Whilst US domestic demand for nutritive sweeteners in the 2011 financial year continued its gradual long-term downward trend, strong seasonal demand and increased exports of corn sweeteners to Mexico offset this impact. Higher Mexican demand was driven by high domestic sugar prices in the Mexican market, and a relative recovery of the Mexican peso against the US dollar which accelerated the substitution of cane sugar with corn sugar.
US corn yields for the 2010 harvest were low compared with recent experience. The fall in production is expected to reduce stocks to their lowest level since 1996 and the forecast stocks-to-use ratio for the end of the current crop year is the lowest on record. The latest planting intentions, reported by the United States Department of Agriculture (USDA), indicate that planted corn would increase to the second highest level on record, driven by high corn prices. The European corn price has followed similar trends to the US market.
In the European sweetener market world sugar prices rose above the EU preferential rate thereby discouraging traditional suppliers of cane sugar, some of whom also experienced harvest difficulties, from supplying to Europe. This supply restriction was compounded by lower beet sugar yields from the harsh winter resulting in higher sugar prices. The selling price of isoglucose (corn sugar), which is closely correlated to the sugar price, rose towards the end of the financial year but not at the same rate as corn prices, resulting in a squeeze on margins.
"Co-product prices were supported by fundamental demand and improved through the year on the back of higher corn and competing commodity prices. "
Although demand for industrial starches in the USA recovered modestly, it still remains significantly below the levels experienced before the economic downturn. The demand for industrial starches in Europe also improved with demand for corn starches receiving an additional boost on the back of the poor potato harvest. In US ethanol, whilst cash margins have increased, levels of profitability within the industry remain low overall.
Co-product prices were supported by fundamental demand and improved through the year on the back of higher corn and competing commodity prices. The market for US corn gluten feed was boosted by the reopening of European markets to EU-approved genetically modified varieties and by China’s increased imports of competing feed products. Demand for corn gluten meal, primarily for pet food, remained firm and exports to Latin America were stronger as aquaculture companies continued to increase production. In addition, demand for corn oil remained strong.
Sales increased by 10% (7% in constant currency) to £1,915 million (2010 – £1,745 million). Adjusted operating profit increased by 15% to £157 million (11% in constant currency) driven by strong levels of co-product income and an improved performance from our ethanol business, despite lower margins in sweeteners and industrial starches. The effect of exchange translation was to increase operating profit by £5 million.
This division comprises three broad product platforms namely: sweeteners; industrial starches, acidulants and ethanol; and co-products.
In the Americas, bulk corn sweetener volumes increased by 14% and sales by 3% (decreased by 1% in constant currency) to £734 million (2010 – £715 million). As anticipated at the time of the announcement of our contracting round in January 2010, corn sugar (HFCS) unit margins were somewhat below the comparative period after taking into account lower input costs. Whilst we experienced firm demand patterns for Corn Sugar 55 and 42 in Mexico and strong US domestic demand as good weather provided an uplift in seasonal demand, the higher volumes did not offset the lower margins which had resulted from the 2010 calendar year pricing round and profits for the full year were below the comparative period.
In Europe, sales of bulk corn sweeteners increased by 10% (14% in constant currency) to £123 million (2010 – £112 million). Volumes increased by 11% year on year reflecting the increased capacity from our Slovakian expansion and increased quotas. Unit margins were lower, particularly in the second half, on the back of higher corn costs which increased at a faster rate than the price of sugar, which effectively determines the price for isoglucose (corn sugar) in the EU.
Operating profits from Almex, our Mexican joint venture, were up significantly on the comparative period, reflecting higher volumes and improved pricing.
Industrial starches, acidulants and ethanol
Sales of industrial starches, acidulants and ethanol increased by 13% (10% in constant currency) to £709 million (2010 – £629 million).
Industrial starch volumes grew by 8%. Whilst we have seen a modest recovery in market conditions, margins continued to be under pressure in the USA where the market remains very competitive. The performance for the year was below the prior year as the increased volumes were more than offset by lower unit margins. In Europe, tighter supply-side conditions as a result of the poor starch potato harvest resulted in improved margins towards the end of the year.
Whilst we experienced improved positive cash margins in US ethanol, this product continued to generate a loss at the operating level. At the end of the period, we completed the sale of our Fort Dodge facility for cash consideration of £36 million resulting in an exceptional credit for the full year of £10 million (2010 – impairment of £217 million). The disposal reduces our exposure to what remains a volatile and highly commoditised industry.
Whilst citric acid sales increased within our acidulants business, profits were lower than the prior year as a result of higher input costs. As in the prior year, the Bio-PDO™ joint venture broke even in the 2011 financial year.
"In Europe, sales of bulk corn sweeteners increased by 10% (14% in constant currency). "
Sales of co-products increased by 21% (19% in constant currency) to £349 million (2010 – £289 million).
The impact of rising US corn prices throughout the year resulted in additional profits of £16 million from co-products compared with the prior year. Since over 80% of our corn grind is utilised to produce Bulk Ingredients, the majority of this impact is recorded within this segment. In anticipation of potential supply tightness in the run up to the new harvest, we plan to hold our silos full to the beginning of the harvest year. With the larger volumes in inventory combined with the higher price of corn, we increased the amount of working capital tied up in US corn inventories by approximately £126 million at 31 March 2011. European corn prices also rose increasing co-product sales. However, hedging options are more limited than in the USA so that higher corn prices had a modest negative impact on profitability in the second half.
In Bulk Ingredients, we expect sweetener margins to remain flat calendar year on year with volumes slightly down as we diversify some grind to Speciality Food Ingredients. Elsewhere, industrial starches are expected to perform better, particularly in Europe, but not sufficiently to offset more normal co-product returns.