Corn and Its Industry: The Next Tobacco 45 comments
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Summary
- Corn-based ethanol, which always was a mistake, is finally out of favor, and the crop price has fallen to $4/bu.
- This is just the beginning of a long-term secular decline in corn’s fortunes. First, the US fiscal wreckage will put pressure on its subsidy payments.
- Far more important, the cost of US health care will turn the debate to the causes of poor health itself, and the fact of our underlying poor diet.
- The corn-driven American diet is acting like a slow poison on us. With a lot of education, this will become better known, producing a profound change in habits, similar to the smoking cessation phenomenon.
- The resulting drop in demand for corn will mean a big retrenchment in the corn-related industries, negatively affecting:
Stocks
- Potash Corp (POT) ($68.52), Fertilizers
- Mosaic Co. (MOS) ($27.78), Fertilizers
- Archer Daniels Midland (ADM) ($17.53 ), Corn refining
- Corn Products International (CPO) ($22.99), Corn refining
- E.I. duPont (DD) ($29.33), Corn seed, crop protection
- Monsanto Co. (MON) ($71.95), Corn seed, crop protection
- Syngenta (SYT) ($29.28), Corn seed, crop protection
- Deere & Co. (DE) ($30.36), Farm machinery
- CNH Global (CNH) ($12.22), Farm machinery
Our thesis is long term by nature, and will take years to prove out. In the short run, both corn itself and the industry participants (e.g., Deere) may have been oversold, caught up in the forced hedge fund liquidations. So, our present recommendation would be to watch for a recovery, and see it as a selling opportunity in what will become a troubled situation down the road.
Research Perspective
On October 1, this analyst wrote of the dubious merits of the bailout:--
Nothing actually changes, except that financials are bailed out and the national debt goes up. We are at the end of a huge credit upcycle. The bailout plan is a very expensive and futile effort to extend it.........a wealth transfer from the public to financials, with no assurance of new lending as a result.
Naturally, the plan was passed. Almost immediately afterward, its central strategy was abandoned, the one on which the government had staked so much of its credibility, and replaced with a completely different one. Neither the previous one nor the current one involves any commitment by the recipients to lend, so there will be no impact other than the wealth transfer we expected. Our institutions and processes are now almost out of control, and the crisis of confidence in them is finally upon us.
For years, America listened to, and went along with, big, forceful assertions about war, deficits, low interest rates, trickle down, deregulation, low savings rates, executive compensation, job creation, incentives, and now bailout plans. We must by now realize that none of it was true, and have started to pay the price. We are now living through Act I, Scene 1 of the payback phase.
If there is any good news in all this, it must be that by now it should be possible to say something not patently false, and not be shouted down. From crisis comes the possibility of reform, maybe even the necessity for it. Six months ago, this analyst wrote up an eight-point economic plan. We said then that no aspect of it would happen. Now, the chances have improved. In particular, our fourth point:--
Cut health care costs in half by getting the massive amounts of corn out of the American food supply. Corn is junk, whose only dietary uses are in fattening up livestock or in milling into junk food or processing into corn fructose. As such, its contributions, uniquely American, are heart disease, obesity, and diabetes.
The corn growers and refiners, and their whole support group infrastructure, have had a stranglehold on US government policy that rivals the military establishment. Their grip may be weakening. The first chink may be corn for fuel, the many bizarre aspects of which were obvious all along. But that is just the start. Corn itself, not just corn-based ethanol, will come under increasing scrutiny and pressure.
The Economy, Heath Care, and Public Policy
Pressure for change in national priorities will come from two directions, accelerated by a progressively weaker economy. First, government spending generally will get refocused on necessary programs, and away from those that are simply corrupt. Second, the cost of health care, not just how to pay for it, will get more attention.
Grower subsidies have been a sore point for years. The Farm Bill is a transfer payment to growers, an entitlement. It typically does not even go to the operators, the ones riding in tractor cabs, but to people living in New York and Beverly Hills. As the legislation makes its way through Congress, it picks up more and more unrelated amendments to buy off critics, some of which are actually good (food stamps, school lunch), making it more and more expensive. Meanwhile, the commodity title survives, with no caps or even a pretense of being downside protection, even when crop prices and farm income are through the roof.
These transfer payments have had a profound effect on industry practices. The subsidies have made corn in particular a huge phenomenon it would not otherwise be. Federal payments made corn so universal by stimulating production and letting the grain be bought, until very recently, for less than the cost of growing it.
