Marketing HFCS: A Sweetener Revolution Robert D. Barry (202) 447-7290 with a relatively short shelf life, such as The directions of food firm diversifica he development of high fructose corn cookies and crackers, can also use that tion may change with demand for an Tsyrup (HFCS) over the last 10 years system to distribute other snack products. industry's products and with technologi has radically altered the conventional pro Firms may also apply their marketing cal developments in production and dis cess of producing and distributing expertise to a wider variety of products tribution. For example, after 1950 in sweeteners, caused the reformulation of distributed through grocery stores. A come growth, increasing urbanization and many food and beverage products, and leading soup company, for example, mobility of the population, and the reshaped the sugar industry. manufactures and distributes a variety of development of television advertising HFCS, a liquid caloric sweetener made grocery store food products-frozen en combined to expand national markets for from ordinary corn starch, has been sub trees, specialty baked goods, pickles, branded consumer food products. Re stituted for beet and cane sugar in a wide cookies, and fresh vegetables-in addi quired skills in product development and range of processed food products such as tion to its canned goods lines. In so do nationwide distribution systems gave beverages, baked goods, dairy products, ing the company uses its experience .in firms with existing large-scale grocery and jams and jellies since its commercial developing and introducing new brand manufacture and distribution systems an introduction in 1972. By 1982, HFCS ac name food products, and its system for advantage. More recently, the expansion counted for 55 percent of the caloric high volume production, distribution, of agricultural commodity trade has sweetener market in beverages, 61 per and monitoring of such products. created opportunities for diversification cent in canning, 48 percent in processed Several food manufacturing companies among existing commodity processors. foods, 31 percent in dairy products, and have also diversified narrowly into pro 24 percent in baking. cessing of such bulk agricultural com Implications modities as wheat, soybeans, and corn What are the effects of diversification Sweets from Starch into products usually sold to other food by food manufacturers? If basic Converting corn starch into sweet sub processors rather than directly to con economic principles hold true, several stances was discovered as early as 1811. sumers. However, the skills required to developments are likely: Sweeteners such as glucose corn syrup distribute these products are quite dif • Diversifying firms may provide new and dextrose were produced in corn wet ferent from those required for branded competition in industries where only a milling before 1900. These products, products. Therefore, a group of firms fewsellers exist. If such firms transfer ef however, were only about 70 percent as may produce in a variety of commodity ficiencies in production, distribution, and sweet as sugar, so they were typically food industries and another group in con product development to their new prod combined with sucrose to derive the sumer foods industries, but few firmswill uct lines, they may reduce production desired sweetness. have major interests in both groups. costs and, in turn, consumers' costs if Initial attempts to convert glucose to Many commodity food producers have competition among firms encourages fructose, a substance 110 to 170 percent diversified into the bulk storage and offeringlower prices to attract customers. sweeter than sucrose, date back to 1865. transportation of grains and oilseeds. • If diversification occurs because of By the l 960's, scientists had discovered With expansion of U.S. agricultural ex tax incentives, firms with high profitsbut an effective method for obtaining fruc ports since 1969, many large commodity low depreciation may shelter profits tose from glucose, but the high cost food firms have applied their large through mergers with low-profit firms discouraged commercial prospects. storage, transportation, and marketing possessing high depreciation. Small, rap A commercially successful HFCS prod networks not only to processing but also idly expanding firms and large, capital uct of 42 percent fructose, about 50 per- to domestic and international trade in intensive firms in depressed industries corn and wheat. may be acquired. Such diversification can Food firms have increased their diver benefit stockholders, but will not neces Table 1. HFCS use as percent of sification into manufacturing industries sarily result in reduced prices or im total caloric sweeteners use outside of food. Firms making foods for proved products in the firm's new indus Long-term try. 1982 theoretical consumers have generally diversified into penetration other consumer goods industries, such as • In some cases, salaries for a firm's apparel, toiletries, and games. Some have management may be closely tied to com Beverages 55 90 invested in chemical industries, which pany size and growth, rather than profits. Baking 24 25 use process techniques similar to those of Diversification may then be pursued Canning 61 70-75 food manufacturing. Other investments solely to increase the size and growth rate Processed foods 48 60-65 have been largely directed to the of the firm, and thus managerial rewards, Dairy products and not because of any skills that the firm 31 35 manufacture of containers and foodprod Confections 5 ucts machinery-products auxiliary to may bring to its new industries. □ food manufacturing.
10 National Food Review Marketing
• • • • • • • • • • • • • • • • • • • • • • • ••• • ••• • ••• • ••• • ••• • ••• • ••• • ••• •• •• • • • ••• • ••• • ••• • ••• • ••• • ••• • ••• • ••• • • • ••• • ••• • ••• • ••• • ••• • ••• • • The rapid adoption of HFCS for com • ••• • ••• • ••• • ••• • ••• • mercial use was further encouraged by • • ••• • ••• •• • • • occurrences in the sugar market. In • •• • • • 1974, the bill to renew the Sugar Act of 1948 was defeated, ending 40 years of Government regulation of domestic sugar production, imports, and prices. Its de feat at a time of world sugar shortages threw the U.S. sugar trade into chaos. Raw sugar prices climbed above 60 cents a pound. HFCS prices also rose, but pro ducers held them to less than 40 cents a pound in order to build a long-term mar ket. HFCS production grew 68 percent in 1975, 44 percent in 1976, and 35 percent in 1977. The price advantage of HFCS was further enhanced by Federal legislation that assured minimum sugar prices for producers. During the decade of 1972- 82, HFCS production costs were below these Federal support prices forsugar, as suring a competitive advantage for HFCS. cent dextrose, and about 8 percent other costs more to transport than an Further helping HFCS to penetrate the saccharides was discovered in the early equivalent quantity of sugar. Further, sweetener market was the easing in 1974 1970's. HFCS-42 was approximately 90 HFCS is more difficult to handle, since it of Food and Drug Administration (FDA) percent as sweet as sugar and had other must be maintained at 80°-100° F tem rules on the quantities of corn sweeteners characteristics comparable or superior to perature when stored or transported. allowed in canned and processed foods. sucrose syrups for use in processed food In addition, HFCS profited from the con and beverages. Influenceson HFCS Growth tinuing trends toward consumption of In 1978, a second generation HFCS The success of HFCS was immediate. processed foodsand low-sugar products. product of 55 percent fructose, about 40 It was able to do sugar's job in a wide By 1982, HFCS made up 21 percent of percent dextrose, and about 5 percent number of applications more cheaply be all caloric sweeteners used. The total other saccharides was introduced. Com cause of a lower cost of production. Pro corn sweeteners consumed, including pared with HFCS-42, HFCS-55, with its duction costs vary with size of plant, glucose corn syrup and dextrose, ac superior sweetness (100 to 110 percent as operating rates; net costs of corn, and counted for 39 percent of U.S. caloric sweet as sugar) and only slightly higher other inputs. A 1977 World Bank study sweetener use. In 1982, per capita con production cost, had far greater commer placed HFCS-42 cost, including plant and sumption of HFCS was 26. 7 pounds; glu cial potential. HFCS-55 was especially equipment, at a range of 12 to 17 cents a cose, 18 pounds; and dextrose, 3.5 suitable as a sweetener for soft drinks. pound. USDA estimated the cost to pro pounds (figure 1). Corn sweeteners' Soft drink firms raised their approved duce refined beet sugar at 17.8 cents a share of industrial sweetener use doubled rates of substitution of sugar by HFCS pound in 1977-78. Depending on the from 24 percent in 1972 to 48 percent in from 25 to 50 percent of sweetener con area, raw cane sugar was estimated at 1982. tent in cola drinks, and up to 100 percent 13.7 to 15.9 cents a pound prior to refin for other soft drinks. In 1979, soft drink ing. In a 1979 Purdue University study, Production of HFCS use of HFCS rose 34 percent to 680,000 the cost of producing HFCS-42 (not in By 1982, HFCS production had tons, and by 1982 had jumped to 1.8 mil cluding plant and equipment costs) in a reached 3.1 million tons, having in lion tons, 58 percent of all HFCS con plant with the capacity to produce 36,000 creased at an average annual rate of al sumption. bushels a day was estimated at 8. 7 cents a most 25 percent since 1977. Production HFCS's main limitation is that it is pound, dry-basis, assuming corn prices of gains followed considerable investments available only in liquid form, and there $2.26 a bushel and byproducts at 1977-78 in building new corn wet milling plants fore confined to certain industrial uses. average prices. specifically designed to produce HFCS or In addition, HFCS-42, with a water con by expanding existing facilities. The re tent of 29 percent of product weight, placement value of capital investment for
NFR-23 11 Marketing
