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Midwest Drought Squeezes ADM, Cargill, Other Food Producers

A worsening drought in the Midwest has pushed corn prices to a record high, forcing meat producers to pay more for feed and squeezing profits of grain traders Cargill as well as agribusiness giant and ethanol producer Archer Daniels Midland.

Yesterday USDA Secretary Tom Vilsack signed disaster designation for an additional 218 counties in 12 states. More than half of all counties in the US have been designated disaster areas by the USDA, mainly due to drought, bringing the total to nearly 1,600 counties in 32 states.

The drought, which has tightened supplies of corn and soybeans, could ripple throughout the agricultural economy, causing food prices to rise for consumers and affecting profits of trucking companies, grain traders, crop processors and ethanol producers.

Corn, which is the primary ingredient in livestock feed, could narrow profit margins of pork producer Smithfield Foods and chicken company Tyson Foods, the WSJ reported.  Tyson will release its earnings Aug. 6.

Cargill CEO Greg Page and livestock industry groups have urged the US government to temporarily curb its quotas to produce corn-based ethanol fuel, Reuters reported. Last year, nearly 40 percent of the US corn crop went into making ethanol.

Tightening corn supplies have led to narrow or negative ethanol margins for some producers, such as ADM and oil refiner Valero, which owns 10 ethanol plants in the Midwest.

The US Agriculture Department said last week that food prices could rise as much as 3.5 percent this year and another three to four percent in 2013, led by meat, due to skyrocketing grain prices tied to the drought. Corn futures on the Chicago Board of Trade rose 27 percent last month and hit a record $8.205 a bushel Tuesday to cap the biggest monthly gain since 1988, Bloomberg reported.

Drought in other parts of the world threatens to compound the problem and push grain prices even higher. Heat waves in southern Europe damaged crops, farmers in India delayed planting because of a late monsoon and below-average rainfall in Australia could push grain output down 40 percent, Bloomberg reported.

Texas businesses were hit hard last year by a drought in the state that forced ranchers to bring hay in from other states and reduce of the size of their herds. That same drought damaged much of the year’s cotton crop, which forced The Gap to cut its profit forecast by 22 percent.

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