The Weekly Consensus: Week of October 8, 2012 Vol. 4, No. 41

Six Degrees from the Holidays

Betsy White

 

The recent anxiety about a bacon shortage traces its roots across the pond, when, while “fighting for…growth and prosperity,” Britain’s National Pig Association (“the voice of the British Pig industry”) issued a press release that included the following assertion:  “A world shortage of pork and bacon next year is now unavoidable.” 

It only took a week for the world to take notice.  The bacon story was broadly picked up on the Internet, and then through mainstream media outlets in the US and Canada, including CNBC, CBS, the Washington Post and the CBC.  Suddenly, people were talking, and worrying, and completely off base, since what Britain’s National Pig Association calls “bacon” is what Americans call “Canadian bacon,” and what Canadians, strangely enough, call “back bacon” – not the product pictured above, which the British call “streaky bacon,” Americans call “bacon” and, strangely enough, Canadians call “bacon.” 

But, since restaurants and home chefs (not to mention soap makers, distillers, candy companies, lip balm makers, scented candle producers, baby formula companies, etc.) seem to include bacon as a part of everything, it’s no wonder that so many people were up in arms when they heard that their ingredient of choice might not be available.  The question is, is there really a looming shortage, and should people hoard bacon because we’re headed for an era of rationing?  As noted above, the answer to the first part of the question is no, because it turns out that sometimes “bacon” is not bacon.  As to the second part of the question, there will not be a dark age of bacon rationing, but consumers everywhere will be finding, no matter what bacon they seek, price increases.

The cause of the bacon price increase is corn.  Drought conditions this year have devastated the world’s corn crop.  Corn is not only the source of the oceans of high-fructose syrup in which America drowns itself, but also used as fuel for some cars and to feed livestock, and when the price of it goes up, the price of everything will follow. 

The underlying cause of the bacon crisis of 2012 is but a small part of a bigger story about looming increases in the cost of staples, which result in an increase in non-discretionary spending, which leads to decreased disposable income and lower consumer confidence.  The lower income brackets are the canaries in the coal mine of consumer spending, fading first, and fast, but there are signs that rising costs are leaving a mark among the more financially robust as well.  High-end brands such as Burberry and Tiffany that have heretofore been immune to the general consumer spending pullback that came with the global recession have started to see demand for their products flattening, or even declining.  As we start to get closer to the all-important holiday season, if even the wealthy are no longer feeling so secure that they can spend as freely as they have in the recent past, while the not wealthy experience yet another decrease in their discretionary budget, it does not bode well for holiday spending.  Projections to the contrary may simply be, yes, putting lipstick on a pig.

Apparel & Footwear

Li & Fung in Talks to Buy NY-Based Sourcing Company

Li & Fung Ltd. is in advanced talks to buy Synergies Worldwide, a small, New York-based supplier, a source familiar with the matter said. The move would help Hong Kong-based Li & Fung gain a better foothold in the fast fashion and discount clothing space. Li & Fung is now negotiating the finer points of a deal with Synergies, which specializes in low-cost sourcing and has a strong foothold in manufacturing centers like India, Pakistan and Bangladesh, the source said. The source did not want to be named because the talks are not public or final yet. Li & Fung, which is halfway through an ambitious three-year growth plan that aims to grow core operating profit to $1.5 billion by 2013, has said it would grow the company both organically and through acquisition. Some analysts questioned whether the company's acquisition-led business model still works.

Power Suitor Escada Eyeing St. John Purchase

Maybe St. John could use a little parental guidance. The stodgy women’s power-suit brand, which was put on the block this spring as its business continues to unravel, has held merger talks with Escada — the German luxury label that had owned it nearly 20 years ago. Megha Mittal — the 35-year-old daughter-in-law of Indian billionaire Lakshmi Mittal, who scooped Escada out of bankruptcy in 2009 — recently flew to the West Coast to meet with execs at Irvine, Calif.-based St. John, sources said. Other prospective bidders for St. John, owned by private-equity firm Vestar, include clothing company Jones Group and PE firm Lion Capital, which has made investments in American Apparel and John Varvatos. Insiders said the company, formerly known as St. John Knits, could fetch as much as $300 million, which would amount to 10 times the company’s adjusted EBITDA.

