HIGH FRUCTOSE CORN Sweetnersg
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318,794 A475734 79-2 CIFiANNiNi OUNbAtION of Agricultural Economics INFORMATION SERIES 79-2 Menorizi SnIt Collection pivision ol14:ct.:.-i.,..-a;aa Economics HIGH FRUCTOSE CORN SWEETNERSg Economic Aspects of a Sugar Su sfifule Division of Agricultural Sciences BULLETIN UNIVERSITY OF CALIFORNIA 1894 PRINTED JULY 1979 University of California, Davis Department of Agricultural Economics HIGH FRUCTOSE CORN SWEETENERS: ECONOMIC ASPECTS OF A SUGAR SUBSTITUTE by Hoy F. Carman and Peter K. Thor ii ACKNOWLEDGMENTS Research support for this study was provided from a gift by the United States Beet Sugar Association. This gift, to the Giannini Foundation of Agricultural Economics, was to support graduate student research on economic problems important .to the U.S. sugar industry. High fructose corn syrup, a direct substitute for sugar, has important implications for the domestic sugar industry. Several individuals contributed to the completion of this report. We especially appreciate the excellent typing and proofreading assis- tance provided by Brenda Petersen and Sharon Baumgartner. We also acknowledge the helpful and timely review provided by Professor Andrew Schmitz and Professor Ivan Lee. 111 TABLE OF CONTENTS Page I. INTRODUCTION. • • • • • • • • . • • • • • • • II • • • • Study Objectives.•••••••••••••••••••.• 3 II. THE PRODUCT . • . • • • • • • • • • • • • • • • • • • • • 3 Manufacturing Process . • . • • • • • • • • • • • • • • 5 Product Research. • • • • . • • • • • • • • • • • • • . 12 III. INDUSTRY STRUCTURE AND COSTS. • • • • . • • • • • • . • • 13 Industry Structure. • • • . • • • • • • • • • . • • • • • 13 Estimated Costs . • • • • 0 • • • • • • • • • 0 • • • • • • 16 Operating Costs . • • . • • • • • • • • • • • • • • • • 16 Corn. • • • • • • • • • • • • • • • • • • • • • • • • • 16 Overhead. • • . • • • • • • • • • • • • • • • • • • • 18 Total Costs . • . • • 0 • • e • • • • • • • • • • • • • 20 IV. SWEETENER DEMAND AND HFCS MARKET POTENTIAL. • • • • • . • • 20 Sweetener Demand. • 0 • • • • • • • • • • • • • • • • • • 20 HFCS Market Potential . • • • • • • 0 • • • • • • • • • • • 27 Bakery Products . • • . • • • • • • • • • • • • • • • 29 Confections . • • • . • • • • • • . • • • • • • • • • • • 30 Processed Foods . • • • • • • • • • • . • • • • • • • • • 31 Dairy Products. • • • • • . • • • • • • • • • • • • • • 32 Beverages . • • • • • • • • • • • • • • • • • • • • • • • 33 V. PROJECTIONS OF HFCS USE . • . • • • . • • • • • • • • . • 34 Industry Estimates. • • • . • • . • • • • • • • • • • • • 35 iv Page Study Projections . • • • • • • • • • . • • • • • • • • • 36 A.D.L. Study. • • • • . • • • • • • • • • • • • • • • • • 36 , Westway Study . • • • • • • • • • • . • • • • • • • • • • 38 _ Brook Study . • • • • • • • • • • • • • • • • . • • • • • 38 A Trend Model Projection. • • • • • • • • • • • • • • • • • 40 Projected Sweetener Consumption . • • • • • • • • • • • • 40 Projected HFCS Market Share . • . • • • • • • • • • • . 44 HFCS Projections. • • • • • • • • • • • • • • • • • • • • 48 Projected Sugar Demand. • • . • • • • • • • • • • • • • • 50 U.S. Policy Impacts . • • • • • • • • • • • • • • • • . • • 52 VI. SUMMARY . • • • • • . • • • • • • • • • . • • • • • • • • • 55 REFERENCES. • • • • • • • • • • . • • • • • • • • • • • • • • • 58 APPENDIX TABLES . • • • . • • • • • • • • • • • • • • • • • • • 61 LIST OF TABLES Table Page 1 Typical Corn Product Mix Derived from Wet-Milling One Bushel of Corn. • • • • • • • • • • • • • • • • 10 2 Estimated HFCS Processing Capacity by Firm and Plant, End of Calendar Year, 1975-1980 . • • • • • . • • • . 14 3 Estimated Operating Costs for HFCS Production . • • • • . 17 4 Corn and Corn By-Products Prices and Value of By- Products from a Bushel of Corn, 1971-1977 . • • • • • • • 19 5 Estimated Total Costs of Production for HFCS. • • • • • 21 6 Sugar Sales to Industrial Users, Total and Percentage Distribution by User Category, 1962, 1967, 1972 and 1977. • • • • • • • • • • • . • • • • • • • • • • • 23 7 Estimated Retail Elasticities for Sugar and Corn Syrup . • • • • • • • • • • . • • • • • • • • • • • 25 8 Estimated Retail Elasticities for Products Containing Large Amounts of Sweeteners. • • • • • • • • • • • • • 26 9 U.S. Sweetener Usage in 1980, 1985 and 1990 by Market Sector and Type of Sweetener Employed . • • • • • • • • 37 10 Sweetener Consumption Since 1960 and Projections to 1985. • • • • • • • • • • • • • • • • • • • • • • • . 39 11 Forecast of Sugar and HFCS Demand in the U.S. in 1980 and 1985 . • . • • • • • • • • • • • • • • • • . 41 12 Projected Per Capita and Total Caloric Sweetener Consumption for Three Alternative Retail Sugar Price Levels, 1985 and 1990 . • • • • • • • • • • • • • • ▪ 43 13 Estimated Logistic Function Coefficients for HFCS Sales Using Four Alternative Ceiling Values, 1967 to 1977. • . • • • • • • • . • • • • • • • • • • • . 