Pre-fuel ethanol, corn was made artificially cheap by taxpayer support. This economic distortion in turn drove down the prices of foods that could incorporate it, thus substituting processed food for unprocessed.
Subsidized grain also meant animals being fed corn at feedlots that could buy it cheaply, below grower cost, so beef cattle, poultry, swine, and dairy cows could all be fattened at animal feedlots, instead of on range and pasture grasses. This factory feeding produced animals diseased by fecal bacteria, and deprived of all manner of nutrition, but these problems were addressed by a big animal antibiotic and vitamin industry.
Corn growing itself is not the only subsidy beneficiary -- there is also corn refining. Sugar import tariffs into the US have for decades supported an otherwise uneconomic market for high fructose corn syrup. HFCS is in pastries and baked goods, ketchup, jams and jellies, syrup, and candy, but most of all sodas. When it comes to effective lobbying, the pharmaceutical companies, oil companies, et al -- Archer Daniels Midland taught them everything they know.
Even in a weak economy, all this nonsense would probably be sustained, if it were not for the pressure coming from a second direction -- health care cost and the imperative need to reduce it.
The US ratio of health care cost to health is high. America spends one-sixth of its national income on health care, and yet enjoys no special benefit from all this spending, compared to other developed nations. The reason for this is not bad doctors, hospitals, or care. The reason is the uniquely high prevalence of chronic, preventable disease, especially heart disease, diabetes, obesity, etc. One-third of US adults are seriously overweight or obese. The Center for Disease Control says that an alarming one in three American children born in 2000 will become diabetic.
It is this analyst’s opinion that the whole tragedy is diet-driven, and that the main problem is corn, which is discussed in detail below. Sweet corn, the kind people eat, is not a particularly good food. It is high-starch, glycemic, empty calories, compared to green vegetables. Milled corn becomes junk food and corn fructose, leading causes of diabetes and obesity. About 10% of American calorie intake comes from corn fructose alone.
Feed grain corn is used to fatten up US beef, swine, and poultry, making American meat a uniquely high-risk food, promoting heart disease and cancers compared to grass-fed. (See detail below.) A corn-based animal diet, vs. grass-fed, elevates saturated fats and triglycerides, and lowers antioxidants.
One reading of the literature leads to the conclusion that, post-smoking, corn is the single worst offender when it comes to boosting health care cost. Therefore, an enlightened health care proposal will not only address issues of who pays how much and by what means. It will also address corn, which imposes huge, unnecessary costs on the nation.
It appears to this analyst that corn is why our health is so poor, relative to what we spend on health care. If this is the case, and it becomes better known, corn will be pressured from two directions. First, if only for reasons of fiscal necessity, the Farm Bill’s grower subsidies will be cut. It will become broadly understood that these payments only lower the cost of low-quality calories of fat, sweetener, and feedlot-fed meat, thereby encouraging chronic diseases.
Second, health care proposals may address corn and identify it as the new tobacco, and the corn lobby go the way of the tobacco lobby. If so, over the next several years, an important investment theme will come along and track policy developments, namely, the decline of corn and the whole corn-driven industry.
Our thesis is long term: It will take a matter of many quarters, even years, to prove out, although we have confidence that it will. In the meantime, we are not making a call on the short-term direction of either the industry or corn itself. In fact, the commodity, on a near-term basis, may be oversold below $4/bu., a consequence of forced hedge fund liquidations.
As shown below, the corn carryover going into the 2009 planting could be only one billion bushels or a touch more, compared to 2 billion bushels going into the 2005 and 2006 plantings, a record low. In 2009, either a harvest below 12 billion bushels, or a recovery in demand ex-ethanol, which dropped by 900 mm bu this year, could produce visible tightness, even if ethanol demand plateaus.
click to enlarge
Corn in the Diet and Bad Health
The literature is extensive and growing on the health effects of a corn-driven diet. A sampling of findings follows:
As mentioned, about 10% of American calories come just from corn fructose. The corn fructose contribution to obesity and diabetes is generally agreed to be higher today than this.
The reason for this disproportionate contribution is not just that the sweetener’s relatively low cost encourages over consumption of beverages and foods that contain it. (This has been the Corn Refiners Association argument.)
Depending on the definitions chosen, a very big part of the US population is overweight. Obesity in turn is partly a function not just of caloric intake, but of the calorie sources. The body makes fat faster from fructose than from glucose (the two sugars; sucrose is a bonded fructose and glucose). Specifically, fructose gets processed by the liver to fatty acids faster than glucose does; it makes triglyceride faster.
