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New era for EU sugar

EU sugar quotas are a thing of the past, so are things about to get sweeter for producers?
November 23, 2017

The Brexit vote made it quite clear that many Britons are not fans of European protectionism. One of the longest standing regulations was a directive on how much sugar EU member states can produce and minimum pricing for the white stuff. As of 1 October 2017, quotas have expired, meaning sugar producers are now free to make full use of their production capacity, which should in turn help reduce the costs associated with making it. 

The quotas originated with the common agricultural policy, which was aimed at manifesting EU self-sufficiency in food production and stable prices for farmers. It said a total of 13.5m tonnes of sugar could be produced across 20 member states, with any excess stored and put towards the following year’s quota, sold for biofuel, or exported up to the World Trade Organisation’s (WTO) own store of 1.4m tonnes.

Sugar producers could be in line for a boost now that they no longer face restrictions about how much they can produce and sell. But a surge in supply could go sour if there isn't sufficient demand. The European Commission estimates sugar production will increase by 6 per cent between 2016 and 2026. Imports are expected to drop from around 3.5m tonnes to 1.8m tonnes, while exports increase from 1.3m tonnes to 2.5m tonnes. Production in the upcoming harvest is expected to increase by a fifth to 20.1m tonnes.

That said, companies using large amounts of sugar in their product recipes could enjoy lower ingredients costs, while those that produce sugar alternatives such as stevia might fear that cheaper sugar will make their products less appealing from a cost standpoint.

But even if the price of sugar falls, companies that produce sugar alternatives may be insulated by a different set of rules coming into effect next year. A new UK tax on products that contain more than five grams of sugar per 100ml is set to apply from April 2018. This has pushed many London-listed companies to reformulate their products so that they contain less sugar ahead of the new duty, and cater to ever-growing demands from consumers for options better suited to a healthy lifestyle.

 

Sugar producers

Sugar producer Illovo helped sweeten results at Associated British Foods (ABF) in the year to September thanks to the higher prices demanded for the ingredient during the period. Sales in the AB Sugar division increased by more than a fifth at constant currency to £2.2bn, while adjusted operating profit surged 374 per cent to £223m. At the time of the results finance director John Bason said that he wasn't concerned that the lift on EU sugar quotas would have an adverse impact on the group, nor would the UK’s upcoming sugar tax, as he thinks sugar will continue to be a key part of Western diets.

Paul Kenward, managing director of ABF’s UK sugar division, called the removal of EU quotas an “opportunity” both for it and the wider industry. Mr Kenward said that, historically, EU quotas have held the company back in terms of the amount of sugar they were allowed to produce and so, with the right trade arrangements in place, “we can sell as much sugar as we can produce here in the UK, in the EU and on the world market”.

Some investors will wonder how a Brexit deal might change the sugar production landscape further. Like many parts of the negotiation process, it's still unclear what a trade deal with the EU will look like, but Mr Kenward says he is “confident" a free and fair UK sugar policy can be achieved and, if so, the "world-leading domestic beet sugar industry can continue to thrive”.

 

Sugar users

Cheaper sugar could help cut costs at companies that use it as a common ingredient, particularly groups with a significant skew towards baked goods. John Duffy, chief executive of Finsbury Food (FIF), said the company’s ambition is to be a low-cost producer of speciality baked goods, and so any external factors that help achieve this – in this case cheaper sugar – are always welcome. But Finsbury Foods is part of a growing list of names that have reformulated recipes to cut the amount of sugar they use. Finsbury is producing a range of reduced-sugar cakes based on Disney characters, while its line of Vogels bread is already made without added sugar.

At the time of interim results in September, AG Barr (BAG) said it was on track to make sure 90 per cent of its own brands contain less than five grams of sugar per 100ml by the end of the January 2018 financial year – well ahead of the upcoming sugar tax. The reformulation process has so far cost the company £300,000, but it's likely to pay off as UK consumers develop less of a sweet tooth. Volume growth in the stills sector was actually driven by water, while low or no-sugar-added options were the driving force in carbonated beverages.

Close rival Britvic (BVIC) also said its no- and low-sugar reformulations have resonated with consumers, with Pepsi Max continuing to gain volume and market share. Chief executive Simon Litherland is hopeful that the company will benefit in the second half of the year from the launch of another no-added sugar line of Robinsons juice drinks. Britvic was the first UK soft drinks company to introduce stevia to its products, pulling the added-sugar Fruit Shoot range in 2014 and the added-sugar Robinsons range in summer 2015.

 

Sugar alternatives

Consumer tastes have clearly shifted away from sugary sweets towards more health-conscious options. Many of the companies that have opted to reformulate their products to use less sugar have tended to turn to stevia as an alternative sweetener.

PureCircle (PURE) is one company that is benefiting from the move towards alternative sweeteners, even if its most recent set of full-year results don't make it look that way. Sales fell 14 per cent year on year to $119m (£89.8m), but this was due to an eight-month absence from the North American market. Ignore the US exclusion and revenue increased by 8 per cent over the most recent financial year. The popularity of alternative sweeteners has PureCircle exploring different flavours such as chocolate and vanilla, along with antioxidant products that complement healthy lifestyle trends.

When UK consumers think of British sugar producers, many think of Tate & Lyle (TATE). The name might still be plastered across hundreds of sugar products on supermarket shelves, but it doesn't actually form part of the London-listed company any more. Tate & Lyle’s sugar business was sold in 2010 to American Sugar Refining for £211m so that the company could focus on other food ingredients, such as alternative sweeteners, thickeners and “wellness” products. As part of the most recent set of half-year results, chief executive Javed Ahmed said that some of the new products developed by the company had generated double-digit sales growth as customers continue to look for “innovative solutions” to reduce sugar, calories, and fat in food and drinks.