Will Government Tobacco Subsidies Move To Stevia?

Includes: KO, PCRTF, PEP, STVF
by: Market Exclusive

Most of the 115 articles on Seeking Alpha on or about stevia have made detailed cases for the all-natural, calorie-free sweetener based on investment by Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), or both. In this article, I'd like to make a different case for stevia, that is based on prospective government funding, specifically for farmers, and even more specifically, for tobacco. What does tobacco have to do with stevia? More on that soon. First, a brief background on farm subsidies.

Farm Subsidies 101, 1930 - Today

Farm subsidies have long been the subject of vigorous debate. They are an American tradition, at least since 1930. They began in that year with President Herbert Hoover, the very first president in history who thought of it as his job to specifically extricate the country from economic recession. He used Federal money at his disposal to try and do just that.

Hoover's logic on farm subsidies went like this. The economists of his day were telling him that the reason the economy was in a depression was because of the price level, which had to be pushed back up to pre-1929 levels and then everything would be all right. In order to reflate the price level, he paid farmers not to grow food, thereby constricting supply. This was the beginning of farm subsidies. Critics, on the other hand, held that the price level was only an effect, not a cause, and that the real cause of the depression was a misallocation of available resources during the 1920's boom, causing a lack of demanded goods and services in the bust, and therefore paying people to produce even less goods and services can only make things worse.

Be that as it may, Hoover failed, and Roosevelt then continued and doubled down on Hoover's policies with even bigger subsidies for even more industries in an even more aggressive attempt to bring price levels back up across the economy.

Back in the 30's, farm subsidies were considered a one-time emergency measure to bring the country out of the depression. Though like most government sponsored one-time emergency measures, they lingered on until the public became convinced that they were a necessary part of life and the farming industry could not survive without them. Nowadays, farm subsidies come in five main flavors.

  1. Direct payments are paid at a set rate every year regardless of conditions.
  2. Counter-cyclical payments are triggered when market prices fall below certain thresholds.
  3. A new revenue assurance program provides for overall profitability for a given crop.
  4. Marketing loans offer very favorable terms whereby farmers can realize tremendous gains through loan deficiency payments (LDPs) and commodity certificates.
  5. Disaster payments recoup large losses due to natural phenomena. And the government subsidizes crop insurance to further insulate farmers from risk.

Essentially, this means that farmers are insulated from market uncertainty, thanks to taxpayers. Proponents say that the farming industry is subject to excessive risk from weather which cannot be controlled, and therefore subsidies are necessary to ensure the health of our food supply. Opponents say that everyone is subject to risk from factors out of their control, so why should farmers get special treatment?

But farm subsidization policy gets even more hotly debated than this. Take tobacco, for instance. Tobacco farmers have been heavily subsidized with taxpayer money since 2000 in the amount of $1,518,567,410. All of that to make sure tobacco farmers stay in business and have steady profits. On the other hand, cigarettes are taxed heavily to discourage people from buying them. These policies are clearly contradictory, no matter what side of the debate you're on. The most recent federal tax hike on cigarettes to $1.01 a pack came in 2009 in the Children's Health Insurance Program Reauthorization Act. This is in addition to state and local taxes and federal mandates that force companies to put labels like "CIGARETTES KILL" on every pack, and other costly government programs to discourage smoking, especially teen smoking.

So why give $1.5B in subsidies to tobacco farmers while taxing cigarettes, banning smoking, and forcing morbid labels on every pack? Clearly, the side voting for the subsidies is trying to get the tobacco vote, and the side promoting cigarette taxes and mandatory labeling is trying to get the anti-tobacco vote. The right hand of government does not know what the left hand is doing, and a lot of money is being wasted in this self-contradictory tobacco policy war.

I doubt the public will catch on to this phenomenal waste of money anytime soon. What I do not doubt, however, is that politicians on all sides are always looking for more up-and-coming ways to attract votes. And there's something specifically happening with tobacco and stevia right now that could easily attract politicians on both sides of the aisle. While an investor can always afford frown on contradictory government policy, he can ill-afford to ignore new money trails. As much as subsidizing tobacco while discouraging its use is a sad waste of money, farm subsidies are not going away anytime soon. Investors may as well capitalize while they can.

