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Drought-Fueled Corn Rally Squeezing ADM Profit: Chart of the Day

A widening drought in the U.S. Midwest is eroding the profit outlook for Archer Daniels Midland Co. by boosting costs for the world’s largest corn processor, according to Topeka Capital Markets Inc.

The CHART OF THE DAY shows that ADM’s share price dropped 12 percent since June 15, as the worst crop conditions since the drought of 1988 sent corn futures in Chicago up 42 percent. Decatur, Illinois-based ADM uses the grain to make more than two dozen products including ethanol, sweeteners and animal feed, and the company has businesses that store and transport the commodity for customers including farmers.

“Corn is a major cost component to ADM’s income statement,” Ian Horowitz, a New York-based Topeka analyst, said in a July 9 telephone interview. “Higher prices should mean lower margins and earnings.” In a report yesterday, Horowitz said corn will “need to move higher” with the U.S. crop headed for “a growing season on par with the 1988 disaster.”

Ethanol refiners were losing more than 20 cents a gallon in mid-June, compared with a loss of about 13 cents on May 1, ADM Chief Executive Officer Patricia Woertz said during an investor presentation on June 19. Corn prices have risen 27 percent since then, touching a nine-month high of $7.33 a bushel on July 9. About 40 percent of the crop was in good or excellent condition as of July 8, down from 77 percent on May 20, U.S. Department of Agriculture data show.

Horowitz lowered his rating for ADM shares to hold from buy on June 20. Similar reductions were made this month by Ken Zaslow at BMO Capital Markets and by David Driscoll at Citigroup Global Markets Inc., who both cited concern over corn costs. The estimate of ADM’s adjusted earnings, based on the average of 14 analyst forecasts, fell to $3.08 a share for the 12 months through June 2013, down 7 cents in the past four weeks, data compiled by Bloomberg show.

“Like others in the agriculture industry, we are monitoring the drought and the weather forecasts very closely,” Jackie Anderson, an ADM spokeswoman, said yesterday in an e-mail. The company declined to comment on the recent share-price decline or rating cuts.

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