Seeking Alpha
Small-cap, long/short equity, special situations
Profile| Send Message|
( followers)  

Upstart Stevia First (OTCQB:STVF) joining agri-giants Archer Daniels Midland (NYSE:ADM), Cargill and Tate & Lyle in lucrative sweetener market.

Sugar is more than a simple staple in our daily diet. Sugar is big business. Industry analysts suggest the broader sweetener market is valued near $58 billion per year. It is no surprise then that producers of sugar and sweetening alternatives are in a pitch battle for market share. It has several of the largest sweetener producers squared off in a Los Angeles court room, arguing over claims to nature and nutrition. Grower-owned Western Sugar Cooperative is leading a group of sugar refiners in a lawsuit against Archer Daniels Midland (ADM) and other corn syrup producers. The corn gang has cried foul and filed a counter suit.

A look at ADM's last financial report helps put the sweetener market and the lawsuits into perspective. ADM reported $4.8 billion in sales from sweeteners in the fiscal year ending June 2012, on which it earned 7.0% in operating profit. This was a far better margin than the 3.7% operating profit ADM earned on oil seeds processing and 2.1% on agriculture services, both of which are significantly larger contributors to ADM sales. ADM cannot afford to let such a lucrative market opportunity slip through its corporate fingers.

In the Cross Hairs of Health Activists

The sugar and corn camps are squared off against each other in court, but both groups are looking over their shoulders at another enemy. Both have been fingered as culpable in the ever widening girth of Americans. In 2010, at least 36% of U.S. adults and children were considered obese. Extra weight increases the risks of diabetes, heart disease, stroke, cancer and sleep apnea, among other chronic illnesses. It is such a critical problem that Mayor Michael Bloomberg in New York City spearheaded a ban on large-size, sugary soft drinks beginning March 2013.

Diet drinks laced with artificial, no-calorie sweeteners will get a pass from Bloomberg's crackdown. There are a number of artificial sweeteners, with NutraSweet's aspartame the most popular. Merisant also sells aspartame under the Equal brand name. Running a close second is sucralose marketed as Splenda by Tate & Lyle Ingredients. Cumberland Packing Company sells saccharin under the brand Sweet'N Low.

These and other artificial sweeteners are increasingly used in formulations of popular soft drinks and prepared foods as well as table top sweetener alternatives for coffee and cereal. Artificial sweeteners have taken a 10% bite out of the total sweetener market. As enticing as artificial sweeteners seemed to be, they have faced increasing criticism from health researchers as potentially harmful. Many consumers refuse to embrace "diet" drinks and food. Consequently, along with caloric big-sluggers sugar and corn syrup, artificial sweeteners are vulnerable to new competitors.

"Natural"Stevia Muscles into Sweetener Market

All sweeteners are facing a new threat from stevia. Extracted from the leaves of a subtropical shrub, stevia products can claim to be "natural" and that has excited consumers. Besides a purity pedigree, stevia has a glycemic index of zero and does not affect blood-sugar levels. Stevia was designated GRAS (Generally Recognized as Safe) by the U.S. FDA in 2008 and approved for sale in the European Union in 2011.

With consumers on board several of the major sweetener market players have embraced stevia. AC Nielson reported that sales of Cargill's Truvia branded stevia product surged to 8.2% of the $2 billion U.S. table top alternative sweetener segment in 2011, displacing Sweet'N Low as the second most popular sugar alternative. Cumberland's Stevia in the Raw also experienced a dramatic surge in sales in 2011. Sales rose 77%, making it the second best-selling stevia brand currently on the market. Merisant is marketing its stevia sweetener as PureVia and Ingredion (INGR) sells stevia under the brand name Enliten. Ingredients producer Tate & Lyle is apparently not intimidated by brands already on the market and recently introduced its own stevia sweetener under the name Tasteva.

Tate & Lyle's confidence is probably boosted by the fact that, despite some concerns about taste, beverage formulators are adopting stevia to sweeten their products. Stevia's taste comes to the palate slowly but lasts longer than sugar. In high concentrations some of its extracts may have a bitter aftertaste. Nonetheless, Coca-Cola (KO) launched three of its Odwalla juices sweetened with Cargill's Truvia and PepsiCo is using PureVia for its SoBe Lifewater products. Formulations for Coca-Cola's flagship drinks Sprite and Nestea have been modified to include enough stevia to reduce the sugar level by up to 30%.

The market share of stevia products among alternative sweeteners is small but growing at a fast pace. The market might shift to stevia at faster rates if supply and quality issues could be resolved. Today nearly all stevia is grown and refined in China and South America. The plant will not grow from seeds and must be painstakingly propagated in greenhouses and transplanted into fields. Harvesting is also challenging. So far production is limited and the cost of stevia extract remains higher than equivalent sugar or corn syrup. UK-based PureCircle is among the largest stevia producers with grower relationships in the stevia shrub's native home of Paraguay and the U.S. PureCircle's Paraguay sources reached commercial production levels in early 2011, and a new grower relationship with S&W Seed (SANW) is expected to yield its first stevia crop from a California test field in yet this year.

