Summary
Both EU sugar beet producers and EU sugar users have expressed concerns a long-term trend towards reduced indigenous EU sugar production is underway. EU sugar users feel this could threaten the competitive position of EU sugar-based food and drink manufacturers. This has led to calls for a ‘radical shift’ in EU sugar trade policy, involving variously: production process ‘mirror clauses’ in trade agreements; the extension of the mandatory EU forestry due diligence regulation to sugar; and the establishment of a traffic light system for regulating sugar imports depending on EU sugar stock levels. However, EC medium term forecasts for the EU sugar market suggest no such sugar market crisis is likely. While current shortages should boost market opportunities for ACP sugar exporters, EU sugar imports are down, in the face of high global sugar prices and massive increases in sea freight charges to Europe. Any structural decline in EU beet production should increase scope for ACP sales to EU beet/raw cane sugar co-refiners. This, however, could complicate the commercial position of full time EU raw cane sugar refiners, while any ‘radical shift’ in EU sugar trade policy could serve to further erode the value of ACP preferential access to EU sugar markets. Overall, ACP sugar exporters face an uncertain future on the EU market, which will require close monitoring and the adoption of targeted marketing strategies by different ACP sugar exporters.
- Production Developments in the EU Sugar Sector
For the 2020/21 sugar harvest EU27 (+ UK) sugar production was estimated at 14,467,374 tonnes, down 11% compared to the 2019/2020 season (1). According to CIBE (the association of European beet growers), 2020/21 was the third year of poor or adverse weather conditions, with yields being impacted by the ban on the use of neonic (NNI) seed treatment. Average yields in France were down 27% compared to the five-year average, while yields in other regions in Poland, Hungary, and Romania (and the UK) were down 25% (2).
CIBE seeks to set the latest change against the background of the withdrawal from regulatory approval of 22 active substances used in plant protection products in the sugar sector, with a similar number still awaiting scrutiny and approval by August 2022 (2). CIBE believes this shrinking of the ‘growers toolbox’ could carry serious implications for farmers production decisions. Indeed, the changed regulatory framework alongside increased input costs and relatively low beet prices, is making other crops more attractive to farmers. According to CIBE, since 2017/18 the area under sugar beet has fallen 15%. What is more, average yields per hectare have stalled or declined over the same period, with an increased variability of yields in many growing regions (2).
CIBE is deeply concerned about what appears to be a long-term trend towards reduced of EU production of sugar from domestically produced sugar beet. CIBE takes the view EU sugar beet growers ‘need rapid actions to meet current and future challenges,’ related to climate change, new pests and the competitive environment generated by third country suppliers, who currently do not have to meet the same production process and sustainability requirements as EU producers. Amongst the 8 third country sugar suppliers CIBE believes repeatedly violate sustainable production requirements are two ACP sugar exporters, Eswatini and Mozambique (2).
This has led CIBE to call for the inclusion of sustainability provisions in trade agreements to ensure third country suppliers meet the same production process requirements as domestic EU sugar beet producers. This, it is argued, should take the form of ‘mirror clauses’ in all EU trade agreements covering sugar imports (2).
In addition, CIBE wants to see the EU’s new forestry due diligence regulation extended to include sugar produced in third countries (see epamonitoring.net, ‘What Are the Implications of New EU Mandatory Forestry Due Diligence Requirements for ACP Agricultural Commodity Exporters?’ 2 December 2021). Overall CIBE argues current trends in EU sugar production call for a ‘radical shift in the EU trade policy to ensure level playing fields with imported products’ (2).
- Supply Side Concerns in the EU Sugar Sector
On the supply side, for the fourth year in a row the EU will be a net sugar importer. This needs to be seen in a context where the world market price remains elevated, in the face of another global sugar production deficit year (3). This is a matter of growing concern to EU industrial users of sugar.
According to CIUS (which represents over 15,000 sugar using companies which employs over 700,000 people), there is now a shortage of sugar on the EU market, with this threatening to disrupt production of value-added sugar products. This it is held, could include the closure of some product lines and potentially even some factories, as well as missed delivery schedules, which result in both financial penalties and reduced turnover (4).
CIUS cites reports of some sugar producers establishing supply quotas for sugar users and others refusing to take on new customers for the marketing year 2021/22. CIUS maintains this is not only affecting small and medium sized businesses but also large-scale companies. CIUS has expressed concern the EU sugar sector has entered ‘a longer-term deficit situation.’
According to CIUS, there are fears of a loss of competitiveness vis a vis high sugar content food and drink imports from third countries, where manufacturers do not face such sugar supply problems, with this distorting competition on the EU market.
In terms of imports, the high world market prices have seen a marked deterioration in EU (+UK) imports of sugar, with the attractiveness of the EU market to third country suppliers deteriorating considerably. In 2018/19 (October to September) EU (+UK) imports totalled 1,944, 000 tonnes, with this falling to 1,870,000 tonnes in 2019/20 and 1,365,000 tonnes in 2020/21, a decline of 29.8%. Meanwhile between 2019/20 and 2020/21 period supplies from EPA/EBA countries (largely ACP countries) fell from 754,000 tonnes to 489,000, a decline of 35.1%. The position of ACP sugar exporters on the EU and UK market thus appears to be weakening.
