Will Soda Makers Shuck Corn for Sugar?

Deutsche Bank downgrades Corn Products amid concern that soft drink makers are evaluating a switch from high fructose corn syrup to sugar

With its new rep as a heavy hitter in the energy industry, corn may be getting a little too pricey for those who depend on the grain in its traditional role as a foodstuff. Prices for the yellow grain have skyrocketed over the past year, though they pulled back a bit on Mar. 30 after the release of a much-touted Agriculture Dept. report that predicted that farmers would plant 90.5 million acres of corn this year, above already inflated expectations (see BusinessWeek.com, 3/30/07, "Has Corn Hit Its Peak?").

Not all food producers are suffering equally. While livestock outfits are feeling the pinch, cereal makers are less affected by corn's spike because it is not really that big of a part of the cost of a box of flakes.

But soft-drink makers are a different story. Years ago, when prices for cane sugar spiked, threatening Big Soda’s profit margins, industry giants like Coca-Cola (KO) and PepsiCo (PEP) switched to high fructose corn syrup (HFCS) as a lower-cost means of sweetening their offerings. While smaller beverage outfits like Jones Soda (JSDA) tout the use of sugar in their pop, the big two have remained steady customers of HFCS. But could cane sugar and soda be ready for a large-scale reunion?

Deutsche Bank analyst Chrisitina McGlone raised the possibility in an Apr. 2 research note on big starch processor Corn Products (CPO). She downgraded the firm's investment recommendation on the shares from buy to hold, based in part on her belief that carbonated soft drink manufacturers are evaluating a switch from HFCS to sugar, given the inflationary outlook in corn-based HFCS and perception that sugar-based beverages are healthier than those sweetened with HFCS.

According to the firm's research, the price of HFCS for the major carbonated soft drink manufacturers and bottlers is still at least 60% cheaper than the price of sugar. McGlone believes that while the reality of switching would be costly, the threat of a sugar substitution reduces pricing leverage for corn processors. With future pricing potential for Corn Products' corn syrup somewhat limited by the threat of substitution, McGlone is more cautious about Corn Products' ability to pass through higher corn costs and increase its profit margins.

The analyst kept her price target of $37 on the shares. (Deutsche Bank does and seeks to do business with companies covered in its research reports. Also, DB and its affiliates makes a market in securities issued by Corn Products.)

Shares of Corn Products fell 2.6% to $34.65 in afternoon trading Apr. 2.

Barney Brodie contributed to this report

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