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Opinion: sugar's volatility drives out part-timers

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Sugar is no longer a business for the half-hearted.

That's not to pour any scorn on UK stalwart Tate & Lyle, which last week revealed it was selling out after more than a century in the business, nor Australia's CSR, which is flogging its Sucrogen business for Aus$1.75bn.

Sucrogen, after all, as the world's second top raw sugar exporter, is hardly a slouch.

But it looks from a series of recent sales in the sector as if the commodity's wild swings over the past year � with prices doubling and halving again within a year - have sorted out those who want a quieter life.

Close the sideshow

It's easy to see why some recent sellers might shy away from a volatile act.

Tate & Lyle wants to focus on higher margin ingredients, produced largely from corn, with which selling common-or-garden sugar is not a natural fit.

CSR is primarily a building materials group. It has reasoned, quite sensibly, that there are better targets than perishable commodities for a bricks-and-mortar company's capital.

Furthermore, it is quitting on something of a high. Sucrogen raised operating profits by 62% in the year to March. The business would have gone for some Aus$500m less if sold a year ago on the same multiple of historic earnings before interest, tax, depreciation and amortisation.

Opposing trends

But it's easy to see why the deals might suit the buyers too.

American Sugar Refining, which has bought most of Tate's assets is a specialist.

And sugar looks a natural fit for Wilmar, the Singapore palm oil giant which has bought Sucrogen, and America's Bunge, which bought a portfolio of Brazilian mills earlier this year, even though their historical operations lie elsewhere.

Both are used to handling, and profiting from, volatility. (Tate & Lyle, meanwhile, lost a bundle on out-of-the money corn futures last year.)

Indeed, sugar's price movements may do them a favour by balancing the swings in grains and oilseeds.

The markets show little correlation. In 2007, for instance, while wheat doubled in Chicago, raw sugar prices were stagnant in New York. Last year, the positions reversed, with sugar more than doubling, while wheat lost some 10%.

More deals ahead?

Besides, dealing in sugar could prove worthwhile for those willing to take the risk. It is a market pretty immune to the economic jitters which are still echoing round the market. World sugar consumption remained stable in 2009-10, despite the hangover from financial crisis and the highest prices in 29 years.

And this excludes the potential for fuel ethanol, of which Sucrogen is Australia's biggest producer, and which swallows most of the cane crop in Bunge's Brazil.

Expect the wave of deals in the sector to continue.

That is, as long as buyers can find any more sugar owners with cold feet or, as Bunge found in Brazil, stretched balance sheets.


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