Introduction
The EU starch industry is navigating through a challenging environment as we move towards the end of 2024. From structurally high costs to varying quality concerns in key raw materials like corn and wheat, processors are facing a myriad of issues that require strategic planning and adaptability to remain competitive. This article delves into the current market dynamics for starch derivatives, the ongoing cost pressures faced by processors, and the quality challenges surrounding corn and wheat in Europe.
Market Demand for starch derivatives is gradually recovering on the back of improving economic environment
As the EU economy shows signs of improvement, with a projected real GDP (Gross Domestic Product) increase of 0.9% in 2024 and 1.4% in 2025, the starch industry is experiencing a gradual recovery. The easing of inflation, projected to drop to 2.1% in 2025 is expected to enhance the purchasing power of businesses and households.
Specifically, the food industry, the primary consumer of starch and derivatives, is also showing recovery signs. For instance, in Europe, food retail is forecasted to grow by 1% both in 2024 and 2025, supported by a decrease in in-store inflation and an improvement in purchasing power.
In Europe, the paper and board industry, another significant outlet for starch processors, is also on a path to recovery. EU paper and board production remains 7.5% higher year-to-date August compared to 2023 according to CEPI statistics and is expected to continue recovering next year.
The better economic prospects and decreasing inflation rates are expected to positively impact the market demand for starch derivatives, which we believe has already shown an 8% growth in the first 3 quarters of 2024 compared to the previous year. Even though some market sectors are recovering faster than others, we believe that demand for starch derivatives will continue to improve through 2025 in Europe.
The EU starch industry continue to face historically high costs
Starch derivative processors continue to grapple with historically high-cost pressures. Grain markets remain volatile, with quality concerns adding to the complexity and cost. Indeed, while MATIF (Marché à terme international de France) corn price remains historically high and volatile, premiums over MATIF for good quality corn are elevated, adding cost pressure on EU processors.
Energy prices in Europe remain significantly higher compared to pre-war levels, with a potential for further increases due to geopolitical risks. The TTF (Title Transfer Facility) gas price is still more than two times more expensive than before COVID-19 and the uncertainties around potential disruptions of gas supply (end of Russian supply through Ukraine, potential escalation of tensions between Israel and Iran leading to a closure of the strait of Hormuz).
The freight market is another area of concern, facing significant cost increases due to a structural lack of truck drivers, environmental surcharges, and the overseas freight environment complexity exacerbated by the Red Sea crisis. The Drewry World Container Index has registered a strong increase, remaining 136% higher than last year's level. Packaging and chemical costs are also on the rise, driven by inflation, freight, and energy prices.
Corn and wheat quality concerns adding pressure on EU processors
Quality concerns in corn and wheat are impacting the EU starch industry. For corn, while global production is expected to be good, quality issues in some parts of Eastern Europe but also in France with the development of aflatoxins and other mycotoxins due to weather conditions is tightening the market for good quality non-GM Corn. Wheat quality is similarly affected due to weather conditions. Lower quality wheat is negatively impacting starch processors grinding capacity resulting in lower starch and gluten yields. As a result, it is affecting the processors’ overall performance. Quality concerns in corn and wheat are putting additional pressure on EU starch processors' performance, as sourcing high-quality raw materials becomes more challenging and costly.
Wheat quality affecting EU starch processors economics
Since 2016, the protein content in wheat as well as high value protein extracted by starch processors have gradually decreased by 15% which is substantially affecting the starch industry economics. Even if starch yields have slightly improved, it did not compensate for the loss of protein value which is reinforced by the substantial price decrease of gluten over the years.
Conclusion
The starch industry is navigating through a complex landscape marked by high costs, quality concerns in a recovering market demand environment. As we move into 2025, strategic planning and adaptability will be crucial for processors to remain competitive. The improving macroeconomic conditions and improving demand growth present opportunities, but the challenges of high costs and quality issues need to be meticulously managed. By staying informed and prepared, starch processors can navigate these turbulent times and offer competitive and sustainable solutions to the market.