Midwest Floods Impact on the Markets

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With thousands of displaced people and the floods working their way from Iowa down to Mississippi, the worst flooding in the U.S. Midwest in 15 years is adding pressure to the economic impact from the recent rise in prices for food and corn-based ethanol. As an estimated 5 million acres of corn could be lost, and approximately 2 million acres of soybeans may be affected, the price of corn for December delivery at the Chicago Board of Trade has surged 14% from a week ago, while the price of soybeans for July delivery is up 7% during the same period, according to Thompson Reuters. Wheat is also feeling the impact, up 4% in the past week and almost 19% month-to-date.

Local farmers in Iowa and Illinois are expecting crop production to decrease by as much as 50% this year from 2007 levels, as the current flooding could delay planting by up to five weeks. On Tuesday, the U.S. Department of Agriculture said that it expects this year's production to decline to 11.735 billion bushels, a 10% decrease from 2007 levels, sending inventories to a 13-year low. Corn futures for December delivery at the CBOT hit a record intraday high of $7.91 per bushel, as the United States, the world's largest producer and exporter of corn, continues to be affected by flooding in the Midwest region.

An increase in the price of corn and soybeans results in higher feeding costs for farm animals. Live cattle contracts for August delivery at the CME are up 4% from a week ago, after hitting an all-time intraday high of $104.40 per lb yesterday. According to Krishna Guha, Chief U.S. Correspondent for the Financial Times, the 65% increase in corn prices year-to-date affects all the products for which corn is an input, including meat and dairy products as well as ethanol.

According to Mr. Guha, many ethanol-producing companies, especially the small ones, are running at a loss due to the increase in corn prices. For example, shares of VeraSun Energy , an ethanol producer in the United States, are down 75% year-to-date, while shares of Pacific Ethanol and Aventine Renewable Energy , are down 73% and 67% respectively. July Denatured Fuel Ethanol contracts at the Chicago Board of Trade are up 38.42% year-to-date.

In Iowa, 83 of the state's 99 counties have been declared disaster areas affecting commercial traffic throughout the area. "All transport, and all commodity deliveries have been suspended or slowed tremendously," said David Swenson, an Ohio State University Economist, during an interview on Power Lunch.

Union Pacific , the largest railroad in North America, said on Tuesday that quarterly earnings will be reduced by approximately 5% a share due to the severe weather. Following the comments from Union Pacific, a number of Wall Street analysts have downgraded their earnings estimates for Burling Northern Santa Fe , Northfolk Southern , and CSX , as the floods have damaged countless miles of railroad track.

During yesterday's afternoon trading, shares of Burling Northern Santa Fe were down about 7% from a week ago, while shares of Northfolk Southern (NSC), and CSX (CSX) were down 3.78% and 2.54% respectively.