From Tobacco to Stevia

With FDA approval for stevia as a food additive coming in only 5 years ago, the stevia industry is still in its infancy. Two mainstream media reports have come out in recent months discussing how tobacco farmers are beginning to switch from tobacco to stevia, one from Bloomberg and the most recent from ABC. Interestingly, the two crops are nearly identical in their cultivation and processing, allowing tobacco farmers to use the same exact capital in stevia production in place of tobacco. If capital stays the same, then so does labor. In other words, those who have been receiving subsidies to grow tobacco will be the same exact people growing stevia now, with the same political connections and political sway as before. Except this time, they'll be growing something that is politically favored instead of politically shunned. Also, replacing tobacco subsidies with stevia subsidies would get rid of the obvious contradiction between subsidizing tobacco while discouraging smoking.

In fact, the ABC article carried a tantalizing hint that new subsidies are exactly what these farmers are looking for. Perhaps they think switching to a more politically favorable crop will serve as the bait to keep the subsidies going. Says ABC:

More farmers soon will have an added incentive to try [stevia], though, says Mike Quin, Sweet Green's senior vice president for sales: "Part of the issue is, some of the federal payouts and subsidies paid to tobacco farmers come to an end in 2014." Looking to the day subsidies end, tobacco growers, he says, are looking for a viable alternative. And stevia fills the bill.

Stevia provides an absolute field day of great-sounding political points for both sides of the political aisle. On the one hand, politicians looking for the health-conscious vote can go on about the dangers of high fructose corn syrup (corn is the highest subsidized crop at $92,478,160,478 since 1995), advocate for government subsidy of stevia instead, and laud stevia as the only natural, calorie-free sweetener that won't fatten America. Others can cite the fact that most of the world's stevia production comes from China, and the government should bring those jobs home for Americans. We hear this kind of political rhetoric all the time from all sides.

Most importantly, if the transition from tobacco to stevia continues, the politicians that passed the most recent farm bill can rest easy that if they start pushing stevia for government stimulation, they'll still have support from their old tobacco friends, as they will be the same people. Everybody wins, politically.

How Would Stevia Subsidies Affect The Industry?

This is certainly a difficult question. Stevia market share is tiny at less than 1% among sugar substitutes according to Reuters. Its tiny size is a big reason why a sudden influx of government money could have a big impact on the whole industry very quickly. There is no guarantee, of course, that this government funding will ever happen, but if it does, here are some quick picks with upcoming catalysts to consider in order to get in front of the wave.

1) Ingredion (NYSE:INGR) - A midcap $5.8B company. While it does not focus on stevia, it does sell stevia products branded Enliten, production of which would benefit by an influx of Federal money. This company is a good hold regardless, as it just started paying a dividend last year totaling around 33% of quarterly earnings.

1) Stevia First (OTCQB:STVF) - One of the only exclusively stevia-focused companies publically traded with any noticeable trading volume. Stevia First is a development-stage company that recently completed trials in its stevia fields in California, signed its first distribution agreement with a Canadian distributor for retail products, and announced a first public taste test next month for its Nature-Identical™ Stevia produced microbially without any agricultural process. As this company is California based, it would be among the first in line to benefit from any government subsidies being considered. At $0.55, the stock has been a bit frothy lately due to recent mainstream media attention from Bloomberg and ABC which has likely attracted many weak retail investors. Consider waiting for a pullback to $0.45 before buying.

3) PureCircle (OTCPK:PCRTF) - This company will not benefit directly from US government subsidies as it is a Malaysian company, but it has already partnered with Coca-Cola and PepsiCo and received GRAS status approval for its new stevia extract reb D this year, and is seeking FDA GRAS status for reb X. The stock is on a tear and just broke through the $1B market cap mark, and is likely to fall back down to support at around $5 fairly soon. Any fall below $4 is a buy.

4) Coca-Cola and PepsiCo - Coke has been underperforming the general market by 20% since May. This funk will not last much longer as the only other time KO has underperformed the S&P 500 for such a long period of time was for a half-year stretch in 2010. Any government funding for stevia will help its transition into the sweetener as it has already begun to do. Its tea segment could especially benefit from a heartier investment in stevia, as the slight bitter aftertaste of stevia extract reb A can be more easily masked by the natural bitterness of tea. As for PepsiCo, it has consistently underperformed the S&P on a 5-year time frame, but it has just announced a 6% increase in its dividend for next quarter. It is pursuing stevia apace with Coke and will benefit just the same with sugared soda consumption leveling off as it has been.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: Market Exclusive is a team of analysts and writers. This article was written by Richard Kaplan, one of our group contributors. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.