Food, Ethanol Prices Set To Rise Again (ADM, DE, POT, VLO, PEIX, GPRE, KFT, SJM, GIS, K, TSN, HRL, SFD, MOO, DBA)

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Hot, dry weather is now expected to reduce the US corn harvest and lift consumer prices for everything from breakfast cereal to pump prices at the local service station. Agricultural stocks from Archer Daniels Midland Co. (NYSE: ADM) to Deere & Co. (NYSE: DE) to Potash Corp. of Saskatchewan (NYSE: POT) reacted favorably to the latest report from the US Department of Agriculture.

Ethanol makers Valero Energy Corp. (NYSE: VLO) and Green Plains Renewable Energy, Inc. (NASDAQ: GPRE) also got a boost, but Pacific Ethanol, Inc. (NASDAQ: PEIX) dropped to a new 52-week low of $0.45/share. Pacific Ethanol faces higher costs for corn than either ADM which grows some of its own and Green Plains which benefits from being located in the Midwest, near the nation’s corn-growing region.

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Some analysts are projecting a price for corn at above $8/bushel, busting through the all-time high of just over $7.99/bushel set in June. The impact on food prices is likely to vary as some food makers absorb the price increases and others pass the increases along to consumers.

Kraft Foods Inc. (NYSE: KFT), J.M. Smucker Co. (NYSE: SJM), General Mills, Inc. (NYSE: GIS), and Kellogg Co. (NYSE: K) are all trading higher than they were a year ago, but have pulled back from annual highs set earlier this summer. Meat processors Tyson Foods Inc. (NYSE: TSN), Hormel Foods Corp. (NYSE: HRL), and Smithfield Foods, Inc. (NYSE: SFD) will likely switch at least part of their feed supply to cheaper wheat, helping keep prices down for chicken, beef, and pork.

Corn yields per acre are now expected to be 153 bushels/acre, down from a previous USDA estimate of 159 bushels/acre. But if hot temperatures continue, especially at night, yields could fall below 150 bushels/acre. That’s a 10% decline in the crop, and could push prices even higher.

For the ethanol makers, corn prices above $7.50/bushel make ethanol production unprofitable at the current price of around $2.60/gallon. Some wheat can be substituted for corn, but the price for ethanol will have to rise, to some extent cancelling any relief for consumers from lower oil prices.

Corn futures are trading slightly lower in Chicago this morning, after closing at $7.14/bushel yesterday. Soybeans and wheat also rose after the USDA’s report was released yesterday.

The Market Vectors Agribusiness ETF (NYSE: MOO) closed at $49.17 yesterday, up more than 4% on the day, and within a 52-week range of $41.83-$57.93. The PowerShares DB Agriculture Fund (NYSE: DBA) rose about 2.5% yesterday, to close at $32.21, within its 52-week range of $25.63-$35.58.

Paul Ausick