THE MAD COW BULLS
by James Grant 02:05 PM 01|26|2001
The United States has been spared the hysteria -- and the reality -- of mad cow disease. But Texas' decision to quarantine 1,000 cattle and a related investigation by the Food and Drug Administration bring the issue uncomfortably close to home.
More than an ocean and a currency separate the United States and the continent of Europe this year. Mad cow disease is cutting a swath through the Old World but has only begun to worry the New. Hardly a day passes without some new mad-cow-related eruption in one of the European Community countries -- embargoes on beef, boycotts of sausage, bans on animal-based livestock feeds and demonstrations by farmers against the wholesale slaughtering of cattle herds. There are newspaper editorials bewailing the failure of EC governments to take early preventive action against a public health epidemic (though it is one in which fewer than 100 Europeans are known to have been infected, and therefore to have died or to be dying). Yet, the 50 states remain blessedly untouched.
Long may they so remain! However, as we never stop hearing, the world is shrinking because trade is erasing national boundaries. At the top of a recent page-one business-news summary in The Wall Street Journal was a bulletin about the discovery of a mad-cow-infected cow by an Italian meat processor that supplies McDonald's in Italy; McDonald's was full of assurances. However, we think, complacency is an even more dangerous state if mind than panic. Because the U.S. imports tons of possibly contaminated bovine products from Europe, and because (as the Food and Drug Administration reported earlier this month) regulations intended to keep mad cow disease away from America are being flaunted by hundreds of animal-feed producers, the risks of a public-health threat to the U.S. seem anything but remote. All in all, we think, the fact that no mad cows have been found in the U.S. to date is a temporary stroke of fortune rather than additional proof of American supremacy.
Following is a speculation within a speculation: a look at the possible economic and financial consequences for the U.S. of the arrival of an epidemic that has not yet materialized. Our guide and mentor is Keith D. Bronstein, a Chicago commodity speculator and biotech entrepreneur who gave a preview of the emerging mad cow-like issues in a talk at the Grant's conference in the fall of 1999. Bronstein's contention (one with which we entirely concur) is that mad cow is about to turn the businesses of public health and agriculture upside down.
As in every upheaval, good or bad, there will be winners and losers. Because mad cow disease has been directly linked to the practice of feeding animal parts to cattle, Bronstein anticipates that the government will ban all animal-based feeds. Certainly, he declares, it should. If it does, there will be far-ranging repercussions. The row crops that compete with ground-up animal parts for a share of the protein market might enter new bull markets (or, at least, enjoy a reprieve from their current bear markets). The fortunes of agricultural implement companies, fertilizer companies, seed companies and the leading public soybean play (Archer Daniels Midland) will brighten.
Such a turn of events would also have a profound effect on the innumerable buyers of meat and animal byproducts: fast-food chains, meat and poultry processors, pet-food makers and the users of tallow and leather. Cosmetics companies might be hard hit, as could soap makers. The potential bearish consequences are easy to imagine.
For now, however, our focus is on the likely beneficiaries of the coming mad cow blight. It is speculative enough to try to handicap the effects of a hypothetical event. It is the better part of valor, we think, to take a long position in markets and companies that are already priced for misery. This is not to say that the speculations described (or implied) in this article are riskless -- anything but. However, there is no mistaking the soybean pit of the Chicago Board of Trade in 2001 for the Nasdaq Stock Market in 1999, or Agco Corp. for Cisco Systems. Soybean prices sit near 25-year lows, and Agco changes hands for less than book value. ("Agco stock doesn't hold much investment appeal at this juncture," concludes Value Line. We wish that we had concluded the same when we wrote about it at 28 3/4 a share in 1997.)
What is this horrible prospective catalyst for fundamental dislocations? The culprit is a disease of the nervous system, bovine spongiform encephalopathy, better known as BSE. A victim's brain is riven with little holes, leaving the appearance of a dish sponge. Stricken cows walk oddly; they become aggressive or nervous; they lick more than usual, and they lose weight. The human version, Creutzfeldt-Jakob disease, or CJD, is hard to detect and (like BSE) always fatal. Victims suffer from "insomnia, memory loss, depression, anxiety, withdrawal and fearfulness, and eventually loss of coordination, incontinence and blindness," according to an excellent primer appearing on December 7 in the International Herald Tribune (and available on that newspaper's Web site).
"The disease can arise out of nowhere and lie dormant for years," writes the Trib correspondent, Barry James, "which the official BSE Inquiry believes is how it started in England. Perhaps only one cow spontaneously developed the disease at first. To become an epidemic, it needed an amplifier, which in Britain was the practice of feeding grazing animals the ground-up remains of others of their species."
It is fearful how little is known about CJD -- but what is known is also fearful. For instance, the agent that causes the spongiform disease are deformed proteins called prions. These prions can survive on surgical instruments even after the instruments have gone through surgical sterilization procedures. They resist "heat, alcohol, boiling, ultraviolet light and ionizing radiation," James notes. They don't die easily in landfills or at freezing temperatures, and they replicate infernally. Furthermore, the spongiform diseases are highly infectious: "According to British scientists, a cow can get BSE by eating one gram of infected material -- a speck the size of a peppercorn -- from another cow. Even a minute trace of the material in meat and bone meal, the protein supplement produced from rendered animal remains, can infect a cow."
