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Ros Agro sees margins 'challenged', as Russia's growth in sugar weighs

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Ros Agro said its margins would "continue to be challenged" this year by factors including the "surplus of sugar" in Russia, whose transformation into an exporter of the sweetener has come at a cost to producers in depressing prices.

The meat-to-beet group - which controls 665,000 hectares of land in Russia, an area bigger than the US state of Delaware, or all but four English counties – said that it was expecting many of the factors which sent its 2016 earnings down 42% to hang around for this year too.

"Following the current foreign exchange rates and trends on world food markets, the company expects margin to continue to be challenged in 2017," said Maxim Basov, the Ros Agro chief executive.

'Sugar surplus'

Mr Basov cited in particular the recovery in the rouble, which cuts the value in Russian terms of assets such as many agricultural commodities traded internationally in dollar – at a time when global prices of many crops are being depressed by ample supplies.

He also flagged, in Russia, "weak consumer demand" and a "surplus of… sugar" thanks to soaring domestic output of the sweetener, with the country earlier this month claiming top rank among sugar producers from beet, ahead of France on 5m tonnes and the US on 4.8m tonnes.

Since 2004, when Moscow imposed a sugar import tax, domestic sugar output has near-trebled, being forecast by the International Sugar Organization at 6.03m tonnes for 2016-17, on an October-to-September basis.

The growth in output - spurred by investment by the likes of Ros Agro, which has expanded its operations to six plants, and rivals such as Prodimex Group and Dominant Group – has slashed Russia's reliance on imports which have fallen from levels above 5m tonnes at the turn of the century to a forecast 40,000 tonnes for this season.

Indeed, Russia is expected to turn a net sugar exporter for the first time in 2016-17, by a margin of 215,000 tonnes on ISO estimates.

'Price equilibrium shift'

However, the switch has come at a cost in prices, with Russian values coming under pressure in order to compete for export demand, besides from the recovery in the rouble.

"Sugar prices dropped as a result of a price equilibrium shift in Russia from an import alternative to an export alternative," Mr Basov said.

The group sold its own sugar at 35.4 rouble per kilogramme in the October-to-December period, a drop of 12% year on year, contrasting with the steep improvement in world prices.

New York raw sugar futures average 20.8 cents during the quarter, up 41% year on year, according to Commerzbank.

Grains vs meat

The easing in rouble sugar prices curtailed to 0.9% to 4.23bn roubles the growth in Ros Agro's gross profits in sugar in the October-to-December, despite a 47% jump to 334,000 tonnes in sales volumes, boosted by extra output after the takeover of three plants from Razgulay.

Factoring in higher running costs - relating to the purchases from Razgulay – sugar division operating profits fell by 18.4% to 2.74bn roubles.

The group fell into an operating loss in oils, thanks to resilient sunflower seed costs and higher advertising spending, and it grain-growing operations, hurt by weak crop prices which prompted an asset revaluation downwards too.

While the meat segment saw a 64% rise in profits to 1.10bn roubles, helped by higher pork prices, Ros Agro reported a 56% drop to 2.47bn in roubles for the quarter.

Ros Agro's London-listed depositary receipts, a proxy for shares, stood 0.4% higher at 12.80 roubles in morning deals.

By Mike Verdin

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