7/9/2012
By David Urani, Research Analyst

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While you swelter in the record summer heat, remember that the crops are too. Just when you thought it couldn't get much worse the heat continues to beat down on the nation's farmland. They're saying now that the Midwest drought is the worst since 1988. Corn is "limit up" once again in futures trading rising more than 5% as it continues to spike to its highest levels since September, and you'd suspect it will rise further as trade keeps being limited to the upside.

Naturally, anybody who uses corn as an input cost risks margin pressure. That means caution for the likes of Tyson (TSN), Sanderson Farms (SAFM) and Smithfield (SFD); one of my favorite short candidates when corn rises is Pilgrim's Pride (PPC) which is off almost 7% today.

Ethanol makers are feeling the heat too, and it's now starting to become more costly to make ethanol than the selling price at some plants. Valero (VLO) for instance is halting 2 of its 10 ethanol plants. If it really becomes an emergency, the EPA could even decide to temporarily ease the national ethanol requirements to cool corn prices. All of this could mean rough business for VLO and other ethanol businesses like Pacific Ethanol (PEIX), BioFuel Energy (BIOF) and REX American (REX).

A USDA report on Wednesday ought to tell us just how bad the damage is.

                    Corn – 6 month

David Urani
Wall Street Strategies