By Glen S. Woods
Stevia is unquestionably the fastest growing of all zero calorie sugar substitutes on the market. The global market for stevia rose from roughly $20 million in 2008 to an estimated range between $800 million to $2 billion in 2011. Furthermore, stevia is forecasted to continue to see a 30% growth rate through 2016. Sales of Cargill’s stevia-based sweetener, Truvia, jumped 73.7% between 2009 and 2010. Today Truvia accounts for 58% of stevia-based tabletop sweeteners sold, and has a retail value of $45 million, or 9.1% of the sales of the sugar substitutes in the U.S.
Cargill Inc. (Private), who receives most of its stevia from small farms in China, recently invested in a little Swiss company, Evolva, which is developing a completely different method of producing stevia via a microbial fermentation process. Interestingly, a small development stage agricultural biotechnology company, Stevia First Corp. (PINK:STVF), has been developing its own microbial fermentation method it licensed from Vineland Research and Innovation Centre of Ontario, Canada, for producing high quality stevia.
Independent of the other, these companies were able to demonstrate that by using low-cost plant material, via a microbial fermentation process, they were able to produce the individual components of stevia extract, making entirely new blends and, conceivably, in any required volume necessary. The fermentation process makes it possible to fine-tune a particular stevia flavor to meet a food and drink manufacturer’s needs…and all this at a lower price and without farming related concerns, such as soil conditions or weather. Why would Cargill, who owns the top selling stevia product, look for another method of producing stevia? The answer can be found in the economics of growing and producing stevia.
Nurtitive vs. Non-Nutritive Sweeteners
First, let’s look at the global sweetener market. The global sweetener market, which comprises nutritive or caloric, non-nutritive or zero calorie, and a mixture of the two for low calorie sweeteners, had an estimated value of $58.3 billion in 2010. In 2011 the global sweetener market rose to nearly $99.1 billion, then in 2012 sweeteners dropped significantly to about $77.5 billion. The sweetener market is expected to rise back up to $97.2 billion by 2017. Though there was a drop in the estimated value in 2012, the demand for sugar continued to rise at a rate of 4% annually. However, sugar values are measured in dollars and therefore can be volatile depending on the fluctuation of the dollar against other currencies. Today 83% to 85% of the sweetener market is comprised of sugar and the more economically affordable high fructose corn syrup (HFCS.)
Introduction of High Fructose Corn Syrup in Food Supply
Prior to the 1980s cane and beet sugars were king of the sweetener world. But in the mid-1980s, soda bottlers began to switch from cane and beet sugar to HFCS in response to the rising costs, mostly due to the government subsidizing corn and slapping tariffs on imported sugar. Other food manufacturers soon follow suit switching to the less expensive HFCS, proving that, all things being equal, the market will shift to a less expensive product. This is still evident today. Even with the tripling of corn costs (which started in 2004) and the recent negative press on HFCS, it is still widely used in most sweetened products as it is still 25% cheaper than sugar. Today, the U.S. Department of Agriculture estimates that Americans consume approximately equal amounts of HFCS and sugar.
Costs Still Drive the Zero Calorie Sugar Substitutes Market
Non-nutritive sweeteners, such as aspartame, Splenda, and stevia accounted for just over 10% of the sweetener market with an estimated $6 billion in sales, and non-nutritive sweeteners are projected to grow at a pace of 5.2% through 2015. However, as customers become more health conscious they are looking for an alternative to artificial sweeteners, as can be seen with the rise in sales of stevia and the decrease in sales of Splenda, the leading player in the U.S. retail/tabletop sugar substitute market. Splenda fell from a 61% share of the retail sugar substitute market in 2007 to 45.5% in 2010, while by the end of 2010 Truvia and Stevia in the Raw rose to 13.8% of the market. Aspartame based tabletop sweetener, Equal, dropped from 12.4% of the market in 2007 to 6.5% in 2010, and saccharin-based Sweet N’ Low fell from 13.2% in 2007 to 11% in 2010.
