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Russia's Drought, Higher Wheat Prices to Affect US Stocks


The lack of rainfall is the start of a domino effect that will reach the likes of Kellogg, General Mills, Molson Coors, and Anheuser Busch.

The lack of rainfall in central Russia and along the Volga River in the West is causing a drought that could affect the prices of everything from cereal, bread, and even beer at the local tavern.

According to Bloomberg, over the past 50 years Russia hasn't seen a drought as bad as is occurring right now. So far 27 crop-producing regions have declared emergencies in Russia. The drought has led to the biggest jump in the price of wheat since 1973 as speculators are worried that wheat production could drop 27% in 2010-11 to 45 million to 50 million tones.

This has led to a 50% rise in wheat since late June.

Click to enlarge

According to the Hydrometerological Center of Russia, plantings scheduled to start in August will be hampered by dry soil. The center went on to say that winter wheat typically accounts for 65% of Russia's annual crop. The damage doesn't stop there, the center also forecasts damage to sugar beets, potatoes, and corn.

The rapid rise in the price of wheat means the price of flour-related products such as bread and biscuits will also rise. This will affect companies such as Kellogg (K) and General Mills (GIS), which use wheat to produce most of their products. Analysts also expect the price of barley to move higher, which would mean beer prices will rise. This would affect companies such as Molson Coors (TAP) and Anheuser-Busch Inbev (BUD).

It's strange to see inflation when everyone else is talking about deflation. But it's a good thing Food & Energy aren't included in the calculation of Core CPI.

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