The Impact of EU Sugar Reforms on Traditional African Caribbean and Pacific Sugar Exporters (1)
Summary
The reduction of EU sugar prices and scheduled abolition of EU sugar production quotas have and will continue to transform the market conditions faced by ACP sugar exporters to the EU. Under the impact of EU sugar sector reforms prices on sugar markets served by ACP sugar exporters are likely to be increasingly volatile. In addition the consolidation and internationalisation of European sugar companies which EU reforms have given rise to are having important effects on patterns of ACP-EU sugar trade. Intensified competition on EU sugar markets is bringing into question the financial sustainability of the full-time raw cane sugar refiners who traditionally refined ACP raw sugar exports. The final stages of EU sugar sector reforms will carry particularly profound consequences for smallholder sugar cane farmers in ACP countries. Close attention will ned to be paid to strengthen the regulatory framework for the functioning of ACP-EU sugar supply chains. This will need to include the development of new revenue sharing formulas which allow independent sugar cane growers to gain a share of revenues from the new products increasingly manufactured from sugar cane.
The challenges faced in ACP-EU sugar sector relations will be further complicated by the impending departure of the UK from the EU.
From 1975 onwards, initially under the Sugar Protocol, the special preferential sugar arrangement and subsequently the EBA initiative, sugar producers in a growing number of African, Caribbean and Pacific (ACP) countries enjoyed quota restricted duty free access to the EU market. These quota restricted imports took place at guaranteed prices (linked to internal EU prices) which were at times three to four times higher than world market sugar prices. Under the traditional EU sugar regime these imports from ACP countries were an integral part of the EU supply balance.
Under the impact of EU sugar sector reforms initiated in 2005, the EU set in motion a process of reducing guaranteed prices alongside an expansion of direct aid payment for EU sugar producers (in line with reforms in other sectors). In October 2007 the EC announced the repudiation of the Sugar Protocol, which from October 2009 removed price guarantees for sugar imported from ACP countries.
In a context of high world market prices, which helped support EU market prices in the face of the lowering of EU guaranteed prices, the first stages of EU sugar sector reforms impacted less severely on ACP exporters as a whole than initially projected. While some ACP suppliers terminated sugar sales to the EU, other ACP suppliers expanded their sales to the EU. This was made possible by the establishment in 2008 of a ceiling on sugar imports from the ACP at a level which effectively no longer limited the volume of exports. By 2013/14 this saw ACP/LDC sugar exports to the EU reach 2.193 million tonnes (a 37% increase over pre-reform levels).
The substantial decline in world market prices since July 2011 is however impacting on EU prices and reducing the returns to ACP sugar exporters. However since EU prices have fallen less than world market prices by June 2015 the EU market still offered higher revenues than world market sugar sales. By 2016 however this position was reversed, with world market spot prices for sugar above EU sugar prices. (3) Prices on sugar markets served by ACP sugar exporters are likely to be increasingly volatile, as changes in world market sugar prices impact more fully on the functioning of EU sugar markets, after the abolition of EU sugar production quotas in October 2017.
However further planned EU sugar sector reforms, notably the scheduled abolition of national sugar production quotas in October 2017, will have profound effects both on the prices paid for sugar imports from traditional preferred African, Caribbean and Pacific suppliers and the overall volume of EU sugar imports. This is projected to see EU prices fall by 33% compared to 2013 price levels, a progressive 5% increase in EU sugar production and a 50% decline in overall EU import demand. (2)
The increase in EU sugar production despite the dramatic decline in market prices is attributable to:
- the increased efficiency in overall EU sugar beet production and sugar extraction;
- the diversification of revenue sources from sugar beet processing which is underway;
- the abolition of EU sugar production quotas (which will immediately bring out-of-quota beet production onto the EU sugar market);
- the ongoing system of public sector support to EU sugar beet producers (consisting of both the ‘decoupled’ single farm payments and since the 2013 round of CAP reforms increased levels of ‘coupled’ support for sugar producers in a limited number (10) of EU member states);
- the continuation of a highly protective sugar trade regime.
In addition to the price and import demand effects of ongoing reforms, the sugar sector reform process has also promoted a consolidation and internationalisation of European sugar companies. This is having important effects on patterns of ACP-EU sugar trade. In particular it has intensified competition on national EU sugar markets, where traditional raw cane sugar refiners traditionally played an important role. The intensified competition arising from a large scale expansion of raw cane sugar refining by sugar beet processing companies, is bringing into question the financial sustainability of the full-time raw cane sugar refiners who traditionally refined ACP raw sugar exports.