Christopher & Banks CEO Waller Staying on the Job a While Longer

Apparently Christopher & Banks Corp. has temporarily ended its search for a new CEO. The women's apparel company said in a filing with the U.S. Securities and Exchange Commission Oct. 2 that CEO Joel Waller has agreed to stay in the job through March 31. Waller, 72, was given a $150,000 bonus for agreeing to the extension of his contract. Waller, the former CEO of Wilsons The Leather Experts, joined Christopher & Banks on Dec. 14, 2011 as president. He was hired for a one-year term. Two months later, CEO Larry Barenbaum left the company and Waller was named CEO while the company's board searched for a new leader. More than seven months later, the board is still looking.

Express Cuts Its Forecast as Promotion Falls Short

Express Inc. slashed its forecast for the current quarter, highlighting the perils of resorting to promotions that fail to clearly communicate value to the customer, ahead of the crucial holiday selling season. The retailer was forced to discount to clear out inventory and return to affordable tops after a shift to expensive knitted sweaters earlier in the year proved unsuccessful. However, Express’s strategy of offering a discount on a second purchase failed to attract customers as they were left unsure about the value proposition, an analyst said. The company, which operates more than 600 retail stores, said a shift to simpler discounts helped improve traffic at its stores in the final week of September.

How This Lingerie Store Boosted Its Bottom Line, Despite the Downturn

Journelle in New York City is no ordinary store. Among its intimate apparel store peers — who are in the business of helping women find the perfect undergarments through a sometimes thrilling and at other times exasperating process — Journelle stands out. Journelle opened its doors in 2007 — when bankruptcy for small businesses skyrocketed. From the first quarter of 2007 to 2008 bankruptcy filings for small businesses grew 33%. From first quarter 2008 to 2009, bankruptcy filings leapt by 75%. Yet Journelle not only survived the recession, but thrived through it, experiencing double digit growth over the period. While many companies decided to cut costs, batten down the hatches and conserve cash in response to the bad economy, Journelle's CEO, Claire Chambers, said she saw the recession as an opportunity: "I realized that woman will still purchase undergarments but they would have very little tolerance for anything subpar, including the shopping experience. This was the time to truly stand out from our competitors, and that is what Journelle had to do if we were going to get the sales that were out there. So I doubled down on the customer experience and the sales associates."

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Athletic & Sporting Goods

Denver's Gart Capital Partners Expands Running Venture

Denver's Gart Capital Partners has acquired five Dallas-based Run On! stores through its joint venture with The Finish Line Inc. The Running Specialty Group joint venture now owns 24 running stores in the Northeast, Florida and Texas as well as the new run.com e-commerce website. The Running Specialty Group plans to expand deeper into Texas in the next five years, tapping the run.com website to expand retail opportunities for brick-and-mortar stores.

Cheaper Nikes Propel Soccer Investor to Top of Retailers

Dan Thomas looks up at the rain clouds hovering above St. Paul’s cathedral in London and then smiles approvingly at the two golf umbrellas he’s just bought for 5 pounds ($8) from a branch of Sports Direct. The 28-year-old electrician from Essex said the store chain controlled by Mike Ashley, the owner of Premier League soccer club Newcastle United, is his initial port of call when he’s looking for sporting goods. The reason: Price.“I’ll always have a look in Sports Direct first because they’re cheap,” said Thomas, who usually buys T-shirts for use at the gym from the store. “The umbrellas were more expensive when I looked on EBay.” With prices luring thrifty customers, Sports Direct International Plc’s stack-it-high-sell-it-cheap strategy helped push its biggest competitor into bankruptcy this week, while manufacturers Nike Inc. and Adidas AG have the products they spend millions of dollars marketing sold at a discount. Logos of the world’s largest sporting-goods companies often get displayed in stores that resemble a yard sale, according to Bryan Roberts, a director at Kantar Retail in London. “It’s not the most attractive proposition in terms of in- store experience, but it’s been tremendously effective,” Roberts said in a telephone interview.

