|Marketing relationship B2B and B2C||Products Sugars and sugar specialty products, by-products (feedstuffs and fertilisers)||Raw materials processed Sugar beet, and raw sugar from sugar cane|
|Key markets Austria, Hungary, Romania, Czech Republic, Slovakia, Bosnia and Herzegovina (Western Balkans region), Bulgaria||Customers Downstream manufacturers (particularly confectionery, beverage and fermentation industries), food resellers (for consumer products)||Special strengths High product quality standards; product offering tailored to customer needs|
The Sugar segment’s revenue in 2018|19, at € 501.2 million, represented a decrease of 23.2% from the year before. The reasons were the significant year-on-year reduction in sugar sales prices, as well as lower volumes of sugar sold (the latter especially in exports and the non-food sector). Revenue from by-products decreased, driven primarily by a lower sales volume of dried beet pulp, and revenue with ancillary goods (INSTANTINA products, seed, services, etc.) was also off. The Sugar segment accounted for 20.5% of Group revenue (prior year: 25.4%).
EBIT in 2018|19 fell from a profit of € 34.8 million to a deficit of € 61.9 million. The principal driving factor was the much poorer sales price environment compared to the prior year, which also made necessary a (retail method) write-down on sugar inventories. In addition, production costs increased due to the poor beet quality of the 2018 crop (not least as a result of the extreme drought conditions) and the acreage reduction in spring 2018 caused by the beet weevil infestation. Specifically, this resulted in idle-capacity costs of about € 13.2 million. The net exceptional items income in 2018|19 amounted to € 3.3 million and stemmed largely from tax refunds in Romania (prior year: net expense of € 2.9 million, due primarily to restructuring effects).
In its estimate of 6 March 2019 of the world sugar balance for the end of the 2018|19 sugar marketing year (SMY, the year from 1 October 2018 to 30 September 2019), the analytics firm F. O.Licht is forecasting a small production surplus. The forecast calls for production of 187.9 million tonnes (SMY 2017|18: 193.7 million tonnes) and growth in consumption to 185.7 million tonnes (SMY 2017|18: 183.4 million tonnes), implying a slight expansion in global sugar stocks to 76.8 million tonnes (SMY 2017|18: 76.4 million tonnes). For the 2019|20 sugar marketing year, a production deficit of 1.7 million tonnes is projected.
The clear downward trend in the world sugar market price continued from 1 March 2018 in the first seven months of the 2018|19 financial year, which was explained primarily by the anticipation of a significant surplus in the world sugar balance. Despite the increased use of sugar cane for ethanol production in Brazil, very good crop forecasts for India and Thailand and a rise in exports from Europe led to the expectation of a considerable surplus in global sugar stocks for the end of the 2017|18 sugar marketing year (SMY, October 2017 to September 2018). This drove the world market quotations to a nine-year low for white sugar (in August 2018 at US$ 303.7 per tonne) and a ten-year low for raw sugar (in September 2018 at US$ 218,3 per tonne).
Since October the market has rallied again somewhat from its lows, due particularly to lower crop results in Brazil for SMY 2017|18, the effects of the dry weather in Europe on the 2018 campaign, and the current dynamics in the foreign exchange and oil markets. Market movements in recent months were characterised by high volatility. The world sugar price also showed a clear correlation with the oil price in recent months.
At the end of the reporting period (28 February 2019), white sugar quoted at US$ 348.0 per tonne and raw sugar at US$ 280.7.
World sugar balance1
|Million tonnes, except %|
|In % of consumption||40.0||41.4||41.7|
1 F. O. Licht, Estimate of the World Sugar Balance 2018|19, dated 6 March 2019.
SMY 2017|18, which ended on 30 September 2018, was the first marketing year after the elimination of the sugar quotas and minimum prices for sugar beet. With very good yields per hectare and with sugar exports unrestricted since the quota abolition, both sugar production and exports increased significantly, while imports declined.
For SMY 2018|19, which began on 1 October 2018, the production expectations are considerably lower than in the prior year, as a result of the drought-related poorer yields in the large European beet growing regions. In its estimate from January 2019, the European Commission, despite similar beet production acreage as in the previous year, projected a production decrease (including isoglucose) to 18.2 million tonnes for this SMY (SMY 2017|18: 21.3 million tonnes).
At the beginning of SMY 2017|18 in October 2017, with the sugar quotas newly ended, the EU price for sugar (food and non-food) per bulk tonne ex-factory fell to € 420 per tonne and, in the months that followed, tumbled further to slightly below € 350 per tonne. At the start of the new SMY 2018|19, the quotation lost another € 27, receding to just € 320 per tonne in October 2018. In January 2019 the EU sugar price was at € 312 per tonne (January 2018: € 371 per tonne) and thus about 23% below the EU’s regulatory reference threshold of € 404 per tonne.
The sales volume trend with industrial customers and with resellers in the 2018|19 financial year was positive. By contrast, volumes declined in the export and the non-food (formerly “non-quota sugar”) sectors amid the world market situation and the associated conscious reduction in export activities.
While the first months of this financial year were still defined by high EU sugar inventories, these were largely depleted in the course of mid-summer, especially in the Eastern European countries.