It is generally agreed that obesity may be related (in a causal way) to diabetes, which would help to explain why America is seeing an epidemic of both. Diabetes (type 2 specifically) is high blood sugar, and obesity increases insulin resistance. A diet high in refined products is especially conducive. In addition, soda with HFCS is rich in reactive carbonyl compounds, which are elevated in diabetics and cause complications.
The most disturbing studies, however, concern the nutritional content of the meat and dairy products that come from grain-fed (corn) cattle, swine, and poultry.
Beef cattle were evolved to eat grass -- a corn diet hurts their digestive system, which makes it necessary to give them antibiotics to control infections. More important, meat from grass-fed animals is lower in total fat, and higher in several antioxidants, than meat from grain-fed animals. Grass-fed cows produce butter that has less saturated fat, and more CLA, vitamin E, beta carotene, and Omega-3 fatty acids. The meat and eggs from chickens raised indoors on corn and deprived of greens are low in nutrients; eggs from pastured chickens contain: 1/3 less cholesterol; 1/4 less saturated fat; 2x more Omega-3’s; 7x more beta carotene; and 2/3 more vitamin A.
Grass is rich in such antioxidant vitamins as beta carotene and vitamin E, so depriving animals of grass is depriving them of nutrients. Food color is sometimes an indication. In healthy meat, for example, beta carotene gives a creamy color to the fat which is absent in the fat of grain-fed animals. In eggs, the more orange the yolk, the healthier; yolks from pastured poultry eggs are vivid. Three nutrients are especially important here:
Vitamin E levels are much higher in grass than in grain. Vitamin E deficiencies in humans have been linked by one study or another with diabetes, immune disorders and AIDS, Parkinson’s, eye disease, lung and liver diseases, heart disease, and cancer. Compared with grain-fed, pigs have 4x the vitamin E in their milk when raised on pasture. Grass-fed beef has meat 4x higher in vitamin E than grain-fed, and even 2x higher than with vitamin E added to grain-fed. An egg from a pastured hen has 30% more vitamin E, even vs. hens on grain feed that is supplemented.
Conjugated linoleic acid (CLA) reduces both cancer risk and tumor growth, and is one of the most potent anti-cancer agents. Grass-fed animals produce meat and dairy products containing 3x-5x more CLA than do grain-fed animals. The cheese from grass-fed dairy cows has more than 4x the CLA of cheese from feedlot cows. The milk from grass-fed Irish cows is 2x-3x higher in CLA than from grain-fed American cows. Raising dairy cows on fresh pasture vs. standard feed increases CLA in milk by 5x.
Omega-3 fatty acids reduce risk of cancer, cardiovascular disease, allergies, depression, obesity, and auto-immune disorders. Grain-fed beef is not only artificially high in total fat, and low in vitamin E, beta carotene, and CLA, it is also low in Omega-3’s. A ratio of four Omega 6’s or lower to Omega 3’s is considered ideal, and in grass-fed beef it is 2 to 1. In grain-fed beef, it is over 14 to 1. Eggs from pastured hens have 2x to 20x more Omega 3’s, and the meat 2x-4x more, than from grain-fed hens.
Conclusion
Cheap oil and gas for years meant cheap fuel and fertilizer. Combined with Federal crop subsidies, this made a corn-based American diet low-cost. But we are paying a high price for all this economy. Basically, we are poisoning ourselves, which is reflected in our poor health and high cost of health care.
Disclosure: I, Paul Christopherson, certify that all the views expressed in this research report accurately reflect my personal views of the subject company (ies). I also certify that I have not and will not receive compensation with respect to the issuance of this report.
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This article has 45 comments:
There is a world outside of the United Statse that will drive fertlizers regardless of whether the US eats or subsidizes corn for ethanol.
The problem with these up and coming food and feed stocks is the price of POTASH which has historically been at 100 a ton to about 300 per ton. The price went up to 1000 during the commodity bubble. There has been a destabilizing of food and ags that will take months to clean out. The first one is the unsustainable increase in prices of feed and ags. Corn is perfectly fine to grow and buy potash and other nutrients at premium prices, but not when Corn as of late has dropped in price as other ags, that doesnt allow for the unsustainable price of 1000 per ton. As I am repeating constantly, you cant have a decelerating market, major players opening up mines in Russia for Potash extraction(online in 2 years) and expect the major ags to see another increase in price.
A few other caveats, soybeans, sugar cane and other "BETTER for fuel" plants are less fertilizer intensive than Corn.