46 14 Projected Per Capita and Total HFCS Demand to 1985 and 1990 for Alternative Sugar Price Levels and HFCS Market Share Ceilings . • . • • • • • • • • • • • • . 49 15 Projected Per Capita and Total Demand for Caloric Sweeteners by Category, 1985 and 1990 . • • • • • • • 51 vi Appendix Table Page 1 High Fructose Corn Sirup: U.S. Supply and Utilization Trends, 1967-1978 . • • • • • • • • • • 62 2 Caloric and Noncaloric Sweeteners: Per Capita U.S. Consumption, 1962-1978 . • • • • • • • • • • • • • 63 LIST OF FIGURES Figure Estimated U.S. High Fructose Corn Syrup Production, 1966-1978 . • • • • • • • • • • • • • • • • 2 2 A Flow Diagram for Corn Wet Milling . • • • • • • • • • • 7 3 A Flow Diagram for Production of HFCS from Corn Starch. • . • • • • • • • • • • • • • • • 11 4 HFCS Sales as a Proportion of Total Caloric Sweetener Sales, Actual 1966-1977 and Projected 1978-1990 . • • • • • • • . • • • • . • • . • • • • • • 47 HIGH FRUCTOSE CORN SWEETENERS: ECONOMIC ASPECTS OF A SUGAR SUBSTITUTE by Hoy F. Carman* and Peter K. Thor** I. INTRODUCTION High fructose corn syrup (HFCS) is a recent product innovation which has gained rapid commercial acceptance. It is a caloric sweetener, made from ordinary corn starch, which substitutes for sugar in a wide range of manufactured products. Growth of processing capacity and market acceptance of HFCS have been dramatic. HFCS was introduced commercially in 1967. Since then production has approximately doubled every two years and 1978 output was estimated at 2.40 billion pounds. The rapid industry growth is illustrated by data in Figure 1. The future use of HFCS depends on several factors including its price relative to sugar, the nature of domestic and international sugar policies, domestic and international demand and prices for feed grains, the suita- bility of HFCS in processed foods and beverages, and future HFCS product development. Growth of the HFCS industry has economic implications to beet and cane sugar growers and processors, sweetener users, consumers, corn producers and trading partners. * Professor of Agricultural Economics, University of California, Davis and a member of the Giannini Foundation of Agricultural Economics. ** Graduate Student in the Ph.D. program, Department of Agricultural Economics, University of California, Davis. -2-- FIGURE 1 Estimated U.S. High Fructose Corn Syrup Production, 1966-1978 2600 2400 2200 2000 1800 1200 Pounds 1000 Million 800 600 400 200 0 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 Year Source: Data in Appendix Table 1 _3_ Study Objectives Information on HFCS, while available, is scattered among trade and semitechnical publications in a variety of subject matter areas. Avail- able statistics are limited, partly due to the newness of the product and partly due to industry reluctance to release information to government 1/ agencies or others. As a result, economic analyses related to HFCS are limited. n this report we attempt to pull together information and data from diverse sources to examine economic aspects of the production and marketing of HFCS. More specifically, our objectives are to: 1. Describe the HFCS production process and industry structure in the United States. 2. Describe the uses for HFCS and assess the market potential for HFCS by user category. 3. Attempt to project the likely rate of substitution of HFCS for sucrose to 1985 and 1990. II. THE PRODUCT High fructose corn syrup is a clear, sweet, low-viscosity liquid with a "waterlike" color. It is high in the simple sugars fructose and dextrose with a composition similar to liquid invert sugar. HFCS is hygroscopic (attracts moisture) and, thus, must be sold in syrup form. 1/ The United States International Trade Commission (1977, p. A-2), for example, noted that it was delayed in filing its report on sugar because of . "the refusal of certain corn sweetener producers to supply certain relevant data and by the fact that the U.S. District Court, for reasons for which we disagree, declined to enforce, for the most part, Commission orders issued to the corn sweetener producers." -4- It can substitute for sucrose in all products that do not require a crystalline structure):!- HFCS is regarded as highly stable when compared to sucrose and sucrose derived sweeteners. With HFCS there is lower potential for crystallization, which is often a problem in products with high solids and high sucrose or dextrose content. In some baked and frozen goods, HFCS imparts a chewy or creamy texture. HFCS is subject to a browning reaction when heated which is desirable in some applications (brown crust on baked goods) but undesirable in others (vanilla pudding). It contains