Stevia Growers And Processors Need To Develop For The Food Industry To Reach Full Potential

by: Henry Kawabe

The global sweetener market is a $56 billion dollar industry, 80% of which is classified as caloric, meaning sugar or HFCS. The remaining 20% is non-caloric which falls into two categories, artificial and natural. Aspartame and Splenda are examples of artificial while stevia, monk fruit, and erythritol a sugar alcohol are considered natural. Artificial has dominated the zero calorie market, but according to the August 2011 report by the market research firm Mintel, the trend is turning toward natural sweeteners with stevia gaining market share. According to Mintel the global market for stevia sweeteners reached an estimated $500 million by mid-2011, and food consultant Zenith International expects stevia sales to reach $825 million by 2014. In a report from Packaged Facts of the U.S. it estimates the world stevia sales in 2011 were somewhere between $800m and $2 billion in 2011. However, as noted below it's mostly in beverages.

The beverage industry is a multi-billion dollar industry, energy drinks alone accounted for almost $7 billion in 2011. Stevia products can be found beverages all over the globe distributed by some of the largest bottlers and food manufactures in the world. Coca-Cola (NYSE:KO), with its stevia product Truvia can be found in over 30 products including Diet Coke in Japan where stevia dominates with approximately 40% of the sweetener market. Del Monte (NYSE:FDP) announced it added stevia to its UK line of Naturally Light juices. Monster Beverage Company (NASDAQ:MNST) includes stevia in its Hanson's Natural Lo-Cal juice cocktails and Blue Sky Zero sodas. Starbucks (NASDAQ:SBUX) entered energy drink market with its Refreshers line, and the list goes on. However for Stevia to progress it must develop a product that can be used beyond beverages. Stevia extracts needs to be able to be adapted into cooking and baking products, confectioneries, and especially boxed cereals, a $7.7 billion a year industry that annually dumps 816 million pounds of sugar into those boxes. At this point no stevia grower, producer, or manufacturer has produced a stevia extract that the food industry believes is able to match the taste of sugar or HFCS. However, there are growers and producers who are developing new strains and extraction methods to produce sweeter steviol glycosides that may work in conjunction with other binders to lower the quantity of sugar of HFCS in food products. Breeding new plants with leaves high in rebaudioside A (Reb A), the sweetest of the steviol glycosides, growers and producers are creating newer and better tasting strains of stevia crucial for it to move beyond beverage sweeteners. Though there are a number of companies either growing the stevia plants or manufacturing the sweet Reb A, below are three companies that are developing high-quality stevia that could be substituted or added to sugar or HFCS in food products people consume.

Ingredion Inc. (NYSE:INGR), the $4.79 billion market global ingredients solutions provider based in Westchester Ill, formally Corn Products International, has developed Enliten, a stevia based sweetener derived from a single patented stevia strain that appears to have minimized the bitter, licorice tasting stevioside and maximized the sweet tasting Reb A. Enliten may be one of the stevia products that can branch out from beverages into baked good. Patrick O Brien, marketing manager at Ingredion explained; "To reduce calories, bakery manufacturers will usually replace sugar and fat in product formulations… However, in doing so, they encounter challenges with maintaining taste, texture and product quality. It is critical that formulators include ingredients that build back body and mouth feel to deliver the taste and texture preferences consumers expect from traditional products. Many high-intensity sweetening options help bakers reduce sugar and thus cut calories." Mr. O'Brien went on to explain, "Our stevia-based sweetener can be incorporated at low use levels because it is 200 to 300 times sweeter than sucrose and imparts sweetness in all-natural, reduced-calorie or reduced/no-sugar bakery products. Within the baking and snack categories, stevia sweeteners work synergistically with sugar-free bulk sweeteners such as erythritol, maltitol syrups and other polyol combinations."

Ingredion stock has seen a 30% increase over the last six months and now hovers around its 52-week high of $65.62. On October 25, the company announced its third-quarter earnings per share were $1.52, 17% above Zacks Consensus Estimate and 27% above the previous year's performance. Net sales also grew 3% to $1.7 billion. According to President and CEO Ilene Gordon, who outlined the growth strategies driving the company's success, such as its capabilities to meet consumer health and nutrition trends; "We have a solid business model and know how to create value. Over the last three years we have met or exceeded our long-term performance targets. Our balanced mix of products, geographies and industries served position us well now and into the future for growth." The stock is trading in the $64 dollar range and has a P/E ratio of 12.28. Zacks has a strong buy as a value stock. Ingredion is a strong company with excellent earnings and a good stock to have in one's portfolio.

