Despite challenges, HFCS business seen as healthy

by Josh Sosland
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NEW YORK — While many investors may shun Ingredion, Inc. because of the company’s presence in the high-fructose corn syrup market, the realities of the HFCS business do not justify this attitude, said Robert Moskow an analyst with Credit Suisse.

Mr. Moskow offered an overview of the HFCS market generally and at Ingredion specifically in an April 16 research report on the Westchester, Ill.-based ingredient company. Credit Suisse has initiated coverage of Ingredion with an outperform rating.

Concern over HFCS emanates from studies linking the sweetener to obesity, Mr. Moskow said.

“Indeed, the negative publicity coming from these studies has hurt U.S. demand for the product to some degree,” he said. “The true science regarding HFCS is that the human body digests it exactly as it digests sugar, but this has been a difficult message to get across to consumers.”

At Ingredion, HFCS sales to beverage companies represent only 14% of total Ingredion sales and are a “highly stable and highly profitable business,” Mr. Moskow said. He said the company sells additional HFCS to food companies but does not break out this business.

Other features of the HFCS business cited by Mr. Moskow include:

■ “Capacity utilization in the HFCS industry in the U.S. is quite high because corn wet milling is such a highly capital-intensive industry, with zero threat of new capacity coming on-line. Ingredion and its competitors view the business more as an annuity rather than a growth driver.

■ “HFCS in the U.S. is dominated by four big manufacturers that tend to exhibit rational pricing. In fact, two of the big competitors (ADM and Cargill) can swing 10% or so of their capacity from HFCS to ethanol, depending on which product line has more demand. This gives the industry some leverage in price negotiations.

■ “Many of the U.S. food and beverage processors who experimented with switching from HFCS to sugar found that there wasn’t enough consumer demand to justify the switch. In addition, the HFCS product is much more convenient than sugar for the manufacturing process because it comes in a liquid form.

■ “We estimate that only half of the company’s HFCS sales come from blending markets, where Ingredion’s customers have the ability to swing some of their product formulations from HFCS to sugar when sugar prices are cheap enough to make it worthwhile. Sugar requires more energy and assets to process because it arrives at the customer in a dirty and raw form as opposed to HFCS, which arrives as a clean liquid.”

While HFCS was priced at a premium to sugar in 2012 and 2013, diminishing its competitiveness, Mr. Moskow cited “industry sources” as suggesting HFCS 55 currently is selling at about 18c per lb, leaving it at a relative discount to refined sugar.
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