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Associated British Foods cuts sugar profit hopes, citing EU price tumble

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Shares in Associated British Foods tumbled to a nine-month low after the clothing-to-bioethanol group revealed cut hopes for profits from sugar, citing a “significantly lower” sugar prices.


Shares in the UK-based group, whose food brands including Ovaltine, Mazola corn oil and Twinings tea, fell 4.1% in early deals in London to their lowest since April, before recovering some ground to stand at 2768p, a drop of 3.1%.


The decline followed the release of a trading statement which said that while its group outlook for the year to September was “unchanged”, with “progress expected” in underlying profits, performance had deteriorated at its sugar division.


Sugar revenues in the 16 weeks to January 6 had fallen by 13%.


‘Significantly lower sugar prices’


“A revenue and profit reduction greater than previously forecast is now expected for the full year,” ABF said, adding that the downgrade was “primarily as a result of significantly lower European Union sugar prices, which adversely affected our UK and Spanish businesses”.


EU white sugar prices as of October, the latest European Commission data available, stood at E420.00 a tonne - plunging 14.3% month on month, and closing the gap on world values, which the commission pegged at E333.0 a tonne.


Prices have historically been supported in the EU through a regulatory regime, including trade and production restrictions, which was scrapped as of the end of September.


And prices were helped to remain comfortably above the reference price, latterly E404 a tonne, for much of last year by weak inventories, sapped in part by a run down of stocks by buyers in expectation that market liberalisation would bring weaker values.


EU price premium


However, prices have tumbled as the ending of output quotas has spurred expectations of a huge rise in sugar output from the ongoing beet harvest, and in removing many trade hurdles left the EU more open to world market pricing.


The commission forecasts EU sugar output in 2017-18 at 20.58m tonnes, a surge of 44% year on year, driving a 65% swelling in stocks over the season, to 3.24m tonnes.


ABF, whose British Sugar division processes essentially all the UK beet crop, restated expectations of the country’s output jumping more than 50% to 1.38m tonnes, in line with previous forecasts, and indeed figures pencilled in by the commission.


Credit Suisse has said that while EU sugar values will “inevitably… command a modest premium to the world price, given, for example, quality and reliability… we don’t see this stretching beyond E50 a tonne”.


On London’s futures market, white sugar for March was on Thursday trading at $362.30 a tonne, equivalent to a little over E296 a tonne at current exchange rates, and down 8.3% so far in 2018.


Global sugar markets, already under pressure over a return to a production surplus, thanks in part to soaring EU output, took another hit this week from ideas that Brazil may open up to ethanol imports, undermining price prospects for the biofuel and so too for sugar, which mills can also produce from cane.


Divisional performances


ABF said that in the UK, its sugar sales were “now largely contracted, but at prices below last year”.


It made no comment on prices from its Spanish operations, although said that beet output there was “in line with expectations, but the cane refinery at Guadalete will process lower volumes this year”.


Outside the EU, the group reported its Chinese beet operations “performing well with prices in line with expectations”.


And the South Africa-based Illovo business, which supplies much of southern Africa, was forecast seeing growth in output to 1.7m tonnes, from 1.65m tonnes last year, “although local currency price increases in some markets are expected to be a little bit behind inflation”.


‘Unseasonably warm weather’


The group reported that its agri business, which includes the Frontier grain trading joint venture with Cargill, achieved 12% revenue growth in the 16 weeks to January 6.


“Profit growth is expected for the full year” in the division, ABF said.


The Primark clothes retailing business reported 9% sales growth, helped by strong pre-Christmas trading, after October sales growth across Europe was “held back by unseasonably warm weather”.

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