Due to the reduced production of beet sugar, the markets were supplied, and volumes for sales in the 2018|19 sugar marketing year were secured, by purchasing white sugar and by refining of raw sugar.
In connection with the strengthening of AGRANA’s sugar brands in the retail sector, the Group relaunched its retail products in all AGRANA regions during the year under review.
Due to the oversupply of sugar that prevailed until the summer and the high harvest expectations existing until then, the sales contract prices for SMY 2018|19 are significantly lower than in the previous year, and therefore no significant improvement in the price situation can be expected until the 2019 campaign.
Since 1 October 2017 the European sugar industry operates in a new environment. The biggest changes are the end of the production quotas for sugar and isoglucose and the abolition of the minimum beet prices.
However, the use of contracts between the sugar industry and sugar beet growers remains a requirement. In the event of a crisis, the European Commission also retains the option to apply exceptional measures. One of the instruments available to it for this purpose is government-funded private storage, through which the Commission can temporarily remove sugar from the market.
A key element of the liberalisation of the EU sugar market is that, since 1 October 2017, European sugar manufacturers have unrestricted freedom to export their product.
Protective features remaining in place unchanged for imports to the EU from countries not party to preferential treaties are the duties of € 419 per tonne for white sugar and € 339 per tonne for raw sugar. The preferential agreements (for duty-free access) with the Least Developed Countries and the ACP Group of States remain intact, as do the duty-free or lower-duty preferential imports that are subject to volume limits.
The European Commission is currently negotiating the terms of a free trade agreement with Australia and Indonesia. The trade talks with the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay) are currently on hold, as the newly elected president of Brazil has not yet taken a position on Mercosur.
The situation regarding Britain’s intended withdrawal from the EU is still unclear at the time of writing. At present, about 0.5 million tonnes of sugar per year is shipped from continental Europe to the UK. A breakdown of preferential imports is included in the draft Brexit agreement.
In SMY 2018|19, AGRANA’s almost 6,700 contract beet farmers harvested only about 83,200 hectares of sugar beet fields (prior year: approximately 96,300 hectares), as about one-quarter of the beet acreage planted in Austria was destroyed by an insect pest, the beet weevil. Just under 800 hectares (prior year: about 1,700 hectares) of the harvest area represented organic production. From the organic acreage the Group produced around 4,000 tonnes of organic beet sugar (prior year: about 9,000 tonnes).
Due to the long winter, the start of planting was delayed by about one to two weeks compared to the long-term average. Most of the initial planting was completed by mid-April. From the first week of April, severe damage was caused in the Austrian core beet production areas by the beet weevil. A total of approximately 12,000 hectares had to be turned under and only about 30% of this was subsequently replanted to beet. In the other beet-growing regions, outside Austria, further beet production area was lost to mud deposits, soil crusting, hail and animal pests.
The comparatively very warm months of April to June 2018 led to rapid juvenile growth of the beet stocks. Widespread rain, particularly in the second half of May, also strongly boosted the beet growth.
From July to September, no regular rainfall occurred in many AGRANA regions. Notably in parts of Austria, the southern Czech Republic and also in Romania, this led to serious and extensive drought symptoms in some of the beet stocks. At the beginning of September the situation improved thanks to above-average precipitation. However, this also brought a severe infestation of cercospora leaf spot. Almost the entire rest of autumn was relatively dry, preventing the beet growth from reaching forecast levels, particularly on the less fertile soils. The extreme weather conditions in the summer and autumn ultimately were also responsible for poorer beet quality and associated lower storability of the beet, especially at the start and end of the processing period.
AGRANA’s seven beet sugar factories processed a combined daily average of almost 50,000 tonnes of beet during the campaign (prior year: 51,500 tonnes). Over an average campaign length of 106 days (prior year: 120 days), the beet was used to produce approximately 701,000 tonnes of sugar (prior year: about 941,000 million tonnes). Generally speaking, in retrospect the quality of raw materials was below average, which led to an increased need for processing aids (sodium hydroxide) and made processing in the plants more difficult. Unfavourable ratios in raw juice and thick juice resulted in lower white sugar yields.
In the 2018|19 financial year AGRANA also refined approximately 34,000 tonnes of white sugar equivalent from raw sugar (prior year: about 200,000 tonnes). To also assure a sustainable supply chain for raw sugar as an input product, AGRANA since 2014 holds a Chain of Custody certification under the internationally recognised Bonsucro standard for all its refining facilities. The Chain of Custody certificate, which confirms the adherence to high social and environmental standards in the entire value chain, entitles AGRANA’s customers to display the Bonsucro logo on their products. Bonsucro is accorded gold status, the highest rating, by the benchmarking tool of the Sustainable Agriculture Initiative Platform (SAI; for details, see from page 43).
For beet purchasing, AGRANA follows a beet price arrangement with a variable price schedule tied to the sugar sales price.
In the Sugar segment, AGRANA invested € 30.6 million during the 2018|19 financial year (prior year: € 32.1 million) in, among other things, product quality and energy efficiency. The most significant projects included the following: