Agribusiness Strategy Case Study #2 Sept. 23, 2008 American Crystal Sugar Company: Diversification in the Corn Sweetener Industry (Response) Economic Environment Prominent yet <a href="/keyword/subtle-differences/" >subtle differences</a> can be sited throughout history between the raw sugar and corn sweetener (HFCS) industries. An outside observer may think that sugar and sweetener are synonymous; however, in respect to these two industries, they differ in various ways. Their target audiences are quite different and due to these differences the end products made from, or combined with the raw sugars vary as well. Despite these differences, they are in direct competition with one another because many times depending on other various factors one may become a substitute for the other. This is why they can and should be studied adjacent to one another. Sugar, compared to sweetener was the first to hit the market within the United States, establishing its own particular niche. It has been common practice for sugar companies to be privately owned and organized. Moreover, the final product, sugar, of these companies comes predominantly come from sugar beets and <a href="/keyword/sugar-cane/" >sugar cane</a> . Sugar can be extracted from many plants, being that it is one of the bi-products of photosynthesis. Ease of extraction, volume, and cost among other important factors led to the use of sugar beets and <a href="/keyword/sugar-cane/" >sugar cane</a> and the dominant sources of sugar. Sugar beets are said to represent about 35% of the world s sugar production. Following the introduction of various market participants outside of the United Statesaround the 1970 s, sugar prices fell to some of their all time lows. USmarket participants would have become almost non-competitors had the government not enacted policies which enabled US companies to become more competitive. Government intervention within the industry continues to be seen today, enacting more policies that have expanded the acreage allowed for crop harvesting. Currently sugar beets and corn are the most sought after crops for the production of sugar and other sweeteners. Growth continues to expand by leaps and bounds as well, this due to an ever increasing demand from industrial and non-industrial consumers. Exhibit 4 located in the case study highlights the growth of capacity and production within the industry between 1980 and 1994. Production is coming from all fronts; in Mexico <a href="/keyword/sugar-cane/" >sugar cane</a> is almost infinitely abundant while Canadacontinues to flirt with the laws of ethics, stuffing molasses then sending it over the boarder were a greater majority is distilled into pure sugars. During the time of the study Crystal Sugar Company was one of the five companies who dominated the sugar beet industry accompanied by 4 other competitors. <a href="/keyword/sugar-cane/" >sugar cane</a> and HFCS industries were both dominated by 5 large companies as well. As compared to the sugar industry, the corn sweetener industry (HFCS) continues to see substantial growth over the years as well. The reasons for this growth vary. The various products like HFCS 42 or HFCS 55 have been shown to be preferred sweeteners for some industrial products such as cereals, canned fruit and <a href="/keyword/soft-drinks/" >soft drinks</a> . Non industrial customers have also bought into the wet mill form of producing sweeteners. HFCS largest market can be found in its use with <a href="/keyword/soft-drinks/" >soft drinks</a> and the soft drink market was cited to be growing at an alarming rate. The induction of NAFTA has also opened trading boarders and soft drink companies abroad are buying into the idea of these new sweeteners. Many companies are looking into merging the new with the old, creating a <a href="/keyword/sugar-cane/" >sugar cane</a> / sugar beet and HFCS company. The sweetener industry is high in cost with initial plant cost at roughly two hundred million dollars. Strengths v Weaknesses Despite having some weaknesses, The American Crystal Sugar Company (ACSC) is predominantly a strong company. The history of the company cited a few ups and downs; however, under its most current organization as a co-op of a large number of sugar beet produces, the company has really been able to shine. They are only second to one company in terms of sugar beet market share and continue to grow. Due to the vertical integration of the organization, management decisions are more fluid and conducive to the longevity of the company. They have been concentrating more efforts on improving efficiency and reducing cost across every aspect of the organization. Moreover, because the shares of the company are owned by the people who essentially work/ or run it, there is always a drive to increase value through best business practices; low cost, more efficient, customer friendly sales etc. More strengths emerged after the merger of ACSC and two other companies to create the Midwest AgriCommodity Company. The merger allows for the centralization of operations and marketing, all while simultaneously reducing cost. ACSC s primary weakness arises out of the need for organic growth. They have currently positioned themselves and the forefront of the sugar beet market, but as competition for diversity of products becomes an issue, the company may need to find a link into the other markets, mainly the market of HFCS production. They must continue to be proactive compared to competitors and be able to adapt and grow at or above its competitors growth rates. They must also be aware of the threat of international competition as well. Add Capacity, Decrease Cost, or Diversify? The option to add capacity would improve the business is a few key ways. Increasing capacity would aid in the generation of cash flows through the issuance of new shares of stock for financing of the necessary acreage expansion. This option has the potential to add upwards of $90 million for the company s growth initiatives. Production capacity is also projected to increase by almost 15% which would place ACSC at the number one spot in terms of market share within this niche of the industry. All this sounds great, until we take into account some of the other market trends mentioned throughout the article. The largest of which is the possible inability to compete unless they adapt or confront the idea of merging with another company to participate in the production of corn sweetener (HFCS). Cost would increase as a result of economies of scale. Despite its obvious advantage of market share dominance, will that be enough for them to sustain within an ever changing industry, in terms of growth, competition, and overall product mix. Decreasing cost through the development of a desugarization plant must also be analyzed. The desugarization process of molasses would couple well with their existing dominance in the sugar beet market. This would help to maintain the goal of decreased cost but would also subject them to the highly skeptical environment of unethical trade practices out of Canadawhere pure sugar is being wrapped in molasses. Due to the ease of unwrapping over actual desugarization they may get caught in a place they weren t prepared for. Molasses is however a low cost by-product allowing for increased production. Many of the other by products of the operation may also be sold for a profit. The initial cost of this project is where we begin to run into some red tape. As stated before, new plants cost somewhere around $96 million. Before moving forward with this option ACSC must determine the percent of their company they would like to keep hold of and how their overall production and managerial practices may be effected. Our last option calls for the diversification into the corn sweetener production industry. There is currently a demand from industrial and non-industrial market participants that makes this industry very attractive. The sweetener and many of its by-products are being shown to be very lucrative. ACSC would partake in this option, trying to keep debt as low as possible, by entering into a joint venture with three other investors/companies. Whatever portion of the 260 million not covered will then be covered though borrowing (debt). The size of the plant they are calling for would produce around 35 million bushels of corn each year. Partnering with the other investors will help ACSC to navigate an unfamiliar market landscape. On the other hand, entering this market with other parties may reduce they market share in the sugar beet industry. Also, due to the centralization of the corn sweetener industry in the US it may take a period of time before they are true competitors in the industry. I feel their best bet is to pursue option one now but to keep the prospect of diversification for a more promising time down the road. They will in turn increase sales substantially, thus lowering cost which would then lead to faster growth. They would also be at the top of one industry which would make it easier to then transition into another. They will also create a competitive advantage if they pursue this strategy first. Their increased cash flows will also aid in the financing of future endeavors such as diversification. Taking note of mergers currently going on in the marketplace by companies looking to diversify will also provide a good source of study to see what happenes to each company s internal structures. They will then be able to gage the best approach for them in the future.