Tate & Lyle (OTCQX:TATYY), the British $5.7 billion market cap global ingredients and food solutions provider recently introduced Tasteva ™, a stevia product the company had been developing for over two years. Tate & Lyle tested over 80 stevia extracts to understand the sensory profile and characteristics. It then isolated certain steviol glycosides to optimize the sweetness that did not have any of the bitter or licorice aftertaste that has been associated with early stevia products. The company claims that feedback from customers who have tried Tasteva shows that the product delivers a clean sweetness and a clear taste advantage over Reb A 97 and other stevia ingredients. According to Jeremy Thompson, Director of Natural Sweeteners Product Management at Tate & Lyle, these advantages had been demonstrated across a wide range of food applications, including beverages and dairy. The company also found that Tasteva can cut the sugar levels in colas by 50% with no bitter aftertaste and no need for masking agents. This is a big step in the evolution of stevia because up till now cola manufactures were only able to reduce the sugar levels 30% before the taste was affected. Tate & Lyle sees Tasteva not just for beverages but for food manufacturers that are seeking sweetness from a natural source. Tate and Lyle introduced Tasteva Stevia Sweetener in Latin America, as part of Food Ingredients South America in São Paulo, and plans for more regional roll-outs in 2013.

Tate & Lyle, stock closed at $773 on the London Exchange, just below its 52-week high. The company sales were up 7% in the first 6 months of 2012 compared with the first 6 months of 2011, though profits decreased for the same period to GBP166 million, compared with GBP175 million for the same period ending September 30, 2011. However, the company raised its dividend 4.2% from the prior year. Earlier Jefferies Group upgraded Tate & Lyle from a hold to a buy. If Tasteva is able to gain a foothold past the beverage products and into cereals and other edibles I'd look for Tate & Lyle to have another high profit item in its sales arsenal, and would only bolster the stock to be a strong company to have in a portfolio.

Stevia First Corp. (OTCQB:STVF), a small agricultural biotechnology company focused on various processes of stevia production intends to be a vertically intergraded stevia company, from developing seedlings, to plant breeding and cultivation, to harvesting, developing, marketing and selling the extracts. Stevia First Corp is working with a two-prong approach on its 1000-acre farm in the fertile central valley of CA. The first is to develop an organically grown stevia product with leaves high in Reb A with little or no lingering aftertaste. At this time the only organic stevia farm is in China, and Stevia First intends on capitalizing on that growing market by being the first in the U.S. to grow organic stevia on an industrial scale. This might be a smart business plan considering the demand for organic foods continues to grow. In 2010 organic food and beverage sales hit $26.7 billion, while in 2011 organic food sales grew to $29.9 billion. Stevia First Corporation sees a built-in market and a consumer need for organically grown stevia.

The most interesting facet of Stevia First's business is its second prong, implementing an industrial size fermentation process to produce steviol and steviol glycosides. This was initially researched and developed by scientists at Agriculture and Agri-Food Canada. What makes this fermentation process unique from growing stevia in the ground is with the knowledge of the characteristics and the biochemical pathways that are in the stevia leaves. Stevia First would be able to tweak the extract far more than cross breeding the actual plants, developing extracts that are high in the sweet Reb A without the lingering aftertaste, thus making it palatable for the one area that stevia has been lacking - food products. While this process sounds very promising the fermentation has a second advantage that should be of interest to many major multinational food and beverage corporations - lower costs. The stevia leaf contains small amounts of sweet steviol glycosides and the extraction and purification process is not cheap, it comes to roughly 70% of the cost of producing the sweet extract. Through the fermentation process the entire plant is not needed, thus significantly lowering the costs to produce the sweet Reb A extract, while guaranteeing a consistent supply line with a taste that does not vary.

Stevia First has a market cap of $22.61 million, and trades in the $0.40 range. It recently finalized $500,000 in funding for its R&D and general corporation purposes. However, like many development stage companies it can move greatly on news, positive or negative. Stevia First is a small development company that has yet to bring its product to market, therefore it has no sales. However, due to the nature of the company being fully involved with the research and holding a worldwide exclusive license on the fermentation extraction method, the company could derive revenue from these in the near term, prior to full-scale stevia leaf production. The company announced earlier this year it was commencing its fermentation-based stevia development, which first involves optimization studies and completion of pilot-scale stevia extract production.

Even if stevia is not successful in going beyond beverages and a handful of dairy products it is estimated that stevia sales will be close to a billion dollars. However, if a company can produce a stevia product that will blend well in edibles such as boxed cereals or baked goods, the potential yearly sales would be in the multi-billion range. If Tate & Lyle or Ingredion can develop such a product, it would surely enhance their product lines. Will it cause those large-cap stocks to rise significantly? Potentially, but Stevia First on the other hand, is a small development company with a single product developed in two different methods, organic farming and fermentation. The real growth for it would be if its fermentation process is successful in developing a stevia extract that can be substituted or added with sugar and other products in food items. I happen to think the multi-national food and beverage manufactures are keeping an eye on the fermentation process to see if it is actually a viable method of producing quality stevia without an aftertaste. And if the process proves successful on an industrial scale I would not be surprised to see one of those giant corporations either engage in an exclusive agreement or buy out of the company. However, it must be understood that at this time Stevia First is reporting no sales and is still in its research and development stage, so one must be aware of the risks involved in investing in any small development company.

Disclosure: I am long OTCQB:STVF, KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.