5.11 Tactical Acquires Beyond

5.11 Tactical has acquired Beyond, a highly technical performance clothing company that builds custom American-made apparel. The acquisition enhances 5.11 Tactical’s domestic manufacturing, product innovation and rapid prototyping capabilities, while providing Beyond with an expanded infrastructure to meet the global needs of the extreme purpose built customer, such as winter expeditionary teams, alpinists, and Special Operations communities. Industry veteran Rick Elder has been appointed as president of Beyond, which will continue to operate as a separate division of 5.11 Tactical in Seattle, WA, while Beyond Founder Scott Jones will move into the role of chief designer.

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Cosmetics & Pharmacy

Walgreens Registers Nearly $5.5 Billion in September Sales, Down 7.8%

Walgreens posted a 7.8% decline in its September sales to nearly $5.5 billion, compared with $5.9 billion for the same month in fiscal 2012. Prescriptions filled at comparable stores decreased by 10.3% in September and by a day-fall adjusted 6.8%. Last month — which had one additional Saturday and Sunday and one fewer Thursday and Friday, compared with September 2011 — negatively impacted prescriptions filled in comparable stores by 3.5 percentage points. Prescriptions filled at comparable stores also were negatively impacted by 0.4 percentage point due to fewer flu shots versus last year, but were positively impacted by 0.1 percentage point due to the higher incidence of flu in September 2012. September pharmacy sales decreased 12.3%, while comparable-store pharmacy sales decreased 16.1%. Calendar day shifts negatively impacted pharmacy sales in comparable stores by 3.5 percentage points. Comparable-store pharmacy sales were negatively impacted by 8.4 percentage points due to generic drug introductions in the last 12 months. Pharmacy sales accounted for 63.7% of total sales for the month.

Chequers Capital Takes Minority Stake in Provalliance

Provalliance — Europe’s largest hair-salon operator, with holdings such as Franck Provost, Jean Louis David, Jean-Marc Maniatis and Saint Algue — has a new minority shareholder: Chequers Capital. Regis Corp. sold its 48 percent share in Provalliance, worth 80 million euros, or $104 million at current exchange, to the Provost family, Provalliance managers and Chequers Capital on Sept. 27. As reported, Regis announced in April its intention to sell the stake to focus on core assets. Following the deal, the Provosts and Provalliance managers now hold 60 percent of the firm, while Chequers Capital has the remaining 40 percent.

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Discounters & Department Stores

Macy's to Hire 80K Temporary Holiday Staffers

Macy's plans to hire about 80,000 seasonal workers this holiday season, a 2.5% increase from last year when the Cincinnati-based operator of Macy's and upscale Bloomingdale's hired 78,000 workers. Macy's said that the seasonal workers will be used to staff up not only its Macy's and Bloomingdale's stores, but also its call centers, distribution centers and online fulfillment centers. Many of the positions will be part-time. Macy's employs about 175,000 staffers on a year-round basis.

Sears to Hold Holiday Hiring at 2011 Levels

Sears Holdings Corp. said it’s hiring of seasonal workers for the crucial winter holidays will be unchanged from a year ago. During a holiday press event, the company, which operates Kmart and Sears, Roebuck and Co. stores, said that its hiring plans come as it has worked hard to make its associates more productive with strategies including mobile checkout. Sears, based in Hoffman Estates, declined to say how many holiday workers it plans to hire but said that the company's workforce is about 260,000. The holiday shopping season is the busiest period of the year for retailers.

Off the Grid

With more than 7,200 stores in 45 states, one would think that Family Dollar had already encountered just about any obstacle that could occur when opening new locations. But though the company could lease, build out and stock a 7,000-sq.-ft. store quickly, fulfilling technological needs could be difficult: Because many locations are in remote areas, connecting the stores to a centralized location was challenging. Those difficulties translated into expensive solutions, like copper-based frame relay circuits to connect the POS system and other functions of the wireless area network (WAN). It also meant waiting on the local telecom to provide the technology to the store, which could take months. It also meant difficult decisions. Family Dollar could choose to “open the store with full functionality, or ... with only a subset of functionality,” says John Schoonover, the Charlotte, N.C.-based discounter’s network engineering manager.

