British Sugar has just offered growers a price of £23.60/t. How was this calculated and can growers really make money at that? Olivia Cooper finds out
For years sugar beet growers and British Sugar have undertaken tense negotiations over contract prices – but a new formula has superseded that regime.
Set up in conjunction with the NFU, the new pricing mechanism works on a cost-plus basis, fixing a known price for growers before they commit to the contract.
Hailed by many as a tremendous step forward, offering much-needed stability, the formula did, however, suffer a setback when it produced a price of just £23.60/t for the 2011 crop. That was some way below the £26/t paid for the 2010 crop, and £1/t less than predicted, sparking reactions from some growers.
So how did British Sugar reach this price? The model is based on the variable and fixed costs of growing sugar beet; a currency-linked margin; and a wheat-related bonus. Independent consultants identified average seed, fertiliser, chemical and sundry inputs, as well as operations and harvesting costs, and apportioned overheads. In 2011 those totalled £1013/ha in variable costs and £357/ha in overheads. With a trended yield of 67.78t/ha, this produced average costs of £20.21/t.
On top of this, the formula used a reference period from 1-14 June to set a currency-linked margin and wheat-related bonus. The variable margin offered 25p/t for every 1p above the £:€ exchange rate of £0.70/€ – so an average exchange rate of £0.83306 in the reference period produced a margin of £3.33/t. The wheat-related bonus gave 5p for every £1/t increase in the November 2011 wheat price above £110/t. With a reference price of £111.28/t, this yielded a bonus of just 6p/t.
“I was hoping to see a price of £24-£24.50/t – but there were two disappointments,” said independent consultant David Bolton of David Bolton Partners. “The first is that the price of wheat was fairly desultory during the reference period – and the second is that the euro has fallen recently from adequate to poor. That has a double impact on growers – it reduces their beet price and their single payment.”
British Sugar’s Colm McKay said the strength of sterling had a direct impact on the beet price. “The EU minimum beet and sugar prices are set in euros, so we need a contract that reflects exchange rates. However, importantly for growers, the price is fixed at the point of contracting so British Sugar carries the exchange rate risk from that point onwards.”
Including a wheat link was also important, to ensure sugar beet remained competitive against alternative crops, he added. And while the beet price was lower than originally expected, it was still profitable for most growers.
“With the past two years producing record yields – averaging 72t/ha last year – 67.78t/ha is a reasonable benchmark. It looks like we are in a new era for sugar beet yields and our yield advancement work is paying dividends.
“The crop is clearly profitable for many growers as there is a large demand for quota in the Outgoers scheme, which is designed to help farmers who want to increase production while compensating those who decide to quit. Growers that have lower yields or are a long way from our factories are sensibly considering selling their tonnage within the scheme, as the contract price looks good.”
William Martin, NFU Sugar Board chairman and grower, admitted that £23.60/t would not cover the costs of every grower. “It covers the costs of average growers, so there may well be some who will struggle to make any money at all. However, this formula gives people a bit of transparency and predictability, with the option to assess their performance and decide whether to continue growing sugar beet, give up, or expand.”
Paul Drinkwater, who grows 20,000t of beet near Huntingdon, Cambridgeshire, was unimpressed with the new regime. “I was hoping to at least get closer to this year’s price. I don’t think it’s any business of British Sugar what I make out of sugar beet – it should stand up on its own against any other crop. We will not be seeking extra quota at that price.”
But Oliver Walston from Thriplow, Hertfordshire, had already bought 1500t of quota at £20/t, and said demand for quota far exceeded supply so far. “Yields are rising and rising, and at today’s prices we are going to make more money from sugar beet than wheat. The formula is not perfect, but it’s as good as you can expect.”
The formula will run for four years until the next CAP reform, after which it will be reassessed.