A Sweet Opportunity?

A while back, I bought a cereal box with an interesting advertisement on it. I took a picture of it, and it's shown above. This label piqued my curiosity because I've been hearing about the debate between High Fructose Corn Syrup (HFCS) and sugar for a while now through reports on various news channels and even TV propaganda commercials. However, after seeing this label, and being the ever-curious investor, I decided to check if there's an investment opportunity to be had.

The Background and Some Stats

So I went exploring for the driving force between the use of HFCS and the dynamics of the industry. The use of HFCS began really growing in the early 80's as scientists were able to create a substitute that was very similar to cane sugar at a molecular level (see the movie 'The Informant! if you want an entertaining way to learn more). As the chart to the right shows, many people attribute the rise of obesity in America to HFCS, but the link is tenuous, and nothing has really been proven. 

 However, I think what's more meaningful is how sweeteners are used in the US as I think this will be where the investment opportunities will arise. So here are the stats I've found (source links are below):

• The average American consumes 35.7 lbs of HFCS and 44 lbs. of sugar annually
• As of 2010, sugar costs about $0.30/lb and HFCS costs $0.20/lb to buy for food makers
• Artificially added sugars to food account for nearly 16% of the average American's caloric intake. Nearly half of this is from sweetened beverages (i.e. soft drinks).
• The average soft drink has the equivalent of 10 teaspoons (that's not a typo!) of sugar in it. 

Those are the basic sugar stats. But there are also interesting stats about both sugar and corn that I think play a large role in the dynamics of the industry:

• The US is, by far, the largest producer of corn in the world with 41% being produced there (second place is China with 19%).
• Along with production, the US is also by far the largest exporter with 53.8% of the world's exported corn coming from the US. 
• The usage of corn is broken down on the chart to the left.
• The US is the 10th largest sugar producer in the world (26.8ktons/yr) with Brazil being first (455.3 ktons/yr)

The Debate Behind Usage?

The big debate behind HFCS syrup is a suspicion that many in academia as well as the general public that HFCS is not as healthy as natural cane sugar. The thought is that the body is not able to process HFCS the same way as sugar and more of it is stored as fat. Consequently, eating/drinking foods with sugar is more healthy than equivalent foods with HFCS. However, everything I've read thus far indicates that there's no concrete evidence that this is the case. Instead, the obesity epidemic may not be as much related to how much HFCS vs. sugar you consume, but how much of either you consume. The first chart above showing the consumption patterns really does make this the more plausible explanation. There's some research that suggests that the volume of sweetener (HFCS or sugar) in a given food essentially shocks your body, and, thus it isn't able to process the sweetener fast enough leading to long-term health issues. Given that the average soda can has 10 teaspoons of sweetener in it, I would think that this seems more plausible. 

Nonetheless, the debate is still alive and well, and I think it will continue to be for a while. But why are some companies switching to sugar now? And why are some not?

Directions from Here?

I think the answer to that is marketing and cost. As you look at the statistics for corn and sugar production, you see why HFCS is cheaper than sugar to produce. This is driven by the abundance of corn produced in the US and is further the exacerbated by the farm subsidies. But as both corn exports have risen due to emerging market growth as well as the growth of ethanol usage, HFCS prices have been driven upwards. Thus, the spread between sugar and corn has narrowed to the point where companies are willing to take in the extra cost (which now only comes out to be 1-2cents per 2 liter soda bottle) to be able to market themselves as HFCS free. I think another driver is the fact that the FDA has stated that HFCS is no longer considered a 'natural' product and any product considering itself 'natural' should no longer use HFCS. 

Going forward, I think the re-emergence of sugar will continue, but not on a mass scale. Indira Nooyi of PepsiCo has already stated that they have no plans to switch mainstream products to sugar as their researchers have not been able to find any health advantages. Plus, the volatility of the sugar markets and the government's obvious support for the corn industry play a big role in keeping it the king crop in the US. Finally, as food makes up less than 10% of corn's usage, it'll be tough for food consumption alone to make a significant dent in corn usage. All these will ensure that HFCS will be a major player in the sweetener business for years to come. 

Can You Make Money Off Of This?

I think the biggest investment opportunity that lies in this space is if a major beverage maker makes a significant push into sugar. Non-beverage makers just don't use enough sweeteners to have an impact. But for beverage makers, I see 2 ways this could happen 1) there's some definitive proof that HFCS is detrimental to the body (I think this is unlikely) and/or 2) there is a major rise in corn prices which makes the pricing spread much smaller. If this occurs, I would invest in the companies supporting the sugar industry in the US. Since most of US sugar is grown in FL and Louisiana, farm equipment companies and retailers with large presence in those regions stand to benefit. You can also look into fertilizer players or chemical companies that make products that are particularly heavily used in sugar growing. These players also would stand to benefit from a rise in corn prices should scenario 2) play out. But they could be hit hard if 1) plays out.    

The sugar/HFCS debate is an interesting one - for both health and investment reasons. Right now, I don't think there are significant investment opportunities until larger shifts occur. But, the health opportunities are there, and the change is simple - consumer less sugar/HFCS.


Source links: 1, 2, 3, 4, 5, 6, 7, 8 

What are your thoughts?

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The Standard Disclaimer

Everything I've written above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting a financial advisor.