New Player on the Field Taking Aim at Quality, Costs

Short supplies and high production costs translate into opportunity for any company with stevia know-how. A developmental stage company based in California, Stevia First Corporation is one of several new entrants to the stevia alternative sweetener market. The Stevia First management team has lengthy experience in California's agriculture sector and hopes to tap its connections and expertise to become one of the first major U.S. stevia growers and refiners.

The company is presently conducting field trials to perfect mechanized cultivation and harvesting of the stevia shrub, both aimed at improving the steps that represent as much as 70% of stevia costs. Stevia First is also designing a pilot extraction facility that will enable it to more efficiently tap the plant's sweetening secret called "steviol glycocides" from the harvested leaves. The extraction process will rely on organic solvents followed by refinement and crystallization steps.

Stevia First is also pursuing a fermentation-based process to produce Rebaudioside A, the sweetest of the stevia glycocides. The process begins with a yeast or other microbe that over-expresses enzymes elemental in steviol. The fermentation alternative eliminates the need to grow and harvest the stevia plant. The company has begun process optimization studies at its laboratory in Yuba City, California and hopes to publish data in early 2013. While not yet proven, Stevia First management believes the fermentation route to stevia glycocides could lead to more consistent flavors from batch to batch as well as reduced aftertaste compared to extractions from stevia leaves.

The novel fermentation alternative has been licensed from a horticulture research group in Canada, Vineland Research, which has given Stevia First exclusive use of the technology and is also providing consulting services to the company. If perfected, the process could give Stevia First a clear edge in a market eager for high quality steviol extracts and finished products.

With both farm and fermentation-based sources, Stevia First is hopeful it can bring large quantities of no-calorie sweeteners to the market. Once stevia glycocide supplies are assured, Stevia First plans to formulate and brand its own stevia products. The management team not only has smart agronomists and stevia experts in its ranks, several members of the group have marketing and brand development expertise. Robert Brooke, the company's chief executive officer, is confident the group can become a successful vertically integrated participant in the stevia market.

Formulation for a Stevia Pure Play

All-natural stevia appears to be the fastest growing segment of the sweetener market. However, none of the established players the sweetener game presents a pure play on stevia. For example, both agriculture giant Cargill and food ingredient conglomerate Archer Daniels Midland sell stevia products, but sweeteners of all types are minor contributors to their respective total sales. UK-based PureCircle is among the largest stevia growers, but also sells flavorings and other sweetener enhancers. To tap into stevia growth on a stand-alone basis, investors will need to take on some risk with a developmental stage company like Stevia First.

As an early stage company Stevia First has yet to book any sales and it has a modest balance sheet. Stevia First reported $917,146 in total cash on its balance sheet at the end of June 2012. The company used just over half a million in cash in the June quarter. However, management believes it can trim back its cash usage to $100,000 per month and stretch its piggy bank well into 2013.

Stevia First has not been a public company for long. It was merged with a public shell in October 2011 and its shares began trading under the symbol STVF less than a year ago. The company raised $1.3 million in new capital through the sale of common stock in the private equity market in February 2012. No matter how frugal management is over the next few months, I believe it is more likely than not that Stevia First will need to open the door for new investors again.

The sweetener market is in a bit of turmoil with heated competition. As the big guys battle in the court room, I believe it is a timely for an upstart like Stevia First to enter the market with new products and new technologies.

Summary: I believe all the companies with stevia products are likely to be beneficiaries from consumer acceptance of stevia as a sweeterner alternative. For the larger players such as Carghill, ADM and Tate & Lyle and Integrion, stevia products may allow them to retain a share of the sweetener market as beverage forumlators such as Coca Cola and Pepsi introduce new non-calorie products. As ADM's income statement demonstrates, sweeteners are highly profitable. However, investments in any of these large conglomerates are impacted by their other businesses such as seeds or food products. To get a pure play on stevia, investors could consider Stevia First, which is bringing proprietary agriculture know-how to stevia cultivation and new technologies to stevia glycocide. As a developmental stage company, Stevia First has no operating history. It may also need to raise additional capital. I believe Stevia First is entering the market at the right time, when no player has yet to dominate the market. Thus a long position in STFA entails risk but could be timely.

Please note that at the current price level STVF can be considered a micro-cap stock. Micro-cap stocks are characterized by price volatility, low trading volume and wide bid-ask spreads. This makes micro-cap stocks appropriate only for risk-tolerant investors.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Source: Stevia Muscling In On $58 Billion Sweetener Market