ArA Commodity Contracting Playbook

American Restaurant Association Group.888-423-4411

www.AmericanRestaurantAssociation.comInfo@AmericanRestaurantAssociation.com

The Commodity Contracting PlaybookHow ARA helps supply chain teams maximize their potential

© 2011 American Restaurant Association Inc. This presentation is protected under U.S. copyright law. Please do not redistribute without permission from American Restaurant Association Inc. Thank you. *These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC butters. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this entire presentation, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading, ARA Hedging and the employees of the companies. Commodity trading involves risks, and you should fully understand those risks before trading.

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ARA Group, 888-423-4411, [email protected]

• Corn price average from 1974 to 2006 was $2.35 a bushel

• Since then we have averaged $4.50 a bushel

• Impact on general commodity price volatility has been tremendous▫ Beef 90% trim, Cheese, Butter, Pork

Bellies, Chicken Wings- all attained new record highs in recent years

• Commodity volatility has expanded greatly.▫ In 2011, the CME block cheese market

has traded in a $.84 a pound (60%) range

• Like football, the commodity markets move much faster than they did years ago.

• Commodity Contracting has become critically more important▫ Companies must manage margin

▫ Companies can gain a competitive advantage

▫ Companies can’t just contract the “same old way.”

A $.20 wrong call in cheese contracting costs a company $2 million dollars per 10 million pounds of cheese

The Game has Changed

NFL teams have invested in the change in their game as NFL teams pass the ball more. From 2000-2009

the average salary of the top 5 paid cornerbacks has risen 190% with growth outpacing running

backs, linebackers and on par with quarterbacks. In 2009, the highest paid cornerback in the league

made 30% more than the highest paid linebacker. In 2000, the top paid at each position basically made

the same.

The Commodity Contracting

Playbook

• ARA 8 Pillars for Commodity Risk Management▫ Education▫ Transparency▫ Measure Risk▫ Tools▫ Analysis▫ Plan▫ Team

Implementation▫ Manage Risk-

Execute

David Maloni, ARA Group, 888-423-4411, [email protected]

Education

• Make Commodity Coaches of your finance and supply chain teams.

• Finance and supply chain team members should all be brought to a level of understanding regarding their top commodities to maximize everyone’s potential

• They should understand what the critical drivers are for their top commodities and where these markets are going

• They should understand all of the contracting tools available to them whether they can currently use them or not ▫ Supplier fixed price ▫ Futures/ Options/ OTC’s

• They should understand who their suppliers are

• Education is ongoing- budget for outside source and ongoing training program (ARA Commodity School)


“Its not the will to win, but the will

to prepare to win that makes the

difference.”- Bear Bryant

Transparency in Contracts

• Transparency is risk discovery much like scouting in football▫ How can you

manage a risk if you aren’t certain where the risk lies?


Think the Colts had some good scouting here?Ryan Leaf won the Sammy Baugh Trophy for the best college

quarterback in 1997 beating out Peyton Manning however Peyton

Manning was drafted first overall ahead of Leaf. Who had the better pro

career?

Measure Risk

• How can you manage your risk if you don’t measure it?▫ Value at Risk

(VAR) model▫ How much risk is

there in that item?

▫ What does that mean to my bottom line?

▫ Is it worth managing?


Tools

• The more tools you have in your toolbox the better you can manage commodity risk-likened to weapons in football▫ Understand all of the

opportunities in contracting Supplier contracts Merchandisers (ARA)

Opens more tools. Can cap a price and participate on the downside besides just fixing a price or doing nothing.

Futures/ Options/ Derivatives Opens more tools. Can cap a

price and participate on the downside besides just fixing a price or doing nothing.

Floating the Market


Analysis

• What’s going on in my key commodity markets

• What are the short term expectations for prices

• What are the long term expectations

• Basket of analysis done on three levels▫ Fundamentals

How should we approach the markets

▫ Technical analysis

History has a tendency to repeat itself

Trends

Seasonal patterns

Where and when

▫ Statistical analysis

Probability studies

• Suppliers are not your best source for analysis! ▫ Yes they care but their first priority is

their company profitability….not yours.

