Corn and Its Industry: The Next Tobacco

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.