What's All The Ferment About Stevia?

Includes: KO, PEP, STVF
by: Tom Luongo

Stevia, the hottest thing in sweeteners, holds the promise of changing world economics if the new production methods are for real.

Without a doubt one of the biggest stories over the next 20 years will be the gradual rejection of the lipid hypothesis and the rise in awareness of the health problems associated with a high-carbohydrate, low-fat diet. We are in the early stages of worldwide acceptance of the role that sugar, specifically fructose, plays in this process. Alternative sweeteners with low secondary side-effects have been the Holy Grail of the food chemical and beverage industry for more than 2 generations now. Stevia, a zero-calorie plant derivative, is currently the one in the spotlight having finally received dispensation from the European Union for use there in recent years.

The epidemic of type-II diabetes which is spreading from the West eastward has caused a tremendous amount of capital to be spent on complications from chronic high blood sugar. When one stops to think about how far the effects of poor dietary choices reach the capital loss is literally incalculable.

To this point the problem with Stevia has been its cost. According to industry PR, more than 70% of the cost of Stevia is in the growth of and extraction of the "Reb-A" glycoside -- the desired compound. Added to that is the natural variability of the resultant product due to the vagaries of biology and the inexact science of chemical extraction. Separation and product quality has been an issue as well.

So, investment in improving Stevia's production, which has seen astounding growth rates in usage in the past couple of years, is a big focus for the industry at the moment. Cargill's Truvia, developed jointly with Coca-Cola (NYSE:KO), has risen in sales to become #2 non-nutritive sweetener behind Splenda. Sweeteners are a $58 billion industry of which the non-sugar products fight for 20% of that pie, according to BCC Research.

At this point there looks to be two main competitors searching for a different pathway to producing the Reb-A glycoside which does not involve actually growing the stevia rebaudiana (Bertoni) plant. Evolva, a Swiss biosynthetic pharmaceutical firm, recently signed an agreement with Cargill to develop its fermentation-based process for producing the compounds that make up what we know as Stevia from common plant sugars. Cargill has invested $5.3 million in Evolva to bring this technology to market. Evolva is expecting to have an industrial process ready for market by 2015.

On the other hand is start-up Stevia First (OTCQB:STVF) which is attacking the problem from two directions, or as the company puts it, a vertically integrated approach. Stevia First is researching growing strains of plants to optimize Reb-A content as well as farming methods that will allow the plant to be grown year-round in the central valley of California. This research is also aimed at furthering the understanding of the biological pathways which produce the stevia glycosides which can then, hopefully, be applied to production. This is in addition to its licensing agreement with Vineland Research and Innovation Centre of Ontario, Canada to research microbial-based fermentation.

But, the real driver behind Stevia First's efforts is finding the right mix of glycosides that would improve the taste. It is Reb-A that is the source of the characteristic bitter aftertaste. Its plan, according to management, is to eliminate this issue through research into optimizing production of other stevia glycosides and finding the right mix. There is a lot of work to be done, however, as less than half of the more than 30 known compounds have been properly characterized. But, that said, this is a nut that has a huge financial incentive to be cracked along with having serious intellectual property ramifications.

Stevia First is, very smartly, looking at the problem of glycoside production via two different biological pathways - production via photosynthesis, and microbial fermentation. By approaching the problem this way the company is working on both process optimization and product development at the same time and efficiently ramping up towards commercial production of Stevia. The company certainly looks to be in the right business at the right time. Its initial research findings should prove interesting.

From a market perspective, the Cargill-Evolva-Coke alliance has an organizational lead over the rest of the industry. At this point Cargill/Coke have the advantage with Truvia and its brand success in the market. Pepsico (NYSE:PEP) and its PureVia product could be in serious trouble if it doesn't develop some form of lower-cost process before Cargill and Evolva perfect their new process. Cargill and Coke have filed 24 patents involving Stevia.

Both Coke and Pepsi are seeing sales of their flagship products waning as a percentage of their total sales and the development of new soft drinks are the key to maintaining their current revenue streams. The political winds are turning against sugary drinks as public health costs are overwhelming old political alliances which have been supportive of the sugar industry. Sugar is an easy target, much like tobacco was in the 1990's.

This is why there is so much attention being paid to Stevia and its potential as a replacement for sugar and why I expect the amount of money to flow into its development will likely grow rapidly. A lower-cost fermentation process that produces a sweetener hundreds of times sweeter than sugar should use a lot less feedstock - think acreage - than sugar itself does. This would free up valuable farmland to be used for other crops or for the global sugar crop to be better utilized-- bioethanol production, for example -- and would begin to reverse the massive economic damage done by the over-use of dietary sugar and fructose in the past 60 years.

For investors, I think it is important to consider the far-ranging implications of technologies like this, but not to get carried away. Much of this research and development is in its infancy and agricultural science is a slow process. But, that said, there is a clear mandate from investors and consumers to find more efficient ways of capturing the energy from the sun and converting it into usable products -- the rise of palm oil is a perfect example of this. Stevia First is setting itself up to capitalize on these new trends and might prove to, one day, become a giant in the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I've been a low-carb eater for 15 years.