There is plenty of money to be made in sweeteners; in 2012 the global sweetener market was at $77.5 billionand is expected to reach $97.2 billion by 2017. While sugar controls roughly 85% of the sweetener market, many Americans are trying to cut down on their consumption of sugar by switching to natural zero calorie sugar substitutes, which is why companies that grow, produce, or utilize stevia (the fastest growing natural zero calorie sugar substitute on the market) are worth watching. For those who don't know, stevia is a shrub that is native to South America and contains roughly thirty different steviol glycosides. Some of these compounds are called rebaudiosides, with rebaudioside A (Reb A) being the most abundant and the sweetest (and least bitter). In the past, stevia could only be found in products in Asia and on shelves in health food/exotic stores in the U.S. (but labeled as a dietary supplement and NOT a sweetener or food due to FDA bureaucracy). But in the past few years stevia has found its way into the mainstream market as companies like Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), and Monster Beverage Corp (NASDAQ:MNS) have incorporated the sweet extract into its growing lines of zero to low calorie beverage products. Even Starbucks (NASDAQ:SBUX) adds stevia to sweeten its canned Starbucks energy drink, Refreshers. As stevia continues to evolve and gain in popularity, the World Health Organization sees stevia could eventually replace 20-30% of all dietary sweeteners.
While some may see stevia as the "holy grail" of zero calorie natural sugar substitutes, there have been issues that have slowed the progression of stevia, such as a bitter aftertaste characteristic of the product. Stevia is also expensive to produce compared to the cheap chemical artificial sweeteners like aspartame or Splenda, add to that the consistency of the supply line of the actual stevia leaf can vary. However, these issues are being addressed by stevia growers and producers, and the next generation of stevia extracts appear to be closer to the "holy grail" of a natural zero calorie sugar substitute.
Recently giant food conglomerate, Cargill announced it had partnered with the Swiss biosynthetic pharmaceutical company, Evolva (EVE:SW), to develop a more consistent and less expensive stevia sweetener via Evolva's microbial fermentation-based process. This is big news for the future of stevia because a microbial fermentation-based process does not have to rely on soil conditions or weather, and stevia can be manufactured anywhere, thus having the potential of guaranteeing an endless supply line of stevia. Through the microbial fermentation, the manufacturer has the capability to process the key sweet individual components of stevia using low-cost plant sugars, and allows for the individual components of stevia, regardless of how minute, to be developed creating blends in any volume, which then could open the door for these manufacturers to fine-tune its stevia to local tastes. But what would be most attractive is that, because the fermentation process does not require the entire plant, the method could conceivably shave upwards of 70% off the cost of producing stevia extracts.
Cargill and Evolva are not the only companies developing stevia via a fermentation-based process. Stevia First Corp. (OTCMKTS:STVF), an early-stage agribusiness based in California's Central Valley, with its sights on being the first vertically integrated stevia company, has been developing its own stevia microbial fermentation-based process (through a license by Vineland Research and Innovation Centre of Canada). Recently the company announced its "Beyond Reb A" research program, aimed at producing not only Reb A, but also Reb D and Reb X, two glycosides found in small amounts in the stevia leaves that have been identified as the next-generation of stevia sweeteners.
Over the past three months there has been what appears to be positive movement in the company's development. In May, Stevia First announced it reached pilot-scale functionality and continues toward commercial production capability of its fermentation process. Then in a July 8th press release, Stevia First announced that it was able to demonstrate the production of the more desirable and high-value steviol glycosides, such as the rare Reb D and Reb X, via its fermentation technology. If mass-produced at a lower cost, this would give Stevia First an attractive commercial advantage.
Sandwiched between the two press releases, Stevia First announced that it has entered into a non-disclosure agreement with GRAS Associates, LLC, to expedite regulatory approval of the company's stevia extracts manufactured through its fermentation-based processes. GRAS Associates has already successfully prepared and submitted 17 separate stevia Generally Recognized As Safe (GRAS) applications with the U.S. Food and Drug Administration (FDA), which represents more than half of all public GRAS notifications for stevia extracts, each of which has received a "No Questions" letter from the FDA. According to Stevia First's CEO, Robert Brooke, "For us, the goal is all about moving rapidly ahead towards commercialization, and such GRAS approvals are a key component for widespread market adoption."
