Sugar: beet up

Business is getting better, but remains sour
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Sugar from beets was a product of the Napoleonic wars. Investors could be forgiven for wondering if that was the last time anyone made money from it. World sugar prices have fallen in recent years because of excess supply and weaker currencies in Brazil and Australia, big producers of freely traded sugar. Prices in the EU, influenced by a complex system of quotas, import tariffs and guaranteed beet prices, are also lower.

There are signs that conditions may be about to improve, though. Weather has limited harvests, prompting a small rally in world prices. European producers, awash with stocks after a bumper 2014 crop, cut back planting in 2015. Associated British Foods said on Thursday that it expected 2016-17 to be the first year of market deficit since 2008-09. And at the end of 2017, the EU will dismantle its quota system, a move that could result in European producers selling more beet-derived sugars at the expense of those derived from cane, often imported from former colonies.

A price recovery is sorely needed. A day earlier, Germany’s Südzucker said sugar revenues fell 11 per cent to €2.3bn in the nine months to November and that the division made a loss of €39m. AB Foods’ sugar business had a return on capital of just 2.4 per cent in the year to November; it is destroying value when its cost of capital is factored in. Both companies have been cutting costs hard, and long ago diversified into businesses such as food ingredients and retailing to offset the volatility of the commodity.

That they are still in the business at all could well be down to their corporate structures. Both have long-term major shareholders: the Weston family at AB Foods and a beet farmers’ co-operative at Südzucker. Tate & Lyle, with a more open share register, sold its sugar unit in 2010.

Back in 2012, AB Foods made more operating profit from sugar than from its vaunted Primark fashion stores. That is unlikely to happen again. Even if prices do improve, it will be 2017 before the benefits are felt. If they do not, then shareholders’ returns could be facing their own Waterloo.

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