Confectioners welcome sugar reform, but sweetener players to feel impact

- Last updated on GMT

Related tags: Sugar, European union, European commission, European parliament, Danisco sugar

Sweeping changes to Europe's subsidised sugar regime announced
yesterday will see sugar prices cut by 39 per cent paid to
companies that include sugar and sweetener suppliers Danisco and
Tate and Lyle, but will bring price relief for food and drink
makers, reports Lindsey Partos.

The EU, the world's third-largest sugar producer and the number two consumer, munching through 16 million tonnes a year, has been heavily criticised for artificially supporting its prices at three times the world level.

But announcing an overhaul yesterday to the 40 year old regime, European Agriculture Commissioner Mariann Fischer Boel proposed measures​ to phase in considerable price cuts over two years and reduce output by more than a third by 2012.

"There is no alternative to a profound reform,''​Fischer Boel said in a statement.

Food and beverage manufacturers, as well as the EU end-consumer are expected to benefit from the changes, feeling the impact of lighter prices through external competition, likely to come from Brazil, Australia and Thailand, among the world's largest exporters of sugar.

"We are quite encouraged by the proposals brought forward by the Commissioner,"​ said David Zimmer, secretary general at the European chocolate, biscuit and confectionery industries association CAOBISCO.

CAOBISCO represents an industry that uses some three million tonnes of sugar per year, and 70 per cent of the EU sugar supplies, in a business worth over €40 billion. But the industry claims higher prices have impacted their global competitivity.

We've been hit, and continue to be hit by our lack of competitiveness in non-European markets, he tells FoodNavigator.com.

Reducing the quotas and chopping at sugar prices "is a step in the right direction, albeit that the impact will not be felt for quite a few years,"​ he adds.

In year one there is a small drop in price, but over the following years this will start to become significant, he says.

The proposal would slash sugar prices in EU to about €386 a metric tonne from more than €632, with a three-year levy on production to compensate companies quitting the industry as a result.

But Zimmer raised one key concern about who will foot the bill for the restructuring packages offered to EU factories, and isoglucose and inulin syrup producers, to encourage factory closure and the renunciation of quota.

"Questions have arisen as to how the Commission intends to impose the levy, and who will pay,"​ comments the CAOBISCO secretary general.

The European Parliament, it would appear, also raised the same query yesterday.

And while sugar users are expected to gradually benefit from the reform, losers are the sweetener and sugar producers.

Danish ingredients firm Danisco said yesterday it expects earnings at its sugar division to fall to DKK600-750 million a year if the European Commission's sugar reform goes through.

"The price cut on sugar is bigger than expected, and that could have a negative impact on Danisco Sugar's earnings going forward,"​ said executive vice president at Danisco Mogens Granborg.

When the commission announced plans last summer to cut the sugar production quota and minimum guaranteed prices, Danisco warned that profits from its Sugar division would fall by a quarter, or DKK250-300 million, in a couple of years if the plans were implemented.

If the suggested price cut proposed yesterday goes through to the final sugar market regulation, there is a risk that the downside earnings impact could be stronger than anticipated, the group said.

"We will now analyse the proposal to decide which structural adjustments to implement to reduce the direct effect of the price cuts in Danisco Sugar's production countries, Denmark, Sweden, Finland, Germany and Lithuania,"​ said Granborg.

Factory closures and other efficiencies will probably be necessary, he added.

In the UK sucralose maker Tate & Lyle warned the market the potential impact of the proposals would result in a massive £85 million fall in operating results for the first year, to March 2009.

And in the run up to 2009, the firm said proposed price cuts will start to affect "operating results" from 2007.

The "potential impact arising purely from changes to the institutional framework is estimated as a reduction in the operating results of around 20 million pounds (€30 million) and 60 million pounds,'​' for the years ending March 2007 and March 2008 respectively, said the London-based company.

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