Quota Reform Would Increase Production
BMI View: We have revised down our 2014/15 sugar production forecast for Turkey to 2.31mn tonnes in line with the country's revision of its beet sugar production quota to 2,317,500 tonnes. The government is currently in the process of substantially changing the structure of the quota, which offers significant upside risks to sugar production over long term.
Sugar production in Turkey is a politically sensitive issue, and since 2001 the country has managed production through the Turkish Sugar Board. This has ensured higher wages to sugar farmers, as well as greater employment in government-owned sugar refineries. Indeed, some of Turkey's main sugar refineries were intentionally located in areas of high unemployment, partly in a bid to limit urban migration. Sugar imports, strictly controlled by the government, are negligible.
We believe that there is a need for Turkey to significantly alter its sugar production quota over the next five years, as industrial sugar usage and human consumption of sugar is set to rise. Indeed, the Turkish Sugar Board has already increased its sugar quota for 2014/15 by 1.6% year-on-year (y-o-y) for beet, and 2.5% y-o-y to 250,000 tonnes for starch-based sugar. This increase follows a quota reduction in 2013/14, the first change in three years as production was previously pegged at 2.29mn tonnes.
|Quota Method Likely To Change|
|Turkey - Sugar Production & Consumption (000 tonnes)|
However, we believe that a more fundamental change will occur in Turkey's sugar industry over the next few years. A new Sugar Law, sent for approval in April 2013, proposes the creation of a new sugar industry body. The main changes would include the deregulation of sugar production for industrial use, and much greater potential for large quota increases for centrifugal sugar production. If the proposed changes were to materialise, we believe that total sugar production would be boosted.
Rising sugar usage in biofuels over the next several years will increase industrial sugar output. The major use of industrial sugar is for biofuels, and as per a 2011 law the amount of sugar used in both bioethanol and biodiesel is set to increase over the next few years. In 2013, for example, the new 2% mixture rate meant the additional production of 540,000 tonnes of sugar beet. The increase to 3% in 2014 called for additional production of 800,000 tonnes of sugar beet. Without a quota for industrial sugar, total output will rise strongly on the back of its use in biofuels.
|Ulker - Revenue From Turkey (TRYmn)|
Rising centrifugal consumption of sugar in Turkey will also necessitate quota increases. We believe that human domestic sugar consumption in Turkey will rise by 7.4% between 2012/13 and 2017/18 to 2.4mn tonnes, mainly on the back of a rise in confectionery sales which will be fuelled by income growth and a youthful demographic. Our Country Risk team forecasts annual average real GDP growth of 3.2% between 2014 and 2018, and real private final consumption growth of 1.9% per year across the same time frame. This will help fuel average sugar confectionery sales growth of 7.3% per year between 2014 and 2018. We believe that Ulker, the largest confectionery company in Turkey, is set to benefit from this trend over the next several years.
|A Major Component|
|Ulker: Components Of Cost Of Goods Sold|
A large increase in domestic sugar production will reduce the procurement price for the government, especially if output for industrial sugar is deregulated. Ulker, which by law sources Turkish sugar, would be one of the main beneficiaries of a decline in sugar prices. Sugar accounts for 15% of Ulker's total costs; palm oil and cocoa each also account for 15%. Wheat, which is also sourced entirely from within Turkey, accounts for 20% of the group's total costs. We believe that Turkey will post a small wheat production surplus every year from 2014 to 2018, following a 2mn tonne deficit in 2012/13. We therefore believe that Ulker is in a good position to take advantage of more favourable sugar prices, which will help mitigate moderate gains in palm oil and cocoa prices. We currently forecast cocoa prices to average GBP1,900/tonne in 2018, and palm oil to average MYR3,300/tonne in the same year.
|Sugar Production, '000 tonnes 1||2,130.0||2,280.0||2,310.0||2,344.6||2,379.8||2,415.5|
|Sugar Consumption, '000 tonnes 1||2,300.0||2,316.1||2,339.3||2,374.4||2,421.8||2,470.3|
|Notes: f BMI forecasts. Sources: 1 USDA.|