• Invest in analysis▫ In 2005, 1 in 4 fantasy sports

participants spent at least $500 a year on the hobby.

Who has more at financial risk the fantasy football player or your organization?


US and world corn supplies projected to be the tightest

in at least the last 25 years. What does that mean to

your commodities?

(Game) Plan

• A disciplined hedge plan sets the stage for your team▫ Plan for surprises▫ Revisit your plan often▫ Be proactive and not

reactive

• Whole organization must be committed to the plan ▫ Think of the Rooney

Family and the Pittsburgh Steelers and their long term success built on commitment. Starts at the top and filters down.

▫ Think of Southwest Airlines and their long term success which is due in a large part to their commitment to their employees, customers and managing commodity risks


Team Implementation

• Many times we come across one person making the decisions. Often this person may become paralyzed in making commodity decisions due to the growing scope of these decisions.▫ How has Terrell Owens

worked out for his different NFL teams?

• Team Implementation▫ Utilize the skills of the

whole supply chain and finance team Cross train those

responsible for contracting commodities.


"On a football team, it's not the strength of the individual

players, but it is the strength of the unit and how they all

function.“ Bill Belichick

Manage Risk- Execute Your Plan

• Meet regularly to discuss commodity developments

• Focus on driving sales for your business instead of input costs

• Disciplined plan saves a company money▫ Man hours spent on reactive

commodity management▫ Changing menu prices▫ Loss of business by “taking price.”▫ Our track record in working with

companies is roughly a 3% under the market savings

• Use big wins in commodity hedging to take margin or to take market share▫ A restaurant chain could have

booked $1.55 cheese for 2011 last January and saved themselves $.28 a pound so for or $2.8 million on 10 million pounds of cheese


“Son, you’ve got a good engine, but your hands aren't

on the steering wheel.” Bobby Bowden

Closing


• Commodity Risk Management is like a football helmet▫ Used the wrong way it

can be very damaging▫ However used

correctly it is vital protection

▫ Like it or not….you’re in the game. Do you need a helmet?

“If we don’t hedge jet fuel price risk, we are speculating.

It is our fiduciary duty to try and hedge this risk.”Scott Topping, Director of Corporate Finance for Southwest Airlines

Thank YouAmerican Restaurant Association Inc., -a food commodity research,forecasting, consulting and contract risk managementorganization founded in 1996 specifically directly to the USrestaurant/hotel industry and supply chain. American RestaurantAssociation also specializes in assisting restaurant/hotelcompanies navigate and contract in the volatile food commoditymarkets through its two sister firms ARA Trading and ARAHedging. ARA Trading, is a licensed Commodity Trading AdvisoryFirm (CTA) specifically directed to the US hotel/restaurantindustry for commodity risk management consulting andeducation. ARA Hedging is a commodity merchandising companyoffering flexible commodity contracting to clients.

© 2011 American Restaurant Association Inc. This presentation is protected under U.S. copyright law. Please do not redistribute without permission from American Restaurant Association Inc. Thank you. *These comments and data are provided for information purposes only and are not intended to be used for specific trading strategies. Past financial results are not necessarily indicative of future performance. Any examples given are strictly hypothetical and no representation is being made that a person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed constitutes a solicitation to buy or sell futures or options on futures contracts or OTC products. Covered parties (as defined below) shall not be liable for any direct, indirect, incidental, special or consequential damages of any kind, whatsoever (including attorney’s fees and lost profits or savings) in any way due to, resulting from, or arising in connection with this entire presentation, including it’s content, regardless of any negligence of the covered party including but not limited to technical inaccuracies and typographical errors. “Covered Parties” is defined as American Restaurant Association Inc., ARA Trading, ARA Hedging and the employees of the companies. Commodity trading involves risks, and you should fully understand those risks before trading.

Documents

ArA Commodity Contracting Playbook