Chipotle and the Great Avocado Scare

NEW YORK (TheStreet) -- Chipotle's (CMG) warnings revealed earlier this week in its latest 10-K filing caused great angst among some of its customers, and perhaps Mexican food lovers everywhere.

From the 10-K:

Any increase in the prices of the ingredients most critical to our menu, such as chicken, beef, cheese, avocados, beans, rice, tomatoes and pork, would adversely affect our operating results. Alternatively, in the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than paying the increased cost for the ingredients. Any such changes to our available menu may negatively impact our restaurant traffic and comparable restaurant sales, and could also have an adverse impact on our brand.

The great guacamole scare, which purported that Chipotle might be forced to remove the green stuff from the menu, made headlines on Wednesday and was no doubt exacerbated by the drought in California.

Chipotle, however, quickly calmed the fears of guacamole lovers, stating that the warning was just a routine risk factor disclosure, much ado about nothing. Thank goodness the media doesn't react to every risk factor disclosure contained within 10-K filings in the same manner; it would make for some very depressed investors.

If you really want to know what's happening in the avocado world, look no further than to the growers and marketers themselves.

Limoneira (LMNR), best known for its citrus production, is also one of the country's largest avocado growers, with 1,200 California acres worth. The company reported a 22% increase in avocado revenue and 25% increase in pounds produced for 2013.

But indications are that 2014 may be a down year because of "plant physiology." The company said, "The California avocado crop typically experiences alternating years of high and low production."

The extent to which the drought will affect 2014 production is unclear at this point, and Limoneira does own vast water rights within the state.

LMNR Chart LMNR data by YCharts

Calavo Growers (CVGW), a global leader in procuring and marketing avocados (the company owns 12% of Limoneira and markets the avocados grown by the company), has added fuel to the avocado fire.

The same day that Chipotle's warning hit the news, Calavo released results for its fiscal first quarter ended on Jan 31. While the company boasted of growing demand for avocados, it also warned that that California's avocado crop may be half of what it was in 2013.

Not to worry, though, the company expects to fill the hole left by reduced production in California with Mexican-grown avocados.

CVGW Chart CVGW data by YCharts

As it turns out, the avocado scare appears to be real, at least for those grown domestically, and prices will likely be higher in 2014.

Chipotle may indeed have to raise menu prices to compensate, but don't fear avocado afficianados -- it is highly unlikely that Chipotle will discontinue guacamole from the menu.

At the time of publication, Heller was long Limoneira.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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