While the fermentation-based method is still in its development stages, a Malaysian company, PureCircle (LON: PURE) (OTCMKTS: PCRTF), the world's largest producer of stevia, continues to develop its stevia through farm-based methods. Last September PureCircle, which also has offices in Oak Brook, Ill., signed a joint agreement with the Coca-Cola Coto investigate and develop a commercially viable stevia sweetener product; and earlier this month in a press release, the two companies announced they were developing what should be a better flavor profile than the much used Reb A with rebaudioside D (Reb D) and Rebaudioside X (Reb X). Reb D, though roughly 10% less sweet than Reb A, has a significantly lower bitterness that Reb A and has been found to have a more desirable taste profile, especially in cola products where stevia previously has not worked well. The issue with both Reb D and Reb X is that they are found in much smaller amounts than Reb A. Thus, at this time it will take a lot more stevia leaves to produce the extracts.
PureCircle has seen its stock rise over 50% YTD due in part to its agreement with Coke, and the partnership appears to have developed new stevia strains for the market. In May the company submitted a GRAS filing with the FDA for the use of purified Reb X as the principal food ingredient component. PureCircle has also received a "no objection" letter from the FDA for the use of Reb D as a sweetener in the U.S. According to Jason Kecker, vice-president of global marketing and innovation for PureCircle, "We have invested over $300 million in a supply chain infrastructure capable of delivering breakthrough ingredient innovation. We are proud to now work with our customers to turn this investment into breakthrough food and beverage solutions."
PureCircle does not grow its own product, but is more of a holding company as it contracts farms scattered around the globe to grow stevia to certain specifications. One such farm is the S&W SEED Co. (NASDAQ:SANW). Toward the end of 2011, PureCircle, with a goal of developing stevia in the U.S. for the U.S market, entered into a five-year agreementwith the California-based grower of high-yield alfalfa seeds, to grow stevia to the company's specifications. Unfortunately the results have not matched expectationsas reported by S&W Seed:
"Due to weeding control practices, damage to a majority of the fields occurred and we believe it is unlikely that the existing plants will produce the desired levels of leaf that will make it economically viable to continue farming these fields. Stevia plants on the properties in Chowchilla and Los Banos have not emerged from the ground as expected, and we have tentatively concluded that the plants have suffered damage from application of certain herbicides…. We currently believe that the field in Chowchilla will not produce a commercially viable harvest. We estimate that the Los Banos field has suffered an 80 to 90% loss rate, and expect that we will be able to maintain approximately 20 to 30 acres of stevia production at that site."
S&W Seed will most likely correct its mistake and grow quality stevia. However, even if the company abandons its stevia production, it is still the world's largest grower of alfalfa, which is a high value cash crop, making the company a viable investment. S&W has also shown that it is indeed growing, as seen with its acquisition earlier this year of the South Australian company, Seed Genetics International Ltd, a breeder, producer, and marketer of proprietary, non-dormant alfalfa seed varieties, thus creating the largest non-dormant alfalfa seed company in the world now geographically diversified and able to have year round production. S&W Seed stock closed on Friday July 12th at $7.79 per share, well off its mid March high of $11.40 per share. I like S&W Seed, especially since the stock pulled back making it a more attractive buy. If the company continues to grow via buying other seed growers, I can see the stock work its way back toward its highs.
Conclusion
While I am excited about the prospects of both Reb D and Reb X and their potential as the next generation of stevia, I am not as excited about the costs of the farm-based method to grow stevia. This is not to say that PureCircle or S&W Seed are not good companies to invest in. PureCircle supplies roughly 90% of the U.S. stevia --excluding tabletop sweeteners-- and is looking to expand into new markets, including India. PureCircle, which has a market cap of $938 million, has had a good run; it's stock is near its 52-week high, closing on the OTC on Friday July 13th at $5.77 per share. While I like PureCircle, as a company the trading volume on the OTC is just too low, averaging just over 400 shares per day while on the London exchange it averages just under 250,000 shares traded per day. S&W Seed, on the other hand, has seen its stock drop 32% from its March highs after getting ahead of itself due in part to analysts like Piper Jaffray boosting its price target. However, now that the stock price has settled, the entry price for this quality company is now more attractive, especially if it continues to grow and can produce a quality crop of stevia
What I am excited about is the prospect of a fermentation-based method to develop the next generation of stevia because, if successful, it would produce a quality product on an industrial scale at a much lower cost. And as Cargill has shown by throwing its money behind Evolva, that's where I believe a bulk of the future investment dollars will go. While I like the boldness of Stevia First's attempting to develop a vertically integrated stevia company, I think if its fermentation process continues to show success, a larger company like PureCircle or PepsiCo may invest in or buy out the company. And if there are rumblings of such a possibility, I could see the stock rise significantly. But for that to happen, Stevia First must continue to show progress in developing the fermentation process on an industrial scale.
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