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Grocery & Restaurant

Supervalu Attracts Buyout Barons

Amid exploration of strategic options for its future, struggling Minneapolis-based grocer Supervalu Inc. reportedly has attracted the interest of billionaire Ronald Burkle and buyout firms KKR & Co. and TPG Capital. Burkle and the private-equity firms are looking at parts of Supervalu rather than the whole, reported Bloomberg.com, adding that Cerberus Capital Management LP also has looked at some of Supervalu’s assets. Grand Rapids, Mich.-based retailer and distributor Spartan Stores Inc. reportedly has also shown interest in some of Supervalu’s stores in the Midwest. Supervalu reportedly would prefer a deal for the entire company and has extended its offer deadline past Oct. 15.

Village Posts Q4 Sales, Profit Gains

Village Super Market said sales and profits grew in the fourth quarter, despite ongoing challenges at its two new Maryland stores. The company, which operates 29 ShopRites in New Jersey, Maryland and Pennsylvania, said net income for the quarter, which ended July 28, was up 3%, to $9 million, on a sales increase of 7.2%, to about $370 million. Same-store sales were up 1.8%. For the full fiscal year Village said net income was $31.5 million on sales of $1.4 billion. Sales for the full year rose 9.5%, including same-store sales gains of 4.9%.

Chiquita Taps Edward Lonergan as President, CEO

Chiquita Brands International Inc. has appointed Edward Lonergan as president and chief executive. Lonergan takes the helm at Chiquita on Oct. 8, replacing former CEO Fernando Aguirre, who stepped down in August. Aguirre had also held the title of board chairman. Lonergan most recently served as president and CEO of Diversey Inc., a global supplier of sustainable cleaning, sanitation and hygiene products. The top board position will be assumed by Kerrii Anderson.

New Seasons CEO to Launch Healthy C-Store Chain

New Seasons Market CEO Lisa Sedlar is stepping down as president and CEO effective Nov. 2 to launch her own company of healthy convenience stores. The Portland, Ore.-based chain of neighborhood grocery stores will be a minority investor in Sedlar’s company and is conducting a search for a new CEO. Sedlar will work closely with New Seasons Market’s operating committee to ensure smooth operations through the transition period.

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Home & Road

Sales Pace Hits 4-Year High

U.S. auto sales got hot in September with a 13 percent gain that unexpectedly pushed the monthly selling pace higher than for any month since the industry's 2008 collapse. Sales totaled 1,188,899 light vehicles for the month, almost 100,000 more than most forecasters had expected. The seasonally adjusted annual sales rate rose to 14.9 million. That's higher than the cash-for-clunkers 14.6 million SAAR in August 2009 and the best since the near-15 million mark in March 2008. Automaker executives expect a solid end to the year.

AutoNation Announces September Retail New Vehicle Unit Sales

AutoNation, Inc. announced that its retail new vehicle unit sales in September 2012, as reported to the applicable automotive manufacturers, totaled 22,982, an increase of 23% as compared to September 2011. Retail new vehicle unit sales in September 2012 for AutoNation's operating segments were as follows: 6,870 for Domestic, up 10% versus September 2011, 11,854 for Import, up 38% versus September 2011, and 4,258 for Premium Luxury, up 11% versus September 2011. For the third quarter of 2012, AutoNation's retail new vehicle unit sales, as reported to the applicable automotive manufacturers, increased 22%, with Domestic up 12%, Import up 35%, and Premium Luxury up 6%, in each case as compared to the third quarter of 2011. There were 25 selling days in September 2012 and September 2011.

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Jewelry & Luxury

De Beers Says Goodbye to DTC, Appoints New Chairman

DTC sightholders will now call themselves “De Beers sightholders,” because of a new corporate realignment from De Beers. “We believe it strengthens the De Beers brand to give everything one name,” says spokeswoman Lynette Gould. “Across our organization, there has been a proliferation of sub-brands over many years…. [That] has left us with too many diverse brands that only serve to dilute De Beers’ leadership position and deprive each business unit of the full value of the corporate brand.” But, she adds, “This is not happening overnight. Sightholders don’t have to rush out and do this big rebranding exercise.” This change was spurred partly by a strategic review led by consulting firm McKinsey and Co., Gould says.