As for the speculation that there is a whole new world that wants corn based products keep dreaming. You cant change cultural habits overnight, and until today the market for grains we are not used to hasnt taken off. I dont see many American's eating papaya, yams, Fried plantains, sorghum or other cultural foods I am cuban, I eat beans and rice almost everyday, but NO CORN and I am far from poor, maybe corny syrup, but i drink diet coke and use cane sugar for my cuban coffee. The other tick to that issue is that the world population hasnt gone up 200% either.
With what Americans have spent on useless cholesterol drugs and MRIs in the last 15yrs,we could have cured cancer!
Once again, government has created negative unintended consequences. This time by subsidizing a less-healthy food source.
Now, since govt. helped screw up our health, they want to save us by taking over healthcare. That will screw up something else, and on goes the negative government involvement cycle.
But more importantly is the premise that a reduction in corn production from lowering use and consumption of corn-related products will affect the companies, that you mentioned, negatively. With an understanding of two things, the farming industry and a growing population with a static amount of available good crop land, you would know that:
A. Seed companies can change in one growing cycle what they need to grow for the coming years crop of choice, and farmers can alternatively switch crops to the one getting better prices as well. Even if it turns out to be green vegetables, they can adapt.
B. Companies that produce farm equipment will still be quite relevant with a lowering of corn production...in fact they will probably have increased sales due to farmers having to buy new equipment for the new crop of choice.
C. And wheter farmers grow corn, soybeans, lima beans or asparagus, they are still going to use chemicals and fertilizers for that production, because the population will continue to grow and oddly enough they may want to have something to eat.
D. The only companies that may be impacted by a reduction in corn consuption are your 'corn refiners' however they are well diversified in other areas of a agricultural production and though there may be a bump in the road will adjust accordingly.
"One reading of the literature leads to the conclusion that, post-smoking, corn is the single worst offender when it comes to boosting health care cost."
The US & world can no more exist as we know it without corn, it is as essential as clean drinking water and electricity to our lives.
Corn provides about half of the feed rations for cattle, pork, & poultry, the other major ingredient is soybean meal. There is no suitable substitute that can be grown in adequate volume to replace corn- none.
If there was, we would have switched to it decades ago.
The author is correct about our general poor state of health, but it is solely due to the fact that we sit on our dead butts and refuse to get a needed amount of exercise on a regular basis. The ones of us who do can get away with almost anything in our diet and still remain very healthy. The ones who shun exercise are the ones you read about in the obits in their 50's.
Finally, E85 will likely never be a viable, competitive source for auto fuel.
But ethanol, as an additive to gasoline (to replace MTBE maybe ?), probably has a future. When that level of ethanol production is reached, there will likely be no new plants built.
The POTs, MOS, TRA's, CF's of the world can no more afford to not sell the only product they produce than can the rest of us. Their mgt is reluctant to cut prices when there is no prompt demand (now), but when serious demand returns in Nov/Dec, their prices will fit what a farmer can afford to pay. Otherwise, no sales, no profits, no jobs.
Also, has anybody read that the Asians have changed their eating habits back to rice 3X a day? Have they solved their projected population increases in the last 60 days? Just wondered, since corn dropped from $8/bu down to $3.50 in last quarter or so. Thank the 1)Hedge fund fiasco, 2) Financial collapse, 3) Upcoming election.
POT made 1.7B dollars last quarter. If you think the world is going to stop eating or using fertilizer to increase crop yields, then you do not understand the metric of a growing population. Bigger population equals a need for more food.
Do not confuse the liquidation of hedge funds, mutual funds, and margin calls for fundamentals.
the u.s corn syrup industry has profited for years by the gov't banning of cuban sugar imports. since castro is not immortal this artificial distortion of the natural market may be subject to change.
> jack
Finally, the author fails to note the fact that CPO is to be acquired by BG, which manufactures fertilizer, so it's a moot argument regarding CPO.
IF there is, could some reader bring it into the open for others to see.
Lost all credibility. Corn <> corn syrup. The former is good for you. The latter...we simply get too much of. Not inherently bad either. Author is an ignorant tool...probably trying to redeem his shorts now that a bottom is in or near and he's getting scared!!
That said, there are still lots of good uses of corn...they're making lots of biodegradeable stuff out of it now....
