Associated British Foods (ABF), the UK-based food, ingredients and retail multinational, has warned that currency headwinds will continue to weigh on profit margins for 2016 in its firstquarter trading update.

Albeit early in its financial year, ABF said it estimates the translation impact resulting from the strength of sterling relative to a basket of currencies, particularly the euro, to reduce full-year operating profits by some £25m (€33m). The group said that profit margins will be squeezed and full-year earnings will be reduced as a result of continued currency pressures.

ABF said that for the three months to the first week of January, group sales were 3% ahead of the same period last year in constant currency terms or 2% behind last year in actual currency terms.

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Sugar improvement

Despite the bearish outlook on currency, ABF’s forecast for its global sugar operations is more upbeat. Since its peak in 2013, European sugar prices have declined by almost 45%, while global sugar prices have plunged by almost two thirds since 2010.

However, ABF is forecasting that 2016 will be the first time in five years where there will be a deficit in global sugar production relative to demand – boosting sugar prices. A tightening of European and Chinese stock levels is strengthening prices in both markets, while a reduction in the UK sugar beet crop in 2015 by almost a third to under 1m tonnes is also helping to lift prices.

However, the group noted that with most EU contracts for the coming year already agreed, it will be 2017 before any rise in sugar prices will be able to impact the group’s profitability.

ABF also said that its sugar operations in South Africa – Illovo – continued to be pressured in difficult market conditions. Sustained drought has diminished crop volumes, while currency devaluations in the region have also weighed on performance.

Agriculture, grocery and ingredients

ABF said its agriculture division was impacted adversely by lower commodity prices and lower sugar beet feed volumes. The group said its speciality ingredients business continues to perform strongly and improve profit margins.

ABF’s grocery division, which owns a number of high-profile food brands such as Twining’s tea, Allied Bakeries, and George Weston Foods, is also performing strongly for the year to date, with improving operating margins and higher sales volumes.

ABF’s most important division is its retail arm, which operates the chain of stores under the Primark brand. In 2015, the division accounted for more than 60% of group operating profit. First-quarter sales are 7% ahead year-on-year or 3% ahead year-on-year in actual currency.