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Cargill, Copersucar tie-up amid sugar deal spree

Cargill has and Copersucar agreed merge sugar trading businesses in the latest of a series of deals in the industry, which has struggled to deal with a persistent global surplus which has squeezed margins throughout the supply chain.

US-based Cargill, one of the world's biggest agricultural trading houses, said it had agreed to a 50:50 joint venture with Brazil's Copersucar, the world's largest sugar exporter, to "originate, commercialise and trade" the sweetener.

For Copersucar, which sells output from some 100 cane mills, the deal will accelerate a strategy of global expansion, to enhance its ability to source and sell sugar.

Last month, the co-operative, which already ships some 10m tonnes of sugar a year and has the capacity for 10bn litres of ethanol, signed a deal to export up to one-third of sugar produced by Australia's Mackay Sugar.

Rise and decline

For Cargill, the deal represents a chance to regain a high-profile in an industry in which it has taken something of a back seat since late 2011, when it suffered an 88% slump in earnings in the September-to-November quarter blamed on a drop in sugar prices and commodity market "challenges".

While Cargill, a privately held company, reveals few financial details, it said on Thursday that its sugar trading business had 180 employees.

Jonathan Drake, who left as Cargill's head of sugar in late 2011 after the losses, has said that in his tenure the group had lifted its payroll in the business from 22 to 425 worldwide.

'Big consolidation'

However, many companies have struggled to negotiate the sector, in both production and trading, driving a series of deals, often in a drive to increase investment and to exploit economies of scale.

Bunge, one of Cargill's main rivals in agricultural trading, has put its Brazilian sugar division up for sale.

Noble Group, a major Singapore-based commodities house, is in talks over placing its agriculture division, which has a heavy exposure to sugar, in a tie-up with China's Cofco.

Smaller producer Sao Martinho has forecast "big consolidation" in Brazil's sugar sector, given the level of debt among some mills, and the poor margins offered at prices which dropped below 15 cent a pound earlier this year in New York's futures market.

'Constrained by the global surplus'

At Louis Dreyfus Commodities, another key Cargill competitor, chief executive Ciro Echesortu on Wednesday, Ciro Echesortu signalled that sugar had played a role in a sharp drop in group profits last year, saying that "performance was constrained by the global sugar surplus".

"Global surpluses were an issue for the [sugar] market in 2013," Louis Dreyfus Commodities, highlighting that the sector was "left with excess stock" despite heavy buying by China and some output setbacks in Brazil, the top producing country.

Nonetheless, the group said that it would continue to diversify in sugar, and expand its distribution network "throughout 2014" to exploit growth in consumption of the sweetener pegged at 2-3% a year.

"Greater wealth distribution and a growing middle class should accelerate consumption… towards sugar over the next 5-10 years," Mr Echesortu said, singling out meat and dairy as also benefitting from this trend.

Leadership roles

The Cargill-Copersucar tie-up - whose name is be announced a closing, expected in the second half of 2014 – will have as its chief executive Ivo Sarjanovic, currently the head of Cargill's sugar and ethanol business.

His colleague Stefano Tonti, financial controller at Cargill's sugar arm, will become chief financial officer at the joint venture.

Copersucar will provide the tie-up with its chief operating officer, Soren Hoed Jensen, and in Luis Roberto Pogetti with its first chairman, a rotating post.

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