Scott Patterson

Ethanol Push Could Deliver Rising Costs for Pizza Guys

Wall Street Journal, March 6, 2007

Investors have other weighty news to digest today.

CEC Entertainment, owner of Chuck E. Cheese’s kid-centric pizza restaurants, reports fourth-quarter earnings. Analysts surveyed by Thomson Financial expect CEC to post earnings per share of 33 cents, excluding some “one-time” items, up 18% from last year.

But Chuck E. Cheese’s might not be serving up much comfort for investors. CEC and other pizza makers could become victims of Washington’s push to use corn-based ethanol as a substitute fuel.

The cost of almost every ingredient in a pepperoni pizza could rise because of the ethanol shift. Wheat prices are expected to rise as farmers dedicate more acreage to corn. Cattle and hogs feed on corn. And high-fructose corn syrup is a common ingredient in tomato sauce.

A pound of cheddar cheese traded on the Chicago Mercantile Exchange is up more than 20% from a year ago. Unlike beef cattle, which graze on grass early in their lives, dairy cows eat corn practically from birth, says Ronald Plain, a professor of agricultural economics at the University of Missouri. Agriculture Department data show monthly feed costs for milk production in Wisconsin rose 35% in January from a year ago.

By 2008 this all could hit the pizza guys. “It takes awhile for the livestock industry to respond because of the biological lag that’s involved in raising animals,” Mr. Plain says.