Death of Irish Sugar Industry: Mallow Sugar factory to close; Greencore seeking 90% of €146 million EU Fund; IFA says farmers should get 75%

Irish
Death of Irish Sugar Industry: Mallow Sugar factory to close; Greencore seeking 90% of €146 million EU Fund; IFA says farmers should get 75%
By Finfacts Team
Mar 15, 2006, 15:03

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The Board of Irish food group Greencore today announced that following an extensive review of the new EU Sugar regime and the EU sugar environment, its sugar division will not process sugar in 2006 (or in any subsequent year). The Mallow sugar factory will close with the loss of 300 jobs.

THE DECISION

Greencore says that the decision of the EU Council of Ministers on November 24, 2005 effectively spelled the end of sugar beet growing and processing in Ireland. Greencore had hoped to be able to undertake ‘one more campaign’ in 2006/2007 but unfortunately, and despite considerable efforts on the part of many parties, it is not feasible to do so. Greencore would incur unacceptable losses if it processed sugar again. Such losses would be driven by:

-a sustained deterioration of EU industrial sugar markets

-payment of a €25 million restructuring levy (confirmed in the Regulation of February 22, 2006) in an environment where the recovery of this levy from sugar customers is uncertain

-reduced sales due to the EU-imposed temporary quota cut of 11.6% (agreed on March 3, 2006)

-significant operational risks associated with running ‘one more campaign’

Greencore says that the continued uncertainty over the availability of a full beet supply could have exacerbated these losses further. Given all of these factors, Greencore will not process sugar again and as determined by the EU sugar regime reform mechanism, the Group intends to renounce its quota and present a restructuring plan to the Irish Government to secure the aid to which it is entitled.

The company says that the sugar factory at Mallow will close in May. The employees of Greencore Sugar are being advised of the fact that there will be no further campaign at briefings this afternoon and Greencore Sugar will be engaging in the appropriate information and consultation process with its employee representatives in the coming weeks.

Greencore Sugar says that it remains committed to serving its customers. It has sufficient stocks of sugar to fully service Irish industrial sugar and retail customers until November 2006 and is putting plans in place to supply these customers under the Siúcra and McKinney brands thereafter.

Commenting on the decision, David Dilger, chief executive of Greencore said:

“It is a very sad day for everybody involved in sugar processing and beet growing in Ireland, not lessened by the inevitability of closure due to the EU sugar regime change. The Board regrets that it has no alternative but to take this course of action. Since the EU sugar regime change was announced, we have worked really hard with our staff and our growers in a determined effort to have one last campaign. However, the regime change has turned an efficient, profitable operation with dedicated employees into a loss making processing business with no viable future. This is a difficult time for all associated with sugar processing and beet growing in Ireland. I would especially like to thank our workforce and our growers for their tremendous endeavour and commitment over many years”.

FINANCIAL EFFECTS

Greencore generated operating profits of approximately €25 million from sugar processing in the year ended September 30, 2005. In the current financial year, operating profits from sugar processing activities are expected to reduce to approximately EUR15 million, reflecting the sustained deterioration in EU industrial sugar markets and the loss of profits generated from the sales of seed, chemicals and fertiliser associated with growing another crop.

The gross cost associated with an exit from sugar processing is expected to amount to approximately €168 million, comprising anticipated redundancy costs, site decommissioning and associated costs of approximately €61 million, and fixed asset impairment of approximately €107 million. Approximately one third of the estimated gross costs will be cash costs.

These exit costs will be partially offset by the receipt of compensation from the EU temporary restructuring fund. The total restructuring aid payable to Ireland amounts to €146 million. The final EU regulation (of February 22, 2006) sets out the process for confirming the allocation and payment of this compensation. In essence, the ‘Member State’ is charged with allocating the restructuring aid based on the restructuring plan submitted by Greencore and in accordance with the specific requirements of the regulation. Given the ‘Member State’ role in allocating the restructuring aid, there is some risk to the level of aid that Greencore will receive.

However, Greencore says that the Board, having taken independent legal, economic and financial advice has determined that the Group is entitled to 90% (€131 million) of this restructuring fund, with the remaining 10% (€15 million) to be reserved for Irish beet growers and machinery contractors. On this basis, the Board will recognise a receivable of €124 million (the present value equivalent of €131 million) in its accounts for the half-year ended March 31, 2006. A net charge of EUR44 million will be reflected in the interim financial statements for the six months ended March 31, 2006.

The Irish Farmers Association says that it is entitled to 75% of the EU Restructuring Fund (see below)

THE FUTURE.

Greencore has advised the Irish Government of its intention to cease processing and renounce quota. As required by the EU regulation, Greencore intends to submit a comprehensive restructuring plan. Under the regulation, a decision to approve or reject the Greencore restructuring plan is required from government by September 30, 2006. The restructuring aid is then to be paid in two tranches – 40% in June 2007 and 60% in February 2008.

Greencore says that it has been reshaping its portfolio for some time (in part to diversify in advance of anticipated EU Sugar reform) and has built a high performing convenience food division. In 2005, this division grew to account for 62% of Group continuing profit, up from 25% in 2000, and it continues to perform well this year.

IFA says sugar farmers' losses from end of Irish sugar industry will amount to €150 million

IRISH SUGAR INDUSTRY

From The Irish Sugar Company site:

The Irish sugar industry can be traced back to 1851 when the royal Irish Beet Root Factory was founded at Mountmellick. This unfortunately failed after 10 years.

The second attempt to establish an Irish sugar industry was in 1926 in Carlow, with the establishment of the Irish Sugar Manufacturing Company. By 1933 the industry was in trouble again and the government stepped in to save it by establishing Comhlucht Siuicre Eireann to operate as a manufacturing and trading concern. Within a year there were three more factories at Mallow, Thurles and Tuam. By 1945 Irish production accounted for 99% of the market share, producing nearly 89,000 tonnes p/a.

During the fifties, attention was turned to producing quality beet. Through soil testing a shortage of lime in tillage and pasture lands was found. Comhlucht Siuicre Eireann set up their own quarrying venture to supply the farms with lime. Research centres to control and eradicate disease were also established. Soon Ireland was a world leader in this field.

In 1982/83, rationalisation brought about the closure of Tuam and Thurles as Carlow and Mallow expanded.

The company is now over 75 years in existance and employs almost 750 people directly. Some 25,000 jobs have been established in downstream and supply industries.

In 1991 with privatisation, the Sugar Company became part of the Greencore Plc. Group, and is now known as Irish Sugar Ltd.

In Ireland today there are some 90,000 acres under sugar beet in any given year. In order to sow this acreage four billion seeds are required annually.

The harvesting of the sugar beet, or the "campaign"as it is known, starts around the end of September and continues until mid-January. Once the campaign starts, it continues 24 hours a day, seven days a week, until all the beet is processed. The present acreage yields some 1.6 million tonnes of beet which is converted into some 200,000 tonnes of sugar.