Smyth Jewelers Takes Over Bailey Banks & Biddle

Bailey Banks & Biddle Group has hired Baltimore-based Smyth Jewelers to manage the company’s nine locations. Smyth’s current leadership team of Mark Motes and John Jackson will serve as the company’s chief executive officer and chief operating officer, respectively. The company will manage operations, purchasing, administration, and field support functions, a statement said. Bailey Banks & Biddle Group declined to provide additional details. But former CEO and president Paul Leonard tells JCK he has stepped down due to health issues, which he calls "serious but not life-threatening." Bailey Banks & Biddle currently has locations in Arkansas, California, Florida, Missouri, Pennsylvania, Texas, and Virginia.

Blue Nile’s New Direction

Blue Nile has now committed whole-hog to growing its fashion jewelry business—it’s hiring a design director, has appointed a new chief merchant, and just unveiled its first proprietary line with Monique Lhuillier. At a Sept. 5 presentation at a Citi Technology Conference, CEO Harvey Kanter admitted that turning Blue Nile into a site for "non-engagement" and fashion jewelry—as opposed to just low-priced diamond engagement rings—has been “difficult.” But he said it was part of a “30 month plan” that won’t pay off until 2014. He stressed that the site wants to change its entire image, to become “less transactional and more inspiring and engaging.” “We don’t want to be the Amazon of jewelry,” says Kanter—though now, that's basically what the site is. “We have to have a point of view…If you are a David Yurman customer, you like what their aesthetic is. We are strongly oriented…towards developing an aesthetic and point of view in the marketplace.”

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Office & Leisure

Staples Seen Reversing Romney Deal Over Value

Staples Inc., the office-supplies retailer that Mitt Romney’s Bain Capital LLC helped take public more than two decades ago, is now offering private-equity buyers a bargain that will be tough to pass up. After falling to a record low valuation in August, the company now has an enterprise value that’s 4.5 times earnings before interest, taxes, depreciation and amortization, still cheaper than 93 percent of similar-sized U.S. specialty retailers, according to data compiled by Bloomberg. At 14.8 percent, Staples’s free cash flow yield is higher than 65 of 67 peers, the data show. The company’s enterprise value, or equity plus net debt, is now 4.5 times trailing 12-month Ebitda, after slipping to an all-time low of 4.15 on Aug. 28, data compiled by Bloomberg show. U.S. specialty retailers with market capitalizations larger than $500 million trade at a median multiple of 9.3.

Layaway Leads to Early Rush on Holiday Toys

It isn't even Halloween and some Christmas toys are already getting scarce, in part because of new, earlier layaway plans and programs that let parents reserve what are expected to be hot sellers. New fee-free layaway programs and reservations for hot toys at some of the country's biggest retailers are already making some popular gifts scarce. Wal-Mart Stores Inc. and Toys "R" Us Inc. launched their layaway programs in September, more than a month earlier than last year, after parents told the retailers they wanted more time to pay off their purchases. Both companies, as well as Sears Holdings Corp. also tweaked their service fees. Toys "R" Us dropped its $5 layaway service fees, as did Sears at its Kmart and Sears chains for the holiday period. Wal-Mart charges $5, but refunds the amount in a Wal-Mart gift card when customers pick up their merchandise.

Toys ‘R’ Us Opens a Digital Entertainment Store

Toys ‘R’ Us Inc. has opened a new digital entertainment service called Toys ‘R’ Us Movies, the retailer announced. The online store includes 4,000 titles of children’s and family movies and TV shows available for purchase or rental, the retailer says. Consumers stream the content to web-connected devices, and later this fall Toys ‘R’ Us says it will roll out apps to make the service accessible on most web-enabled devices, including Blu-ray players, smartphones and the retailer’s own 7-inch tablet, Tabeo, which will hit stores Oct. 21. Toys ‘R’ Us brought in $1 billion in e-commerce sales last year and grew its online business by double digits in 2010 and 2011. The retail chain reported $13.9 billion in sales during its 2011 year, which ended Jan. 28, 2012.

