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: Avocado demand persists despite 44% increase in prices and sky-high grocery inflation

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Prices for avocados have jumped, but demand won’t budge, even with inflation at a 40-year high.

Global avocado producer Mission Produce Inc.
AVO,
-3.68%

reported an 18% jump in fiscal second-quarter revenue this week, reaching $278.1 million. The result fell just short of the FactSet consensus of $278.9 million. The company said the result was boosted by a 44% increase in average selling prices, partially offset by a 19% decrease in volume sold year-over-year.

“While Mission’s global footprint provides sourcing advantages relative to the industry as a whole, there are not enough ample sources of fruit available at this time of year to meaningfully offset the impact of the Mexican supply shortages,” said Stephen Barnard, chief executive of the company, on the earnings call, according to a FactSet transcript.

Still, Barnard said the company distributed about the same volume of fruit in the most recent quarter as they did in the same period of 2020 with prices 24% higher.

“The backdrop of constrained supply, coupled with consistent demand, continued to create sustained upward pressure on pricing through the first half of this fiscal year, where prices were approximately 50% higher versus the prior year,” he said.

“Despite these higher prices, demand in the core U.S. markets have proven to be resilient and largely inelastic. We think this speaks to the broader health and wellness trends that underpin the avocado industry, elevating the avocado to a must-have staple in many households.”

Demand for avocado’s remained strong even as grocery prices have increased sharply due to inflation, with prices on items like milk and butter up nearly 16%, and as egg prices have soared a whopping 32%. Egg prices are further impacted by avian flu.

See: Inflated grocery prices and shrinking package sizes. The cost of food is rising at fastest pace since 1979

Also: Rising rents, gas and food prices push U.S. inflation to 40-year high of 8.6%, CPI shows

The majority (76%) of avocados in the U.S. during the second quarter were sourced from Mexico, though there was “ongoing inconsistency” in that supply. Barnard said there was “abnormal grading and sizing of harvested fruit” there. Mission was able to fill some of the void with product from Chile, Colombia and California.

Avocado imports from Mexico were suspended in February after a safety inspector received a threat. The ban was lifted shortly after.

Barnard said in an earnings release statement that its production in Peru as well as investments in farms it owns in Guatemala and Colombia will help with supply in the second half of the year.

“However, we think it is prudent to expect some price rationalization in connection with the improving supply conditions later this fiscal year,” he said on the call.

“While we expect to generate sales growth in the second half of the fiscal year, the inflationary environment is expected to mitigate some of the operating leverage that we typically expect out of our own international farming segment.”

The FactSet consensus is for full fiscal-year sales of $1.044 billion, up from $891.7 million last year.

JPMorgan rates Mission Produce stock neutral with a $16 price target, up from $14.

“In 3Q22, the company still expects volume to remain pressured year-over-year but improve sequentially because of increased sourcing from California and a record harvest from its farms in Peru (5%-to-10% bigger than last year, per Mission),” wrote JPMorgan analysts in a note following the earnings call and a follow-up call with the company. 

“In 4Q22, the company expects another step up in volume. Supply from Mexico could begin to recover by then,” analysts wrote. “And the company expects sourcing from Peru to be slightly more weighted to 4Q (versus 3Q) than normal.”

Mission Produce stock is down 10.4% for the year to date while the broader S&P 500 index
SPX,
-2.29%

has slumped nearly 18%.

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