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After the Flood


The far reaching impact of disaster in Iowa.


By now we've all seen the horrific pictures of flooding in Iowa on our televisions. Countless homes and businesses have been destroyed and families uprooted. It's a tragedy in every sense of the word.

And, because of what the state's famous for -- its corn -- the impact of the floods reaches far beyond Iowa's borders. Iowa corn is used in a variety of products, ranging from the sweeteners we use in our soft drinks to cereal to packing materials. Needless to say, with all of the rain and damage the price of the commodity has soared.

Just how bad have things gotten? The price per bushel has gone from about $4 last year to around $7 now - and traders are talking about the possibility of it hitting $10. If you think you're paying a lot at the supermarket now, just wait.

But the consumer isn't the only one that's likely to get hit. Food industry players such as Kellogg (K) and Kraft (KFT) will probably have to eat some of the cost as well, which in turn could mean margin compression and lower earnings going forward.

A quick check of the current average 2008 estimates for both companies reveals that the sell side hasn't scaled back its numbers. But that doesn't mean it won't have to tinker with its models at some point. The longer farmers are kept out of their fields, the worse the pricing situation could become and the higher the likelihood of earnings being affected.

Don't forget that ethanol is a corn-based fuel. The Associated Press quoted Citigroup analyst David C. Driscoll as saying, "As a result of this unprecedented weather event which has happened only twice in the last 25 years, ethanol margins have plummeted over the same ten-day time span with small and mid-size ethanol producers now running at substantial losses against cash costs."

It's a state of affairs that has obviously impacted the shares of big names in ethanol, including Verasun (VSE) and Archer Daniels Midland (ADM). The 2008 estimate at Verasun has been revised by a penny over the last seven days from 28 to 27 cents per share. Meanwhile, the average 2008 estimate for Archer Daniels Midland has come down from $2.98 to $2.97. Not the end of the world, but more downward revisions could be coming in the next week or so once the scope of the field damage is better known.

Finally, a lot of chickens and pigs and other farm animals eat corn-based food. To the point, the cost of raising those animals could go up as well, which probably means higher prices for that grilled chicken sandwich you so enjoy or the bacon you're given to wolfing down at breakfast. Restaurant chains like Burger King (BKC), Wendy's (WEN) and McDonald's (MCD), which go through a lot of chicken, may see some margin compression as well.

So stay tuned. However things shake out over the next few days will have a big impact on your wallet.

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