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Technology & Internet

Wells Fargo / Pathlight Provide $100 Million Term Loan to RadioShack

Wells Fargo Capital Finance, part of Wells Fargo & Company, recently agented a $100 million term loan for the financing of RadioShack Corporation, a Ft. Worth, Texas-based consumer electronics retailer. Pathlight Capital, LLC, a portfolio company of Sycamore Partners, acted as Syndication Agent on the transaction. RadioShack is one of North America's largest companies in its segment, operating both stores and kiosks located throughout big-box retailers in the United States and Mexico. As of June 30, 2012, Radio Shack operated 4,423 company-operated retail stores under the RadioShack brand name in the United States, 1,503 Target store mobile kiosks, 227 company-operated stores under the RadioShack brand in Mexico, and 1,085 dealer and other outlets.

Uniqlo Launches New Hybrid Store with Electronics Chain

Japanese fast-fashion retail giant Uniqlo has launched a new hybrid store in Tokyo that combines fashion and electronics, reported Yomiuri Shimbun last week. The new store is called Bicqlo, a mash-up between the casual clothing chain Uniqlo and Bic, for Bic Camera, one of Japan’s leading electronic chains. The new 4,000-square-meter mega store is eight stories high and has three basement floors. The Shinjuku store features some 80 mannequins dressed in Uniqlo apparel while holding cameras and other home electronic products such as vacuum cleaners. Uniqlo, which has more than 1,100 stores worldwide, announced that there are plans to open more Bicqlo stores in New York and Paris.

Best Buy Founder, Equity Firms Mull $11 Billion Buyout

Best Buy Inc. Co. founder Richard Schulze and at least four private equity firms are examining the books of the Minneapolis electronics retailer in what could possibly lead to a $11 billion buyout proposal, Reuters reported, citing people familiar with the matter. Among firms cited as conducting due diligence, together with Schulze and his financial adviser Credit Suisse Group AG, are Apollo Global Management LLC, Cerberus Capital Management LP, TPG Capital LP and Leonard Green & Partners LP, the report said.

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Finance & Economy

Retail Sales, Consumer Confidence Up in September

U.S. retailers have reported a very good month for shopping activity. September, 2012 was not the greatest month on record for retail sales, but according to Reuters Financial, the numbers are better than expected and they point toward stronger consumer confidence in the economy and greater optimism regarding consumers’ own personal finances. Reuters follows the retail sales activities of seventeen different stores and the average for all stores was a 3.6 percent sales gain in September. Previous years have witnessed even stronger September surges in sales, so this is by no means the best early fall month on record. Still, it is a sign that consumers are slowing coming back from their spending hiatus.

U.S. Consumers Paying Down Debt, Job Growth Needed

U.S. consumers made progress on paying down debt in the second quarter of 2012, but sluggish job growth and the struggling economy could weigh on Americans' ability to pay back loans in the future, the American Bankers Association said. The group said a composite ratio made up of delinquencies in eight loan categories fell during the quarter, and bank card delinquencies dipped to an 11-year low. The bank association defines a delinquency as a late payment that is 30 days or more overdue.

Consumer Credit Up $18.1 Billion

Americans boosted their borrowing in August by the largest amount in three months with strong gains in the category that covers auto and student loans and in credit card debt. Total consumer borrowing increased $18.1 billion in August compared to July, the Federal Reserve reported. In July, consumer borrowing had fallen for the first time in nearly a year. The rebound in August along with a separate report that shows the nation's unemployment rate dropped to 7.8 percent in September are being viewed by some as encouraging signs for an economy that has been struggling in recent months.

Food Prices May Stay High in Next Six Months on Drought

Global food prices will probably stay high in the next six months after drought in the U.S. and Russia cut grain supplies, said the United Nations. The global market “will switch to a short supply mode”for the first time in two years, said Hiroyuki Konuma, the regional representative for Asia and Pacific at the UN’s Food & Agriculture Organization. “We will have to monitor it very cautiously,” he said in a phone interview on Oct. 3. World food costs rose in September to the most expensive in six months as dairy and meat producers passed on higher feed prices to users, the FAO said yesterday. An index of 55 food items rose to 215.8 points in September from 212.8 a month earlier and compared with a 131.17 average in the past 20 years. Corn traded in Chicago jumped 50 percent since the middle of June as the worst U.S. drought in half a century killed crops.

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