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.
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.
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.
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.
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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