This situation is further complicated by the impending departure of the UK from the EU. Unless specific UK government trade policy initiatives are adopted, this will create considerable uncertainty over the future basis for access of ACP sugar exports to the UK market. The UK market has traditionally been an important market for ACP sugar exports. This uncertainty is further compounded by the lack of clarity over the UK’s future import regime for sugar, with the principal cane sugar refiner, Tate & Lyle Sugars lobbying forcefully for the abolition post BREXIT of the current applied EU tariff of €98/tonne on imports of sugar from the world market into the UK. The abolition of this import duty could profoundly impact on the value of any continued ACP duty free-quota free access to the UK sugar market, should ACP governments be successful in securing the extension of existing preferential access to the UK market in the immediate post-BREXIT period.
The projected price and import demand effects of EU production quota abolition will carry particularly profound consequences for smallholder sugar cane farmers in ACP countries. Particularly in those countries with a high dependence on the EU market for sugar sales (notably in Africa – Swaziland, in the Caribbean – Belize, Guyana, Jamaica and Barbados, and in the Pacific – Fiji). While many of the milling/refining companies in competitive African, Caribbean and Pacific sugar producing countries are diversifying their revenues from cane processing away from raw sugar markets (through sales of alcohol, ethanol, co-generated electricity, bottled water, fertiliser animal feed and even chemicals and plastics), independent small and medium sized sugar cane farmers will remain dependent on cane payments based solely on revenues derived from sales of sugar and molasses.
Unless formulas can be found which allow independent cane growers to gain a share of revenues from new products manufactured from sugar cane (i.e. beyond sugar and molasses sales) then the future commercial viability of independent sugar cane farmers, particularly small holder sugar farmers looks uncertain.
The fact that investments in the expansion of smallholder sugar farming has been supported under the Accompanying Measures for Sugar Protocol programmes, without a proper assessment of the long term commercial implications of the on-going process of EU sugar sector reform for small scale sugar producers, suggests important issues of policy coherence have been left unaddressed in the sugar sector.
Recommendations
- EU sugar sector companies have a poor record in terms of avoiding abuse of dominant market positions, with this suggesting a need to strengthen the regulatory framework for the functioning of ACP-EU sugar supply chains.
- The EC should bring its substantive analytical work on strengthening the functioning of agricultural supply chains to bear on initiatives to strengthen the functioning of ACP-EU sugar supply chains, so as to avoid abuse of the dominant market position which EU sugar companies enjoy within ACP-EU sugar supply chains.
- This should include a broadening out of EC initiatives to monitor price developments on EU sugar markets, to include more detailed analysis of price developments within ACP-EU sugar supply chains.
- As sugar prices on the EU market fall and the volume of sugar imported into the EU declines (including as a result of the UK’s departure from the EU), so the importance of non-sugar sales revenues will increase, with this suggesting a need for policy initiatives to expand the participation of smallholder sugar farmers in revenue sharing arrangements linked to non-sugar and molasses revenues, derived from the further processing of sugar cane.
- This particularly relates to the issue of the pooling of proceeds from sales of sugar cane based products and their division between growers and millers.
- This is likely to be a critical issue to the future financial viability of both sugar cane production by smallholder farmers and independent growers in ACP countries.
- The EU should support initiatives to share experience amongst smallholder sugar farmers on the pooling and sharing of new revenue streams, and promote best practices, as part of its sugar sector adjustment support measures in ACP countries.
Source:
(1) Initiativet for Handel og Udvikling , ‘The Impact of EU Sugar Reforms on Traditional African Caribbean and Pacific Sugar Exporters’, November 2015
http://ihu.dk/media/cms_page_media/47/EU_Sugar_Reforms.pdf
Research for these analytical papers posted by Initiativet for Handel og Udvikling in November 2015 was financed by ActionAid Denmark in the summer of 2015.
(2) EC, ‘Prospects for EU Agricultural markets and income 2014-2024’, December 2014,
http://www.lafranceagricole.fr/var/gfa/storage/fichiers-pdf/Docs/2014/Commission-081214.pdf
(3) EC, ‘Prospects for EU Agricultural markets and income 2014-2026’, December 2016,
https://ec.europa.eu/agriculture/sites/agriculture/files/mp-mto-2016-fullrep_en.pdf
Additional Background Materials on the Evolution of EU Sugar Policy
Agritrade, ‘Executive Brief Update 2013: Sugar sector’, 16 December 2013
http://agritrade.cta.int/Agriculture/Commodities/Sugar/Executive-Brief-Update-2013-Sugar-sector
Agritrade, ‘Executive Brief Update 2012: Sugar sector’, 12 July 2012
http://agritrade.cta.int/Agriculture/Commodities/Sugar/Executive-Brief-Update-2012-Sugar-sector
Agritrade, ‘Executive Brief Update 2011: Sugar sector’, 31 October 2011
http://agritrade.cta.int/Agriculture/Commodities/Sugar/Executive-Brief-Update-2011-Sugar-sector
Agritrade, ‘Sugar: Trade issues for the ACP’, 31 March 2010
http://agritrade.cta.int/Agriculture/Commodities/Sugar/Sugar-Trade-issues-for-the-ACP