Commodities Watch: Corn, Cattle Futures Booming; Ethanol Makers Could Give Up Federal Tax Credit (SWY, KR, WMT, WEN, JACK, MCD, YUM, C, CS, MS)

It’s time for our daily look at commodity prices and developments that will carry over ahead in commodities. Corn and cattle prices top today’s news and these both have many implications on the markets. Cattle futures have hit an all-time high and corn prices sit at their highest in a month. Indications point to rising food costs for food producers and restaurants, and that are very likely to push up costs to consumers.

Cattle futures hit a new high of $1.2155/pound, with the rise linked to yesterday’s US Department of Agriculture report on low corn and soybean stocks. As feed prices have risen, herd sizes have shrunk and fewer cattle are being sent to feedlots for final fattening.

Ranchers would like very much to sell, but the feedlots aren’t buying. Feedlots that haven’t hedged grain prices lost $6/head on animals sold in February, compared with a profit of $20/head in February 2009. That’s the story in a nutshell.

The impact on consumer prices will start to show up as retailers give up trying to hide their own higher costs. Grocery stores like Safeway Inc. (NYSE: SWY), Kroger Co. (NYSE: KR), and Wal-Mart Stores Inc. (NYSE: WMT) saw wholesale prices rise nearly 8% in February while retail prices rose less than 3%. Wendy’s/Arby’s Group, Inc. (NYSE: WEN) and Jack in the Box, Inc. (NASDAQ: JACK) estimate that beef costs could rise 15% in 2011. McDonald’s Corp. (NYSE: MCD) and Yum! Brands, Inc. (NYSE: YUM) could also raise prices, but by smaller amounts due to hedging on supply costs for beef, corn, and wheat.

Corn prices have risen sharply in the last two days, driven primarily by a USDA report that stocks are down and the belief among traders that even the amount of US acreage targeted for corn planting won’t be enough to meet expected demand.

Corn prices are also propped up be demand for ethanol to blend with gasoline. A federal mandate to produce 12.6 billion gallons of ethanol for blending with gasoline will require about 5 billion bushels of corn, or about 30% of the expected corn crop. Not only does the federal government mandate the production of ethanol, it also pays a “blender’s” credit of $0.45/gallon, most of which goes back to the corn grower.

The Wall Street Journal reports that the corn-ethanol lobby is having discussions with federal officials to either scale back or eliminate the credit as it now exists.  The credit could be replaced with a payment tied to the price of oil which would not take effect until corn-ethanol prices fall below a given floor with respect to crude oil prices.

Finally, commodities trader Glencore International AG has been approved for an IPO on the Hong Kong stock exchange. The company also plans an IPO on the London exchange, and the two offerings are expected to raise about $10 billion. According to the WSJ, Glencore has hired Citigroup, Inc. (NYSE: C), Credit Suisse Group (NYSE: CS), and Morgan Stanley (NYSE: MS) to handle the IPOs.

Paul Ausick