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Tate & Lyle flags raised HFCS margins - but downbeat on ethanol

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Tate & Lyle held out prospects for better profits in corn-based sweeteners, but not in ethanol, warning that fundamentals in the US industry "show no near-term signs of improving".

The corn processor said it was "achieving moderate margin gains" in the annual round of contract settlements for supplying sweeteners such as high fructose corn syrup (HFCS) to buyers including the large soft drinks groups.

The round of talks had "progressed more quickly than in previous years too", with the group already having settled prices for the bulk of volumes on which terms were up for renegotiation.

The comment follows market talk of HFCS manufacturers squeezing substantial price roses out of buyers, after the closure by Cargill of a sweeteners plant in Tennessee took some 7% of North American supply out of the market.

Archer Daniels Midland, a rival to Tate & Lyle in the HFCS market, said on Tuesday that "in corn, the sweetener balance sheet should remain tight", and flagged "strong sweetener demand" in the July-to-September quarter, although the group declined to comment on the pricing round.

'Close to breakeven'

However, Tate & Lyle cautioned over the US ethanol market, in which "significantly lower margins" drove the UK-based group's commodities unit into a £2m loss in the April-to-September half, compared with a £9m profit a year before.

"High ethanol inventories and low gasoline prices in the US drove a continuation of the low ethanol prices from the beginning of the 2015 calendar year," Tate & Lyle said.

Cash margins were "close to breakeven, compared with an average of about $0.55 per gallon" in the April-to-September period of 2014.

"The fundamentals of the US ethanol industry show no near-term signs of improving, so we expect returns from US ethanol to remain weak in the [October-to-March] half."

'Margins will roll forward'

These comments too echoed those of Archer Daniels Midland which, unveiling a sharp fall in ethanol profits, said that "we continue to confront very weak industry ethanol margins".

However, US ethanol producer Green Plains separately forecast that margins would end up wider than suggested by current futures prices.

With domestic and export orders of ethanol remaining robust, "in order for this demand to get the volumes that it needs, [the market] needs to incent[ivise] the producer to keep running at maximum levels," said Todd Becker, the Green Plains chief executive.

While futures were - with forward corn contracts more expensive than near-term ones, but the ethanol curve "flat" – suggested squeezed production margins ahead, there had been a tendency for "the last seven years" for the gap to widen as the contracts got closer to expiry.

"We believe ethanol margins will roll forward to some extent," Mr Becker said.

In order to encourage production in the first half of 2016 "against the demand that we see against cheaper gasoline prices and excellent export demand, you are going to have to continue to incent the ethanol producer to run at the pace of 940,000-960,000 barrels each day".

The comments came ahead of official data on Wednesday which showed US ethanol output last week soaring 25,000 barrels a day on that the previous week to hit 969,000 barrels a day.

Market reaction

Tate & Lyle reported a 9% drop to £42m in operating profits in the April-to-September half in its bulk ingredients division, which includes the sweeteners and commodities operations.

However, group pre-tax profits soared 28% to £103m, lifted by a strong performance in its specialty ingredients operations, on which it said it intends to focus more in the future.

Tate & Lyle shares stood 1.6% higher at 607p in lunchtime deals in London.

"In general, these results are in line. But we believe there is more than a hint at trying to rebuild investor confidence after the warnings seen last year," Credit Suisse analysts said.


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