Oh yeah? If you are using tax structures to do so, it certainly does. I'm not sure how else you mean? I think you can effect more equitable distribution by other means...such as abolishing income taxes entirely, and going with sales taxes only. That's really the only just tax. Those who buy luxury goods are obviously going to pay much more. The income tax is fundamentally wrong in principle, since it assumes that the government has a pre-emptive right to what we earn. Noone has a right to what I earn -- and where is the merit in forced giving to those less fortunate? Clearly, voluntary giving has merit, and I think we'd be a much more compassionate society if that was encouraged. Forced giving through taxation breeds resentment.
To give all the same opportunity, we need to lower the up-front costs -- and that means ditching income taxes. With consumptive taxes, you are in control of how much you give to the government. This has the direct side-effect of returning power to the people, by the way. You wish you could stop the Iraq war? If government funding was based on sales tax, all the citizens would have to do is stop buying discretionary goods...voila - funding cuts. That's the end of unresponsive Congresses.
Would the author take the "Christ" out of his name ?
In short, socialism has nothing to do with equitable distribution. Neither does communism. This is a very common misunderstanding propogated by those who create strawmen arguments against socialism and communism.
It has to do society or gov't sharing ownership or share of control. But it does not mean that every person has equal share or control. In fact, a common mantra of socialism/communism is to each "From each according to his ability, to each according to his need."
Marx delineated the specific conditions under which such a creed would be applicable - a society where technology and social organization had substantially eliminated the need for physical labor in the production of things, where "labor has become not only a means of life but life's prime want." Marx explained his belief that, in such a society, each person would be motivated to work for the good of society despite the absence of a social mechanism compelling them to work, because work would have become a pleasurable and creative activity. Marx intended the initial part of his slogan, "from each according to his ability" to suggest not merely that each person should work as hard as they can, but that each person should best develop their particular talents.
And in closing, just because I want to use an informed definition of socialism does not mean that I am a proponent. But I am a proponent of using proper definitions.
At least one large study released last year made many of the same points, pointing out that we are so unhealthy because government subsidy programs subsidize corn and wheat and not fruits and vegetables.
Range-fed meats are dramatically better, leading to a simple but profound conclusion. If we want a healthy diet to include meat, we must grow healthy animals for slaughter. Corn can't be part of that to any large degree for the reasons cited. Ironically, high corn prices have actually made beef somewhat healthier in the last 2 years as farmers have substituted alfalfa , which has many of the same characteristics of grass.
In short, the health benefits of fish come from the Omega-3 fatty acids in plankton, and the health benefits of range fed animals come from the same Omega-3 fatty acids in grass. Corn has to go, but it must be replaced by something. Perhaps switchgrass or something new.
Interestingly, bio-diesel oil crops are nitrogen-fixing, so they are actually part of the solution to growing feedstocks with less petroleum derived nitrogen, vs corn.
Capitalism is not perfect in practice, but it at least is sound in theory, because it espouses the theoretically sound notions that a) nothing is free in life; noone has a *right* to what they do not earn -- it may be granted to them out of generosity -- but generosity implies it be done with the good will of the giver, not by coercion; b) the way to drive efficiency is to reward it.
I've heard a lot of things like this during my lifetime. First it was butter (which is better than margarine), then eggs (which also have omega 3). Ruining butter production was so that the margarine companies could sell their product. Ruining egg production was misguided, but at least the intent was good.
If you want an eye-opener, go check out the ag departments requirements for "organic" farming. The organic farmer is allowed to use roundup (or others) for weedkiller, and malthion D (or others) for bug killer.
Where are your references?!
Thank you,
A. Reader
"In Cuba, Obama's campaign vow to ease the 46-year-old U.S. trade embargo and his willingness to consider dialogue with the Cuban government were a breath of fresh air after almost eight years of tough talk and hard-line policies from the Bush administration, Cubans said.
"I think with Obama we will have some improvement. We're going to breathe a little, because if the other (McCain) had won we would be in bad shape - and not just the Cubans," said housewife Cristina Recio, 50.
"With Obama, there has to be a relaxing of the policy toward Cuba because he has at least promised to change things such as ending restrictions on trips to Cuba (by Americans) and that will be good for everyone," restaurant employee Diego Lopez, 41, said."
Do we really have to create wars, just to eat?
We have enough war problems in Africa. Surely, we dont want that sort of thing happening in the Americas, not to mention the whole World?
On Oct 27 01:29 PM fatcat wrote:
> Tell this story to the Mexicans,their whole diet is based on corn
> and has been for years..the real problem is the medical nazis and
> their pill pushing.
>
> With what Americans have spent on useless cholesterol drugs and MRIs
> in the last 15yrs,we could have cured cancer!