While successful distributors like PureCircle Limited (LON:PURE), the largest producer and marketer of stevia products, have their growers now breed stevia plants with higher amounts of Reb D and Reb X, growing enough stevia plants to extract the glycosides is going to require an investment in more fields, more plants, more water, and more equipment and labor. Then add in the additional expense of producing the extract, and the cost continues to rise. The problem with the additional cost is that, according to Mintel’s juice report, three-fifths of all juice drink buyers look for low price when shopping, suggesting that any price increases might turn a buyer to a less expensive brand that would probably have a higher sugar content.
FERMENTATION PROCESS: THE FUTURE FOR STEVIA?
There is another process of extracting these sweet glycosides in the stevia leaves; it’s called a fermentation-based method, and this process, once operational, will be able to produce a variety of quality stevia and at a reduced cost. The fermentation-based process utilizes a microorganism growth medium such as yeast or bacteria to convert low-cost carbohydrate feedstock to create steviol glycosides that are, as some call it, “nature identical”—or molecularly the same—as glycosides that are obtained by extracting through leaf production. Today there are two companies that are separately developing the stevia fermentation-based process: the giant food processer and developer, Cargill, and a small development-stage agricultural biotechnology company, Stevia First Corp (OTCMKTS:STVF).
Stevia’s fermentation process centers on an enzyme called steviol synthetase, the starting point for all glycosides, and there are more than 30 of them. Stevia First licenses the enzyme steviol synthetase from agricultural research firm Vineland Research and Innovation Centre of Canada where its scientists discovered that particular enzyme in 2007. According to Robert Brooke, CEO of Stevia First, by using the enzyme with the fermentation process, “You can produce the same, identical steviol glycosides that are found in nature.” But Mr. Brooke continues to explain why the fermentation process (which takes places in closed vessels using the enzyme, yeast, and low-cost sustainable carbohydrate feedstock as starting material) may well be the future of stevia production: “You can think of brewing beer or wine in which you have large vessels that are completely contained. So you can work on something in the lab at a 1-liter scale, and then you can quickly move up to 10 liters, 100 liters, and then 10,000 liters or more. And you can do it with pretty good reliability, meaning that if production works at 1 liter, it’s going to work at 100 and 10,000 liters.”
STEVIA EXTRACT VIA FERMENTATION IS JUST AROUND THE CORNER
This process is no dream down the line. Cargill has a lot invested in the future of stevia, as it is partnered with The Coca-Cola Company (NYSE:KO) in developing Truvia, the dominant brand of stevia product on the market, controlling roughly 60% of the table top stevia segment. Truvia is also used in all of Cargill and The Coca-Cola Company (NYSE:KO)’s stevia products. And both companies continue to test new Truvia blended products including reduced sugar juices and Coca-Cola’s new Coke Life.
Cargill obtained its fermentation process earlier this year by partnering with the much smaller Swiss company, Evolva Holding SA (SWX:EVE), which has been developing its fermentation process and had already reached pilot scale on the process when the deal was struck. Cargill and Evolva expect the fermentation process to be in production by 2015. Stevia First has been developing its fermentation process over the past year and has also reached pilot scale, with full production expected in a few years. Both Evolva and Stevia First are small companies. Evolva is a $189 million market cap company, and it saw its stock climb 15% shortly after the announced partnership with Cargill. Stevia First is a $19.8 million market cap company in California’s breadbasket, the Central Valley. The company is still in the development stage so it does not at this point sell any stevia on the market. The company focus strictly on developing its fermentation process and developing new breeds of stevia plants and expects to have product on the market at a later date.
Clearly the consumer would like to have a natural sugar free substitute, which has helped to drive the stevia companies, like PureCircle, in the past. But cost savings is also a major issue with the consumer, so I believe the future of the bulk of stevia may well go companies that produce the product via a fermentation process, which puts Cargill, Coca-Cola, Evolva, and Stevia First in great positions to be leaders in the field. And while I am a believer in the future of The Coca-Cola Company (NYSE:KO) and its stock, I do not look to Coca-Cola for a pure stevia play; the company is just too large.
Here’s where, as an investor, it becomes interesting: Evolva has witnessed its stock jump over 15% since its announcement with Cargill. PepsiCo, Inc. (NYSE:PEP) and other large bottlers will not sit by if Cargill’s fermentation method produces a better tasting stevia at a lower price — because it would give Cargill and Coca-Cola too big of an advantage in the diet juice and soft drink business.
Stevia First is the only other company that is actively developing the fermentation-based method, and the firm controls the patent on the enzyme steviol synthetase. To me it is quite conceivable that one of these larger bottlers or food manufacturers could swoop in and either partner up as Cargill did with Evolva, or outright buy Stevia First for its fermentation method in order to compete in the diet arena with The Coca-Cola Company (NYSE:KO) and Cargill. And I believe as the fermentation process gets closer to full-scale production, whether it’s with Evolva or Stevia First, the value of the process will increase, and if that happens I would look for Stevia First’s value to increase too.