Ag-Flation Aggravation

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While many trumpet ethanol as a cost-effective alternative energy, they are not accounting for the domino effect it is having on food prices. Today, China reported the highest inflation in 10 years because of food prices. Food distributor Sysco (SYY) is among the companies on the front lines of this issue so what’s the trade amid the “ag-flation” aggrevation?

Sysco Chief Executive Richard Schnieders joins the guys for this conversation. Here are excerpts from what was said.

Will upward pressure on food prices continue much longer?

“There’s a possibility that we’ll see inflation at fairly high levels yet,” says Schnieders. “But just because (cost) to farmers increases, that doesn’t mean the farmers will sell (crops) for more. It’s anybody’s guess.”

Have farmers been passing along higher costs and then are you passing them along?

“Certainly farmers have been passing them along to an extent,” explains Schnieders. “And we, to our customers, to a certain extent."

Is there a point when you feel you can’t pass it along?

“We help customers find substitute products. So if there’s one kind of steak they have on their menu we help them find a little different steak for them to keep their prices in line,” Schnieders explains.

Why did the stock market respond to you so positively on Monday?

“They were pleased with the sales number and they were more pleased with the earnings number,” replies Schnieders. “It feels to them -- and us -- that many of the initiatives we’ve been working on are bubbling up and making a contribution to the bottom line.”

What are your thoughts on ethanol?

“I’m from Iowa and a lot of plants have been built in Iowa,” says Schnieders. “The state is covered with corn and I think it’s frankly a false economy.

He adds "It’s a difficult situation until we get to “cellulosity”… environmentally it’s not any help to us and economically if there were no subsidies on the product it would not be viable for the farmers.”

If you took those subsidies away – what would we see in terms of food pricing?

“You’d see corn prices drop significantly,” says Schnieders. And you find the ethanol would no longer be..

(interrupts) How much, hypothetically speaking?

“1.5% of the inflation we’re seeing,” Schnieders suggests.

Is there a reason you’re not in foreign countries other than Canada?

“For years we’ve had plenty to do here in the US and Canada,” says Schnieders. “But we have been looking at other parts of the world.. as affluence grows around the world people tend to eat out more and we’ll be there someday.”

Are you on the way there?

“We are headed in that direction, absolutely,” replies Schnieders.

Dylan Ratigan asks the panel what they think of this stock?

Jeff Macke and Pete Najarian like it.

Guy Adami says it’s a volatile stock.

Eric Bolling says sell this stock because it doesn’t have international exposure.

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Trader disclosure: On Aug 13 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money
Macke Owns (EMC); Najarian Owns (EMC), (GS); Bolling Owns Japanese Yen Futures; Bolling Owns Gold Futures