Danisco cuts quota in wake of sugar reform

By Alex McNally

- Last updated on GMT

Related tags: Sugar, European union, Danisco sugar

Danisco has said it will reduce its sugar quota by more than 10 per
cent following sugar reform proposals agreed by EU agriculture
ministers, and being stung with levy charges of some €20m.

The firm said it will buy additional quotas in Denmark and Sweden in order to maintain "production efficiency,​" and predicted selling its quota will help increase this year's profits. The firm added that planned quota purchases and sales will mean a net reduction in the overall sugar quota of around 85,000 tonnes to around 967,000 tonnes. Danisco's outlook, based on amendments to the sugar reform agreed Wednesday by agriculture ministers, shows that companies are looking at ways to readjust operations to offset any negative impact. EU agriculture ministers adopted a number of changes to the sugar reform introduced in 2006. The aim of the legislation was to improve competitiveness and market-orientation of the EU sugar sector and guarantee its long term future. Reform rules now hope to further encourage voluntary quota reduction and as a new incentive, beet growers will be allowed to sell 10 per cent of the quota. Moreover, sugar producers who sell that share will receive a refund of the restructuring levy. The Commission hopes the changes will help take some 3.8m tonnes of quota off the market. Other sugar companies also said the sugar reform changes would be good for the industry. Tate & Lyle said it welcomed the announcement, adding: "Whilst these changes will have little direct benefit to our sugar refineries, which are not part of the restructuring fund, we believe that in the long term a balanced and stable market is good for the whole industry." ​ Yesterday Danisco said these amendments showed "positive elements.​" The Danish ingredients firm was always thought to be one of the most hit by the reforms, with early predictions indicating sugar earnings would drop by 40 per cent. Executive Vice President, Mogens Granborg, said: "We are very satisfied with the steps taken. This amendment comprises a range of positive elements in that it provides clarity and rectifies some of the inexpedient aspects of the 2006 reform. "We expect the new incentives to accelerate the reduction of sugar production in Europe, bringing us back on track to restoring the market balance." ​ Danisco will look for a quota sale of up to 13.5 per cent in all its production countries, corresponding to a total of around 135,000 tonnes of sugar. Per country, this is on a par with the temporary quota withdrawal adopted by the EU Commission in the spring of 2007, the firm said. To minimise the effect of quota reduction, Danisco has said it will buy around 32,000 tonnes of quota in Denmark and around 18,000 tonnes of quota in Sweden in 2007/08, at an cost of some DKK 220 m (€29.5m). The firm added that planned quota purchases and sales will mean a net reduction in Danisco's overall sugar quota of around 85,000 tonnes to around 967,000 tonnes. As a result of quota sales, Danisco Sugar will avoid a restructuring levy of approx. DKK 150 m (€20m) in 2007/08, which will boost the firm's operating profit (EBIT) estimate for the year in sugar from around DKK 300 (€40.2) m to around DKK 450m (€60.4m). Danisco estimates its quota sales will bring in some DKK 180 million (€24m), and has increases its expected profit for the year from DKK 1,350m (€181m) to DKK 1,450m (€195m). Danisco said: "We believe that the changes to the reform will lead to significant sales of quota in the EU in the next six months, which will create a better balance between demand and supply in the European sugar market." ​Other changes agreed will see growers receive an additional payment pf €237.5 per tonne of quota given up. The sugar reforms were also in response to fierce criticism for distorting sugar prices - trading at some three times the world price in Europe - and causing high prices to the end-consumer. Earlier this month Danisco reported overall revenue of DKK4,672m (€627m), down from DKK4,866 (€653m) for the same three months of last year. Operating profit was down to DKK599 (€80.4m), from DKK635m (€85.2m). Last year Danisco unveiled a series of closures to safeguard its sugar activities in the face of widespread regulatory reform and increasing competition.

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