Sugar: bittersweet regulations

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Welcome to Europe’s bittersweet sugar industry. Complex regulations that both help and hinder the sector make investors nervous. The region’s largest sugar producer Südzucker discovered as much on Tuesday. Shares in the German company with a market capitalisation of €4.5bn fell 11 per cent after Exane BNP Paribas warned of the impact from changes to the EU’s future sugar policy.

The changes were announced in June; Exane’s report offers a first concrete analysis. At present, quotas exist to reduce the production of sugar alternatives made from lower cost grains. Minimum beet prices are also in place to support farmers growing beet – an important part of Europe’s crop cycle. Such regulations are good and bad for the likes of Südzucker. While beet price caps raise its input costs, restrictions on sugar alternatives protect the company against competition.

The EU’s sugar policy extends to October 2017 and will see the end of quotas and minimum prices. Because beet farmers own half of Südzucker, the removal of price caps may result in no change in prices as farmers choose to keep input costs high to protect their own profits. Alternatively, the removal of caps may mean Südzucker pushes beet prices down to lower costs – lifting its profits. That would still benefit the beet-farming shareholders. More competition from sugar alternatives may force the latter scenario.

More details on Europe’s future sugar policy will come later this year. Yet in the near term the outlook for Südzucker, along with its Brazilian and US peers Cosan and ASR Group, has not changed. The sector still suffers from a sugar oversupply and thus falling prices – down 45 per cent over the past two years. Following Tuesday’s rout, Südzucker trades at a historical low of 10 times expected earnings. That is worth a look given that things are no more confusing now than before.

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