To a casual American observer, the European hysteria about mad cow may seem bafflingly out of proportion to the relatively small number of deaths associated with it. However, as James relates, the worry is well-founded: "The danger to humanity, scientists say, is that the general level of potential infection will rise, making it easier for the disease to emerge in future generations. This threat is illustrated by the speed at which bovine spongiform encephalopathy amplified among cattle in Britain in just a few years. There have now been more than 180,000 cases, with many others doubtlessly undiscovered among the 4.8 million cows culled and destroyed since 1996 in an attempt to check the disease. An article in the science journal Nature estimated that 975,000 infected cows entered the food supply."
Britain, which introduced Fabian socialism to India, has been chiefly responsible for exporting mad cow to the Continent. As long ago as 1988, British health officials arrived at the conclusion that the source of the scourge was feeding animal parts (sheep or cow) to cows. It banned the practice, but did not similarly ban the export of British ruminant meat and bone meal to its unsuspecting or corner-cutting overseas clientele. "The spread of BSE has broadly followed the patterns of those exports," the Trib has also reported, "with Ireland, Portugal, Switzerland and France being the most affected countries."
The New York Times recently produced an in-depth report on the mad-cow risks facing the U.S. The article offered two conclusions: (1) Americans don't have much to worry about, and (2) there is definite cause for concern. We choose No. 2, and not only because (as the Times notes), aberrant prions can jump from one species to another, as from cows to sheep, or because, as it also reported, "an unknown number of American sheep are infected with scrapie, which, like mad cow disease, is a spongiform encephalopathy." Rather, we were struck by information attributed to Dr. Maura Ricketts of the World Health Organization, who noted (in the Times' words) that "some British renderers continued to make and ship contaminated meat and bone meal around the world while some European farmers knowingly used such products until November because the products were cheap.... [M]ad cow disease has gone global."
As for the contention that the U.S. is safe because adequate testing and safety measures are in place, the Times gave reason not to be sanguine: "Out of 900 million cattle, the Agriculture Department tested fewer than 12,000 sick cows for mad cow disease in the last decade." By way of comparison, France, with 5.7 million cattle, is currently testing 20,000 animals a week; last year, it discovered 153 infected animals.
"The feeding of animal parts to animals is a major public health hazard -- period!" Keith Bronstein has written. "The economic cost of banning this practice is nonexistent. While meat packers will suffer some short-term reversal in their profit margins [fattened by the sale of expended carcasses to feed producers]..., the real economic cost would occur if our leaders fail to take this seriously and a crisis in confidence develops around our food supply." Besides, Bronstein notes, annual federal subsidies to the nation's hapless grain farmers run into the billions of dollars. An executive order banning the use of animal-based feed products would be tantamount to an executive order proclaiming a new bull market in row crops. The savings in subsidies would vastly exceed the higher costs borne by the nation's abattoirs.
It is hardly possible to hold a more contrary opinion in any market than bullishness toward soybeans. "Right now," relates Richard Brock, president of Brock Associates, a Milwaukee commodity consulting firm, "the soy market is more concerned about the fact that we have another record crop being grown in Argentina and Brazil, huge numbers both acreage-wise and so far in production." For another thing, he adds, the spike in natural gas prices has lifted the cost of nitrogen, a critical input in corn-growing. Thus, at the margin, more acres this spring will be diverted away from corn and into sorghum and beans. All in all, says Brock, "It is premature to get real bullish on the soybean market until after this washout is over...." To which Bronstein replies that the bean market for years has chronically and single-mindedly focused on looming burdensome supplies. Before long, there will be no escaping the logical endpoint of this exercise, he goes on, which is a price projection of zero.
In the meantime, few expect a new, shiny-bright agricultural bull market. Grain prices (and the prices of the shares of the companies that sell things to grain farmers) are already deeply depressed. Furthermore, as Bronstein observes, inventories of wheat, corn and beans are extremely low in relation to usage. No surprise there: Every sentient corporate manager long ago learned the rules of just-in-time inventory management. Yet, Bronstein goes on, JIT works only in an environment of surplus. A glance at the California energy news shows how badly it disappoints in an environment of scarcity.
Nobody knows exactly how much animal-parts-derived feed is consumed every year in the U.S. Bronstein's estimate is toward the high end of a very wide range -- he guesses six million tons, including pet-food use. That would roughly be the equivalent of the entire estimated U.S. soybean inventory. An executive order to ban any and all animal-parts additives (a voluntary agreement banning the practice of feeding cow parts to cows is believed to be anything but airtight) would hold explosive speculative potential.
Mad cow may be the story of the year -- but which year? The European panic constitutes an instructive example of the possible speed of events. After years of inaction, governments have quickly taken action, some of it draconian. Thus, France recently ordered a total ban on animal-based feed; Switzerland has removed beef from school lunches, and Germany has directed the slaughter of entire herds whenever mad cow disease is detected in even one animal. In France, the family of a CJD victim recently brought suit against the government for involuntary manslaughter.
In this country, Bronstein says, timing may turn on whether it is possible to leapfrog the bureaucracy -- to short-circuit the laborious process in which a study produced by the Department of Agriculture deliberately makes its way to the appropriate congressional staff members and thence into the consciousness of higher political powers until hearings can be convened at which the meat industry produces its own science (apparently quite persuasive), leading to further debate and compromise legislation that perpetuates the status quo. So fraught with life-or-death import is the mad cow drama, Bronstein speculates, that the U.S. government might -- at that -- act as quickly as the European authorities belatedly did.
"The question is whether it happens or it doesn't happen," Bronstein winds up. "The potential for it is right here."
A version of this story first appeared in the January 19, 2001, edition of Grant's Interest Rate Observer.
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