sell us things we don’t need at a price that – compared to last year – we likely can’t afford. Inflation is out of control. So much so that CNBC today actually had an agreement between Rick Santelli and Steve Liesman over the Producer Price Index. It was Liesman – not Santelli – who said that the latest report on wholesale prices failed to suggest that we are at “peak inflation.”
I thought maybe I’d switched up my medication after I heard this admission. So, while everyone was being sold Michelob Ultra by Peyton Manning, Toyota trucks by Tommy Lee Jones and crew, crypto by Larry David, and General Motors cars by Mike Myers – all I could do was think about avocados. Where am I going with this? You’ll see…
Super Bowl Salsa
The top condiment in the United States is salsa, a fact that would upset my four-year-old who puts ketchup on everything. So, as I watched celebrities try to sell me expensive products, I reacted pretty well to the commercial for Avocados from Mexico.
Not only did I eat an uncomfortable amount of guacamole on Sunday, I did actually laugh at the part where Andy Richter – playing Julius Caesar – gushing about his favorite Mexican-based topping on a bed of lettuce.
“You know, they [avocados] also taste great on salads,” Caesar says, gleefully.
“Yeah, Caesar, we get it. You love—” says his aid.
“I love salads!” hams the Emperor.
It felt like a Mel Brooks line from the cutting room floor. It was incredibly smart and incredibly stupid and delivered perfectly all at the same time. Should I buy avocados? I don’t know. But let me type Avocados from Mexico into Google, I thought… Oh no… What a bad time to run that ad, I discovered.
Your Avocados are Getting More Expensive
While Andy Richter was pushing avocados, the United States was pushing them as well… back into Mexico. A new report states that the USDA temporarily suspended shipments of avocados from Mexico’s western state of Michoacán after a U.S. inspection officer received a threat. The sector is the latest victim of ongoing turf battles between rival drug organizations in the Pacific region.
You’re talking about a regional industry that has shipped 135,000 tons of avocados over the last six weeks to the United States and maintains 600,000 jobs. It’s the region’s most lucrative agricultural commodity. We’re talking about a $3 billion industry. However, like many industries, they are susceptible to threats of extortion. Even a small disruption in that supply chain can cause serious price increases and disruptions to supply.
This is a very interesting business full of trade disputes before there were territorial disputes. The U.S. once banned avocados from Mexico. We lifted our ban in 1997 (the NAFTA years) after a staggering 83 years. The purpose was to prevent pests and weevils from hitting U.S. orchards. We inspect avocados to prevent diseases from hitting domestic crops. This is the same thing we do with any other agricultural product entering our border.
But the timing for this ad couldn’t have been worse. You see, the trade group that pays for the ad is trying hard to associate the Super Bowl with guacamole. Now, with this pause in imports, we’re about to see prices move higher. All for a commodity of which the average person consumes about 10 pounds per year.
A Lucrative Trade
I spent some time looking at companies that aren’t exposed to this situation. The best pure American play appears to be Limoneira (LMNR), which owns significant amounts of avocado farms out in California. However, we’re seeing a big problem out in California. Rainfall has produced much smaller crops over the last year. According to Supply Chain Drive, the company produced just 3,000 pounds of avocados over the last three months of 2021.
That figure is down from more than 475,000 pounds in the previous year – a 99% drop. Higher labor costs, less water, and other big input costs are drying up the supply of this popular product.
Listen. I can typically find a trade for everything, but sometimes an entertaining story just doesn’t have a trade. So, there’s no real way around this… unless you start to think about substitutions… and the impact on restaurants and producers.
So – yes – this does open up a conversation about stocks like Fiesta Restaurant Group (FRGI), Chipotle Mexican Grill (CMG), and Jack in the Box (JACK). I’m going to look at what they are doing and if they are moving toward substitutes like edamole and broccomole (yes, these are things) to address high demand and short supply.
This trend brings into question how Limoneira, Dole (DOLE), and other producers will solve this crisis… and if there’s a value trade or a true fade on these stocks in a period of high inflation and weather events. We’ll keep digging our chips into this story…