Interestingly, the economics of aspartame, in many ways, is similar to that of sugar and HFCS. Prior to the introduction of aspartame, saccharin was widely used as the zero calorie sugar free substitute of choice in most packaged beverages and foods. Aspartame, though a superior tasting product, cost roughly $90 per pound verses saccharin at $4 per pound. And due to such a spread in price, food and beverage manufacturers were slow to switch to aspartame, choosing to stay with a much cheaper artificial sweetener, saccharin. However, in 1987 when Monsanto’s patent on aspartame expired, aspartame’s price dropped significantly, shrinking the spread between the two artificial sweeteners, and the food industry began to switch to aspartame, with sales hitting $921 million by 1990. Aspartame’s price did not drop as low as saccharin, but it did drop low enough for the food and beverage industry to switch to a better tasting product.
Cargill and Stevia First: Making Stevia More Affordable
And that is where Cargill’s investing in a new and less expensive method to produce quality stevia via a microbial fermentation system comes in. Stevia is expensive, far more expensive than the artificial sweeteners. To grow the stevia plant it requires a large capital investment, not just the plants or seeds, but in land and equipment for growing and harvesting. Then there is the added cost of extracting the sweet steviol glycosides from the leaves. Artificial sweeteners, on the other hand, are comparatively cheap, as the sweetener consists of a blend of inexpensive chemicals. Therefore, one of the challenges that is holding back stevia is the economics of cost. However, by developing a microbial fermentation method, both Cargill and STVF are attempting to make stevia an economically feasible natural zero calorie sugar substitute by lowering the cost to produce stevia by upwards of 70% while securing a constant supply line. If a company can lower the price of stevia and maintain or enhance the product quality, stevia should overtake artificial sweeteners such as aspartame or Splenda as the bestselling zero calorie product on the market.
To be clear, the author is in no way trying to compare the two companies. Cargill is a giant, privately-held company with deep pockets and many successful products on the market. Cargill announced net earnings of $445 million in the fiscal 2013 third quarter, which ended February 28th; its nine-month earnings totaled $1.83 billion, up 66% from $1.1 billion in the prior year. STVF is a small $21.4 million market capitalization company developing one product, stevia. If the fermentation process is successful it will be just another feather in Cargill’s cap, but for STVF it could mean the difference between surviving and flourishing.
Cargill developed Truvia with The Coca-Cola Company (NYSE:KO), and given the amount of diet products sold under the Coca-Cola banner, if a fermentation method can cut the costs of Truvia anywhere close to the 70% figure, it would be a considerable savings to Coke and would give the company a leg up on its competition. Other food and beverage companies, to compete, would look to develop its own fermentation process, and that’s where I think Stevia First Corp. (PINK:STVF) has its best chance of being a break out stock. If STVF’s fermentation process is successful, I would expect a larger company, like PepsiCo Inc. (NYSE:PEP) or Kraft Foods Group Inc. (NASDAQ:KRFT) to step in and either partner up like Cargill has done with Evolva, or buy STVF outright and its licensed technology to the stevia microbial fermentation process.
Stevia First is still in its development stage, it has yet to bring its product to market; therefore the company has no revenue. As of December 31, 2012 the company has accumulated a deficit of $3,203,550, and further losses are anticipated as the company develops its product. However, when Cargill partnered with Evolva, the smaller company received $5.3 million and could receive $7.5 million in milestone payments, plus the company has the right to a 45% participation in the final business. Thus, I would look for a similar agreement between Stevia First and a possible partner in a major food or beverage company should the fermentation process prove viable. This would propel Stevia First (STVF) as a major player in the stevia business.
One must remember that the non-nutritive market, as earlier stated in the article, is estimated to be a $6 billion dollar market. Stevia sales are estimated to rise to over $2 billion in 2014. And those sales are with stevia’s production costs higher than the rest of the field of zero calorie sugar substitutes. It makes sense that if the fermentation method to produce stevia is developed on an industrial level. Sales from that process should generate the bulk of stevia sales to the major food and beverage manufacturers. So it is conceivably possible that the fermentation process would be able to generate sales in excess of $1 billion.
Cargill’s investment in Evolva for its microbial fermentation process has given credibility to the fermentation process, and that helps both the stevia market and the much smaller Stevia First (STVF) with developing its own fermentation process. The caveat in the deck is if the fermentation process does not become successful, Cargill will not feel the negative effects, as it will still own the most successful stevia product on the market, just at a higher cost to produce. Stevia First, however, would feel the effects in a major way, as it will become just another company growing stevia. Though Stevia First also plans on developing stevia via seed in the ground, and that may bring in revenue for the company, I think the best odds of the stock rising are via a successful fermentation method. And until that happens, an investor must assess their risk/reward tolerance.