HFCS production had reached an es timated $2.4 billion in 1982, Figure 1. High Fructose Corn Syrup: U.S. Shipments and Capital investment in HFCS occurred Per Capita Consumption in two major spurts-in the mid 1970's and between 1980 and 1982. The latter Thous. tons dry weight Pounds reflected the growth in demand after the decision by beverage companies to in 3500 35 crease the use of HFCS in cola soft Shipments drinks. 3000 30 HFCS producers were encouraged to risk expansion by the expectation that 25 Federal sugar support prices would be kept at levels above the cost of producing 2000 20 HFCS. Fluctuations in sugar prices, then, were not expected to eliminate the price advantage of HFCS. 15 The HFCS industry expanded rapidly in the 1972-82 decade. In 1982, 10 corn 10 wet milling firms produced HFCS in 16 plants, compared with only 2 firms and 2 ...... 5 plants in 1972. Production capacity grew ...... ·..···· ...... ·.·· ..··· from 250,000 tons of HFCS to 4.2 million ...... 0 tons by the end of the decade. Plant 1972 1974 1976 1978 1980 1982.6. capacities to grind corn increased from a range of 4,000 to 50,000 bushels a day in .6. Preliminary. 1972 to a range of 16,000 to 70,000 bushels a day in 1982. Expansion of the HFCS industry was percent between 1975-76 and 1982-83. Some sugar companies have also diver also helped by U.S. farm policies that Output of cane sugar is about the same sified their interests into areas outside kept farm price supports for corn low as 7 seasons ago, 3 million tons. How sweeteners and foods. In addition, four enough to encourage exports, and by the ever, the industry has been restructured, companies entered into HFCS production farm-held grain reserves designed to with Hawaii production down 11 percent either independently or in joint venture serve as a large bufferagainst a corn crop while production in Florida is up 23 per with a corn wet milling firm. disaster. Because corn accounts for 50 cent. Eighteen cane mills representing 18 To the extent that it has been able to percent of HFCS production costs, these percent .of processing capacity and four compete with sugar in particular uses, public policies reduced costs and minim refineries accounting for 16 percent of HFCS has dominated because of its ized investment risk. capacity ceased operations between modern, automated, and efficient plant 1975-76 and 1982-83. facilities and highly advanced custom HFCS's Challenge to Sugar While smaller, the sugar industry is oriented technology. Also, HFCS facili HFCS's gains in many food and bever also more efficient as a result of improve ties can be operated year-round compared age uses adversely affected the U.S. sugar ments in equipment and energy use. On with 3 to 5 months for beet factories and industry, including cane mills, beet pro the farm, sugarbeet yields were up to 20.5 cane mills. HFCS supplies are more reli cessing factories, cane refineries, tons an acre for the 1978-82 period from able and predictable, and prices are less growers, labor, and other suppliers of in 19.3 tons during the 1968-72 period. volatile than sugar. puts. Output per manhour in beet factories Despite dramatic gains by HFCS, cane The impact of HFCS can be seen by rose faster between 1974 and 1979, in and beet sugar continue to be important comparing today's sugar industry with its creasing at an average annual rate of 3.7 because HFCS's technological limits 1975-76 peak of 7 million tons. Output percent, versus rates of less than 3 per prevent it from replacing much more fell to 5.7 million tons during 1982-1983, cent in prior years. Comparable data for than about a third of sugar's volume of with even lower levels likely in the fu raw and refined sugar combined show use. Sugar accounted for over 60 percent ture. Beet sugar production dropped productivity per manhour increased at 3.2 of U.S. caloric sweetener use in 1982. from 4 million tons to 2.8 million and 17 percent a year, also higher than in earlier beet factories have shut down. Process years. ing capacity for all sugarbeet plants fell 26
12 National Food Review Marketing
Other Impacts duct of the wet milling process, is sold in depends on how low-caloric sweetener While HFCS has hurt the competing the European Community (EC). The EC use complements rather than replaces sugar industry, it has provided an addi is increasingly concerned about the rising demand forcaloric sweeteners. □ tional outlet for the rising output of corn. volume of such grain substitute feeds, The 3.1 million tons of HFCS produced which enter with little or no duty and un GLOSSARY in 1982 required about 200 million dermine the EC policy of high variable Saccharide: A sugar carbohydrate. bushels of corn or 2-1/2 percent of the levies on grain to protect their high-cost Glucose: The most common monosac total crop. grain producers. charide or simple, 1-molecule, sugar. The arrival of HFCS has represented a Dextrose: One of three forms of glu major boon to processors and ultimately The Future of HFCS cose, often used synonymously with