The company PureCircle (PCRTF.PK) has a fairly substantial job on its hands. PureCircle is responsible for supplying nearly all of the country's (U.S.) stevia. Some estimate that PureCircle is responsible for as much as 90% of stevia supply, excluding the table top sweetener category. And the role of providing 90% of stevia continues to become a larger task as the market grows year-after-year. The products that use stevia continue to rise as large companies make the switch to healthier alternatives. PureCircle may be well-positioned to meet the demand in 2012 with its S&W Seed Company (SANW) partnership; but with its current production, there is no doubt that it will have to grow in some way to meet demand in the foreseeable future. And if not, then it will have to compete for market share.
Stevia is an all-natural zero calorie sweetener, which is taking the market by storm as large companies turn their focus to healthier options with all-natural components. Most recently, Green Mountain Coffee Roasters (GMCR) announced that it was creating a healthier blend of drinks. Also, Coca-Cola (KO), PepsiCo (PEP), and Starbucks (SBUX) are other large-scale beverage companies that have added healthy alternatives, specifically stevia, to their products. As a result, with more beverage companies turning a focus to healthy alternatives, with the use of stevia as a replacement to or in combination with sugar, we can conclude that the trend has been set and that stevia will continue to be in high demand over the next several years.
Back in 2010, PureCircle and SANW entered into a five-year agreement for PureCircle to purchase stevia products from SANW. SANW rows the stevia on its 118 acres in Chowchilla, California, a fairly large increase in production from the 85 acres harvested last year. The growth strategy of PureCircle is to meet demand, and so far it has done a good job. The company's strategic goal is cultivating a diversified global supply of high purity stevia and to build on its existing presence that spans fifteen countries across four continents.
There are some beliefs that PureCircle is going to need stevia production on a larger scale following the decision of several large consumer goods companies to focus on healthier alternatives. As of now, SANW is producing a good harvest; but if stevia continues to grow and slowly replaces sugar (and alternative sweeteners), then larger scale production will be necessary. SANW demonstrated that stevia can be produced in the agricultural regions of California, which should result in an improved supply chain to the U.S. In the past, much of stevia supply has been produced in other countries, which has led to an increased price of production.
SANW is a diversified company that is currently trading with a 16% gain in premarket (Monday), after acquiring Imperial Valley Seeds. This is a company that has grown drastically in size following its partnership with PureCircle. In fiscal 2011, the company returned revenue of just $3.64 million, but in 2012, it has increased sales to $14.15 million. With production of stevia, and other products, continuing to rise, this is a company that could grow significantly more over the next few years. The company's acquisition of Imperial Valley Seeds is encouraging, as it follows a recent trend of increasing its acreage on year-over-year basis. The acquisition instantly doubles the size of SANW, but, with a $6 million price tag, this small company is taking a big risk. The negative side of purchasing Imperial is that it does not necessarily aid in addressing the stevia demand, as Imperial is a producer of alfalfa seeds, which still leaves a large demand. However, this acquisition does further diversify the business of SANW, and prepares it for a future where it may not be dependent upon relationships such as with PureCircle.
There are many other companies with production capabilities that could be just as effective as SANW. Stevia First Corp. (STVF.OB) is a small company with over 1,000 acres of land, an effective production process, and is located in the heart of California's Central Valley. The company's most recent intellectual property will allow for a more efficient process of cutting costs and producing the sweetest components of stevia. But more importantly, in regards to a potential PureCircle and Stevia First agreement is the company's location. The company's acreage is within 200 miles of Chowchilla, CA, which would make a potential contract sensible for all parties involved. PureCircle already knows that the region, or land, harvests a good product; and if the company wishes to remain the largest supplier in the U.S. (and perhaps Canada and Mexico), it needs to fully develop this particular region in California.
There is another possibility for PureCircle: the company could remain loyal to S&W Seed. The financial details between PureCircle and SANW are confidential and the contract allows for SANW to produce and supply stevia for five years. There is no reason to believe that PureCircle is unhappy with the relationship between the two companies. And over a course of many years, this partnership could provide significant upside for SANW investors. But as a stevia provider for American food and beverage companies, PureCircle must ensure that supply is plentiful. Some have suggested that SANW has good relationships with California farmers and that it could gain access to thousands of acres if, indeed, the relationships do exist. As of now, PureCircle mustn't operate under the assumption that this land will be developed. The company must continue to look for alternatives to ensure that it remains the leader in this fast-growing field.
The overall potential for stevia as a global and local alternative to sugar and artificial sweetener is large. In fact, it is growing so fast that there is more than enough room for small companies in the same space (with land) to produce and sell its own products. PureCircle is a major producer, marketer, and distributor of stevia products, but not entitled to the future of the industry. There are other companies in great locations, with great relationships, and hundreds of acres that would love to take market share or compete for it with PureCircle. One is Stevia First, and the company has increased in value by an astonishing 150% during the last month alone. The company's gains began after licensing a new fermentation-based intellectual property from Vineland Research. This intellectual property makes the company attractive because it can now produce stevia for a much cheaper price that could allow it to reach its goal of becoming a vertically-integrated enterprise in North America. PureCircle has also been a big-time performer, with its value more than doubling over the last year. I believe it wants to maintain this level of momentum with continued success.
Regardless of PureCircle's approach to stevia development, whether it builds new partnerships or competes with other promising companies, this is a space that is growing rapidly. Already we are seeing several companies positioned to benefit throughout the next few years. PureCircle could build on its one partnership and try to meet the demand, or it could form new partnerships with other promising companies that have equally good prospects of production. Either way, consumers will begin to notice change in the marketplace as the largest of food and beverage companies make the switch to healthier alternatives. This switch from the likes of SBUX, KO, PEP, and even Kraft (KFT) creates sizable upside for companies producing the product.
PureCircle may be the best positioned to meet this demand in 2012, but as this switch occurs rapidly among consumer goods companies, it will be interesting to see which companies will benefit over the long term, and which route PureCircle travels to uphold its authority in the space. Because at this point, companies such as SANW and STVF are holding all the cards with many acres of land and the ability to produce the growing commodity with great success. Therefore, the transitions and trends in the space should be monitored, to see which companies will emerge as leaders, both with partnerships and alone in the production and marketing of stevia.
I hadn't thought about a commercial partner for STVF before. It will be a lucrative deal for them that is for sure. They will have the best product on the market with the highest demand. The R&D time and money will deliver much larger returns down the road than the company haphazardly planting existing seeds and being just a grower.
Sentiment: Strong Buy