The rising tide of world sugar output, which has prompted the International Sugar Organization to call time on four seasons of supply tightness, helped Associated British Foods forecast a sharp rise in profits.
The tea-to-grain trading group, saying its results for the year to September 15 would be "substantially ahead" of those last year, said that profits in its sugar division would be particularly strong.
"Profit for AB Sugar for the full year will be considerably higher than last year, with the benefit of European and African revenue increases and a strong operational performance," the group said.
"Sugar revenues in the second half [of the financial year] have been well ahead of last year."
In Europe, the group's performance was boosted both by the 30% rebound in UK sugar production, after poor weather hit output the previous season, while a strong beet harvest boosted Spanish output too.
In Africa, where Associated British Foods controls Illovo Sugar, the group was helped by both higher sugar prices and output, up 200,000 tonnes at 1.8m tonnes, helped a return in sucrose content in cane, a dynamic which is very responsive to weather, "to more normal levels".
The group enjoyed strong output growth in northern China to, where its volumes soared 37% to 287,000 tonnes although, with southern volumes steady at 405,000 tonnes, and the country's prices under pressure from strong production the increase was not enough to support profits.
"Profit in China will be considerably lower," ABF said.
China's national output rose 10% in 2011-12 to 11.5m tonnes, the ISO said two weeks ago, forecasting that "further growth is widely anticipated for 2012-13 due to increased areas as well as favourable weather conditions.
Grain trading result
ABF reported that in its agriculture operations, profits would come in "in line with" those of the year before, despite signalling a decline in grain trading results at its Frontier joint venture with Cargill.
"Earnings from grain trading were at more normal levels which reflected less movement in wheat prices during the year," the group said, while saying that Frontier overall had "continued to trade well".
"High crop prices underpinned good farm profitability and Frontier benefited from continued high demand for fertiliser, seed and crop protection products."
ABF's UK feed business "saw some margin erosion" in pig and poultry sectors after the strong beet crop lifted fodder volumes at a period which brought "another difficult year for the UK livestock industry".
Sugar pullback ahead?
In the City, the data, which also included a forecast of 17% at the Primark discount clothing retailer, were well received by broker Panmure Gordon.
"ABF will deliver impressive earnings growth [for 2011-12], driven by a significant rise in sugar profits," Panmure analyst Graham Jones said, forecasting the division will report earnings before interest, tax, depreciation and amortisation (ebitda) of £500m
However, some concern over next year's performance saw shares close down 2.0% at 1280p in London.
"As is usual, ABF makes no mention of 2013 in this statement… but we expect sugar profit to fall back to £442m reflecting higher UK beet costs, a weaker euro, a lower anticipated UK sugar crop and a further decline in Chinese profits," Mr Jones said, restating a "hold" recommendation on the shares, with a 1300p price target.
At Shore Capital, Darren Shirley said that "looking into 2012-13, we believe the outlook for EU [sugar] prices remains very firm – indeed we believe early indications suggest prices for October contracts may be 5-10% higher.
"However, with sugar contracts priced in euros, current currency weakness will probably hit profits," he said, also falling some £25m in extra sugar beef input costs.
"We therefore believe it prudent at this stage to forecast a contraction of EU profitability," for the ABF sugar operations.Shore Capital restated a "buy" rating on ABF shares.