glu to consumers. HFCS has provided pro The United States produces about 75 cose. Commercial dextrose, produced by cessors a greater diversity of sweeteners percent of the world's HFCS output of almost complete conversion of starch into and associated ingredients to choose from over 4 million tons, and will likely con dextrose, is usually called simply "dex and reduced production costs for foods tinue to be the leading producer because trose," or "refined corn sugar," or just and beverages. It has led to the reformu of low-cost and large corn supplies, vast "corn sugar." lation of old products and the creation of technical resources, and a large consumer Glucose syrup: A product obtained by new ones. market. World corn sweetener produc partial conversion of starch into dextrose. Part of the success of HFCS stems tion including HFCS is now estimated at Usually called "corn syrup" or simply from aggressive customer service. HFCS about 9 million tons, or 10 percent of the "glucose." suppliers are working closely with total output of world sugar and corn Fructose: A monosaccharide which sweetener users, providing technical as sweeteners. has the same elements in the same pro sistance and adapting products to the spe Having carved out a sizable sweetener portions as glucose but whose molecular cial requirements of specific classes of domain, U.S. producers of HFCS now structure is different, thereby giving a customers. HFCS blender-distributor face problems of industrial maturity as sweeter taste than glucose. companies are also providing combina HFCS nears the limit of its technological Sucrose: Ordinary sugar from sugar tions · of HFCS, sugar, and other corn applicability to various uses. Except for cane or sugarbeets. Sucrose is a disac sweeteners for specific client require the beverage market, HFCS is near mar charide, made up of a dextrose molecule ments. HFCS, because of its lower cost, ket saturation in most uses (table 1). and a fructosemolecule. has encouraged selective use of various Without further development of HFCS Invert sugar: The liquid sweetener sweeteners, each chosen for its special characteristics or new applications, HFCS that results when sucrose is hydrolyzed contribution. This allows processors to will lose momentum and settle into a (treated with water, and usually some obtain effective sweeteners at the lowest conventional slow growth due largely to acid), and containing equal amounts of cost. changes in population. dextrose and fructose. The introduction of the lower priced Assuming the two major cola firms will High Fructose Corn Syrup (HFCS): HFCS may also mean cost savings for permit 100 percent replacement of sugar, The liquid sweetener that results when HFCS is expected to reach full market consumers of processed foods and bever glucose from starch is treated with an en ages. HFCS-42 prices ranged from 17 to potential over the next 2 to 3 years, and zyme (a protein that speeds up chemical 48 percent, or 2.7 cents to 14.7 cents a HFCS consumption for all uses including reactions without itself being altered or pound less than sugar between 197 5 to beverages should level off at 36 pounds destroyed) to produce a combination of 1982. Part of these savings could be re per person. Sugar consumption is ex dextrose, fructose, and small amounts of flected in consumer product prices. pected to average about 67 pounds, and other saccharides. HFCS has also influenced the interna total caloric sweeteners about 126 pounds tional markets. Sugar imports have cus per person. Sugar will continue to be the REFERENCES dominant sweetener at 53 percent of total tomarily provided about 45 percent of Brook, Ezriel M. High Fructose Corn Sir use, while HFCS will take 29 percent and U.S. sugar needs. As a sugar substitute, up: Its Significance as a Sugar Substitute total corn sweeteners 46 percent. Corn HFCS has reduced some of the U.S. and Its Impact on the Sugar Outlook. dependence on sugar imports. However, sweeteners by 1990 are expected to total World Bank Commodity Paper 7.2 million tons, of which 4.5 million imports continued to provide over 30 per No. 25, April 1977. cent of U.S. sugar use in 1982. Both would be HFCS. Cubenas, Gervasio J., Lee F. Shrader, domestic and foreign sugar have shared Prospects for U.S. consumption of and J.R. Deep Ford. Cost of Producing in sugar's market loss to HFCS. HFCS by 1990 are tentative. The rising High Fructose Corn Sirup: An Economic While all the HFCS produced in the popularity of low-caloric soft drinks in the Engineering Analysis. Purdue Univer United States is marketed here, about 85 largest sweetener market, beverages, may sity Agr. Exp. Sta. Bui. No. 239, Sept. percent of the corn gluten feed, a bypro- lower HFCS's growth potential. Much 1979.
NFR-23 13