US Drought Subsiding, Slightly, But The Damage Is Done

 @angeloyoung_a.young@ibtimes.com
on August 17 2012 1:13 PM
Vilsack U.S. Drought
U.S. President Barack Obama talks to the media next to Secretary of Agriculture Tom Vilsack during an Aug. 7 meeting with the White House Rural Council to discuss ongoing efforts in response to the drought, at the White House in Washington, Reuters

The worst of America's worst drought in more than 50 years seems to be subsiding, slightly, as summer starts to wind down in northern parts of the country and rain comes to the parched Southeast, according to the latest weekly U.S. Drought Monitor report.

The U.S. Department of Agriculture estimates that 61.8 percent of the country's 48 contiguous states (excluding Hawaii and Alaska) are still under abnormally dry to severe drought conditions. Corn rated as good to excellent appears to be stabilizing at 23 percent. Soybeans might receive some late-season respite in the Northwest, but much of the damage is already done.

"There were some decent rains in central Illinois and west central Indiana yesterday, but it's too late for corn and too late for most of the bean crop," Don Keeney, meteorologist for MDA EarthSat Weather, told Reuters.

The National Oceanic and Atmospheric Administration forecasts dry conditions to persist in the Midwest into November.

While not all food companies are directly affected by the battering of corn and soybean, meat-protein producers are already feeling the bite of the estimated complete loss of at least 15 percent of the national corn crop and poor yields for most of the surviving plants.

Earlier this month, Springdale, Ark.-based Tyson Foods Inc. (NYSE: TSN), which produces chicken, beef, pork and related prepared food products, warned Wall Street of lower earnings expectations for its next fiscal year. Meat consumption was already under pressure due to a sluggish economy, and the rising cost of corn-based livestock feed will add to this pressure as costs are passed down to the grocery stores shelves. Tyson's stock price has lost 20 percent of its value since July 1.

Other meat protein producers have seen similar hits.

The stock price of Laurel, Miss.-based poultry producer Sanderson Farms Inc. (NASDAQ: SAFM) has shed 13 percent since July 1 while the world's largest pork producer, Smithfield Foods Inc. (NYSE: SFD) of Smithfield, Va., has shed 11 percent from its stock price in the same period of time.

The U.S.D.A. estimated that next year's food inflation will be as high as 4 percent. That's considerably higher than the 2.3 percent food inflation rise for the 12 months ended July, according to the Bureau of Labor Statistics.

Meanwhile, the call to waive the federal ethanol mandate has grown louder even while U.S. Agriculture Secretary Tom Vilsack warned Thursday against sending the wrong signal to investors in biofuel production.

North Carolina Gov. Beverly Perdue and Arkansas Governor Mike Beebe officially petitioned the Environmental Protection Agency on Tuesday to waive ethanol quotas that require 13.2 billion gallons of biofuel, mostly from corn-based ethanol, this year, as well as 13.6 billion gallons next year. Already at least 25 senators and 156 House lawmakers have requested the same, but the gubernatorial requests hold more weight.

"Given the valid basis for the waiver requests in this instance, we believe the EPA is unlikely to deny the petition without a public comment period," said Deutsche Bank analyst Christina McGlone in a note on Friday. "However, such a decision depends on the degree of detail in the waiver requests as EPA requires adequate evidence and substantive data to support claims that harm is being done. According to the waiver guidance (which is not binding), EPA should comment on the requests within 90 days."

In related news: On Friday the U.S. Appeals Court in Washington tossed out a lawsuit challenging an EPA rule that would allow higher concentrations of ethanol -- up to 15 percent from the current 10 percent. The lawsuit was brought in 2010 by the Grocery Manufacturers Association, the American Petroleum Institute and groups representing food companies that use a lot of corn, such as Tyson. The lawsuit was dismissed by Circuit Judge David Sentelle on the bases these groups have no standing, according to Bloomberg.

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