Credit Suisse calms sugar, HFCS market nerves over Trump
By Mike Verdin - Published 11/01/2017

Investors may over overreacted, a little, to the threat posed to makers of corn sweeteners from the election of Donald Trump as US president, Credit Suisse said, seeing some scope for recovery in Tate & Lyle shares.

In the sweeteners markets "one always has to consider the politics and the economics and in that order", Credit Suisse said, with corn, from which the likes of high fructose corn syrup (HFCS) are refined, and sugar strategic commodities for many of their producing countries.

However, "we do not see a major political threat" to the markets, the bank said, adding that the "economics in the industry right now are very good", estimating that makers of HFCS achieved 2-5% price increases for 2017 in their key annual negotiations with major users, such as soft drinks makers.

While not the "bumper 12-13%" achieved for 2016, this year's increase was enough to prevent "margin erosion" for HFCS makers, which besides Tate & Lyle, also include Archer Daniels Midland, Cargill and Ingredion.

Bitter taste

Investors' immediate market reaction to November's election of Donald Trump as US president was to send shares in the listed HFCS makers tanking, with Tate & Lyle stock slumping 12% on the day.

US HFCS producers, by market share

1: ADM, 31%

2: Cargill 28%

3: Tate & Lyle, 26%

4: Ingredion, 12%

5: Roquette, 3%

Source: Credit Suisse

The decline reflected investor concerns that Mr Trump, having branded North America's Nafta agreement in 1993 as the "single worst trade deal ever" signed by Washington, would reopen a Mexico-US rift over sweeteners which has a bitter history.

Fears by Mexico, a sugar producer, that Nafta would prompt a flood of imports of HFCS, which the US exports, prompted trade curbs which cost manufacturers of the sweetener heavily, and required World Trade Organization resolution.

Tension remains between the countries' sweeteners industries, with Washington currently considering a complaint from US cane refiners over sugar imports from Mexico, which has agreement to export in essence some 1.5m tonnes of sugar to the US every year, with restrictions on the quality make-up.

'Make it fairer'

However, Credit Suisse said that this sugar dispute was "highly unlikely" to escalate into a fresh sweeteners battle which extended to HFCS trade.

"The concern would only be if this spat reached an impasse and one or the other side took punitive action."

And the bank reckoned that Mr Trump's bark may be worse than his bite, underling that the president elect "appears to have backtracked on several things stated in the run up to the election", highlighting comments from Anthony Scaramucci, senior advisor to his transition team.

Mr Scaramucci told business leaders last month that "I don't think we're looking to rip up Nafta as much as we are looking to right-size it and make it fairer.

"I don't think anybody in the administration from the top to the bottom is looking for protectionism."

Share price prospects

Still, although Tate & Lyle shares remain well below levels they stood at before Mr Trump's election, and at a "modest discount" to peers, Credit Suisse flagged limited potential for the stock to recover.

It cut its price target for the stock by 50p to 750p, some 8% above current levels, with a "neutral" rating.

"We need to recognise that sector valuations have slipped in the last three months as interest rate expectations have risen.

"The forward price/earnings multiples of staples are off 10%, so while Tate & Lyle's valuation may have slipped, it has done so only modestly relative to the sector."

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