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An index of food items tracked by the United Nations’ Food and Agriculture Organization rose to a six-month high in September. High grain prices in June and July – partially due to widespread drought in the United States – drove feed prices up, and farmers are in turn passing on those costs to the consumer.
“We expected this for both meat and dairy,” said FAO economist Abdolreza Abbassian in a phone interview with Bloomberg. “You have a lag with this big increase in input cost from the grain sector.” U.S. Class III milk futures have risen for five straight months, while the FAO meat index has risen for two.
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This has eaten into the margins of meat producers like Pilgrim’s Pride (NYSE:PPC) and Tyson Foods (NYSE:TSN). Pilgrim’s Pride and Tyson Foods were among the food stocks to take a beating at the end of July because of uncertainty related to the droughts, and haven’t fully recovered. With a somewhat hyped-up bacon shortage kicking around, one of the world’s largest pork processors, Smithfield Foods (NYSE:SFD), is also down on the year.
Dean Foods (NYSE:DF), with a heavy hand in dairy, is up so far this year. The company recovered from a massive drop at the end of July when a subsidiary filed for an IPO and third quarter earnings came in line with analyst expectations.
“Despite a very difficult market, the fundamentals that suggest a food crisis are just not there,” said Abbassian. “Market sentiment is now accepting high prices more as a rule than as an exception.”
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