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Last Updated: Wednesday, 19 April 2006, 07:36 GMT 08:36 UK
Sugar costs hit Associated Foods
Silver Spoon
The EU is to change the sugar regime
Associated British Foods, which owns the Silver Spoon sugar brand, has seen a 2% drop in half-year profits.

The company, which also owns clothing chain Primark, has warned of further falls in the second half of the year.

AB said costs would "continue to be adversely affected by conditions in the UK sugar business, our bakery operations and energy costs".

While the group's revenue rose by 10%, adjusted pre-tax profits fell to 225m in the same period.

New sugar regime

"As expected, British Sugar has experienced price pressure, but it is well positioned for the medium term and we remain confident about its prospects," said George Weston, chief executive of Associated British Foods.

The price squeeze follows the EU's final proposals to bring its sugar trading rules into line with world markets from 2009.

The EU has agreed to reduce the subsidies it pays to its sugar producers in the face of criticism from the World Trade Organization and pressure groups.

At the same time, least developed countries (LDCs) will be allowed to sell sugar to EU countries without being subjected to quotas or tariffs.

The company said the changes and continued imbalances in supply and demand could be expected to "affect the profit of British Sugar during the transition period".

Sugar accounts for a fifth of AB Food profits. As a result, the company is looking for cheaper raw sugar outside the EU and is considering bidding for Africa's biggest sugar producer, Illovo.

It has also reduced the importance of sugar within the company's portfolio in recent years and instead is focusing on other food businesses and Primark.

Clothing sales

Primark's like-for-like sales went up by 6% in this period, despite a fire at its warehouse before Christmas. Stock levels have now recovered.

The company said investment in Primark stores was the main reason net income had fallen by 16m. ABF opened seven new stores during the half-year.

The company bought clothes retailer Littlewoods last July and is now refurbishing and refitting 41 stores.

Shares in ABF were down by 3% in early trading following the announcement.

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