Bitter pill for sugar giants

Danisco could see its sugar earnings fall to DKK 600-750 million if the new European sugar regulations come through. Sugar prices will initially fall by 39 percent.

22/06/05 The European proposals for a new sugar market regulation, will see a price cut of sugar beet and sugar of 42% and 39%, respectively, to be implemented in two stages. The commission today confirmed it adopted a plan to cut the sugar price guaranteed by the EU by 39 pct over two years. The new sugar market regulation is scheduled to take effect as of 1 July 2006.

Europe’s biggest sugar producers are quivering as a result. “If, contrary to Danisco's expectations, the suggested price cut is maintained in the final sugar market regulation, there is a risk that the downside earnings impact could be stronger than anticipated, and that Danisco Sugar's future earnings level will stabilise around DKK 600-750 million,” Danisco’s Executive Vice President Mogens Granborg said.

Associated British Foods PLC, Europe's fifth-largest food producer, expects annual profit to fall by 40 mln stg from fiscal 2008 if the European Union adopts cuts sugar subsidies in line with earlier recommendations by the EU Commission. While analysts do believe that AB Foods will have to contend with price cuts in sugar beet they could however be allowed to increase production. Fellow British giant Tate & Lyle however, which is a sugar cane refiner, could lose existing benefits as well as face the price cuts. Yesterday Tate and Lyle reported a total sales increased to £3,342 million (2004 – £3,167 million) and profit before tax, exceptional items and amortisation was £255 million, a 12% improvement on the prior year.

Danisco said that the news of the new European regulation was drastic with several positive elements. “The price cut on sugar is bigger than expected, and that could have a negative impact on Danisco,” commented Granborg. “However, we consider it likely that changes will be made to the reform proposal during the negotiating process, not least because in its current form the proposal will cause several countries to discontinue beet growing and sugar production. This raises expectations of a more limited price reduction in the final sugar market regulation,” he said.

Other highlights of the proposal include that it allows the validity of the sugar market regulation to be in place until 2014/15. The proposal will include a restructuring scheme giving sugar producers wishing to discontinue their sugar production access to sell their quota to the European Commission, which can subsequently cancel the quota to reduce sugar production in Europe. The scheme is financed by a levy on sugar, a quota purchasing scheme giving sugar producers who have previously carried on C-sugar production the possibility of buying a total sugar quota of up to 1 million tones. Meanwhile there will also be a ban on exporting C-sugar, major restrictions in the EU's possibility of exporting quota sugar and a subsidy scheme for beet growers compensating them for 60% of their income loss.

Danisco said that it will now analyse the proposal to decide which structural adjustments to implement to reduce the direct effect of the price cuts in Danisco Sugar's production countries, Denmark, Sweden, Finland. “Germany and Lithuania. Factory closures and other efficiencies will probably be necessary,” said Granborg. “However, we will not make any final decision about this until the Council of Ministers has adopted the new sugar market regulation, probably before the end of the year,' he added.