In addition, there are concerns about a growing dependence on imports, in the context of higher global sugar prices (up 48% for raw sugar and 34% for white sugar over the last year (5). This has taken world market prices to the highest levels since 2017. This comes on the back of rising freight costs and deferred, and delayed deliveries linked to Covid related shipping disruptions. Greater stock holdings at all levels in response to supply chain disruptions, are further seen as compounding this situation (4).
Against this background CIUS feels remedial action is required if the domestic competitiveness and export performance of the EU sugar-based food and drinks product industry is not to be undermined (4). CIUS has called for the establishment of market access arrangements for the EU market based on a traffic light system, with import arrangements varying depending on the market situation. This would include triggering access for sugar users to increased duty free imports of sugar when EU sugar stocks fall below 1.5 million tonnes. This is seen as essential ‘to avoid dramatic consequences for the sugar using food and drink industry’ (4).
According to CIUS for the second year in a row EU ending stocks have declined, with stocks now equivalent to only five weeks of consumption (4). However, EC data for the end of September 2021, put EU sugar stock levels at 2,362,000 tonnes (1).
However, this current situation cannot be divorced from price considerations, given average EU sugar prices and world market price are now virtually the same, while major freight cost increases have been faced in shipping to EU markets.
Price issues in the EU Sugar Sector
According to CIBE, although the EU has now become a net importer on a sustained basis, this has not had a noticeable impact on the beet price (3), despite the average EU white sugar price increasing €32/tonne from September 2020 to September 2021 (an increase of 8.5%). Despite this increase in the EU white sugar price, this increase was substantially lower than the increase in average global white sugar prices of 34%. According to CIBE this has left the EU average price premium over world market prices at ‘close to zero’ (2).
The key issue in terms of EU farmer production decisions is the relative prices of sugar beet and other potential crops, which can be grown within mixed farming systems. Against this background, CIBE has identified a range of contractual issues which need to be addressed along domestic EU supply chains, if the attractiveness of sugar beet production is to be enhanced and the current trend in farmers exiting sugar beet production is to be reversed.
CIUS takes a different view on pricing issues maintaining a 25% increase in the sugar price has occurred in recent years, but with this failing to halt the decline in beet production (4). The ACP meanwhile have argued they can meet EU sugar needs if a fair price is offered (2).
However, it should be noted there is considerable controversy over the accuracy of EC collected sugar price data. EU average price reporting is seen as being increasingly disconnected from market realities.
Even on the basis of recorded EU data, there is considerable discrepancy in average prices across EU member states, depending on whether the region is a sugar surplus producing or sugar deficit area. A price differential of €73/tonne exists between region 1 and region 3 countries, in the context of an average EU price of €408/tonne (a price differential of some 18% of the average price). The prices obtainable for sugar thus depend on where the sugar is sold. These differences in market prices are not fully reflected in beet prices according to CIBE (1).
Future Prospects for the EU Sugar Sector
For the 2021/22 harvest CIBE see’s growing conditions as more favourable, with an average campaign now expected (2). This being noted EU domestic sugar production would still be below EU consumer demand, with according to CIUs total EU demand of 17.5 million and a projected production of 16.3 million tonnes (4).
In terms of the longer-term, the latest EU Agricultural Outlook Report which covers the period 2021 to 2031, projects EU sugar beet production by 2031 at 106.2 million tonnes, down only 2% on the average for the 2019/2021 period. EU sugar consumption meanwhile is projected to fall to 15.9 million tonnes of white sugar equivalent, a 4.2% decline over average consumption levels from 2019 to 2021 level (6).
EU sugar imports, meanwhile, are projected at 1.4 million tonnes in 2031, down from an average of 1.7 million over the 2019/2021 period, a decline of 17.6%.
In contrast EU sugar exports are projected to increase from an average of 0.9 million tonnes over the 2019-21 period to 1.7 million tonnes by 2031.
EU ending stocks meanwhile are projected to remain healthy, rising from an average of 2 million tonnes over the 2019 to 2021 period to 2.6 million tonnes in the middle of the projection period and 2.3 million by 2031 (6).
However, this projection of EU sugar beet production levels by 2031, would appear at variance with current sugar beet producer and sugar user concerns and inconsistent with current trend in EU sugar beet production, given the apparent exodus of producers out of sugar beet production.
| Comment and Analysis The reported shortage of sugar on the EU market should be good news for ACP and LDC sugar exporters, who enjoy full duty-free/quota-free access to the EU and UK markets. However, with high global sugar prices and the average EU price premium over world market prices having largely disappeared, ACP sugar exporters are not finding the EU market attractive. This cannot be divorced from the current exceptionally high shipping rates, an issue of particular concern to ACP producers which have expanding regional demand on their doorstep (e.g., for highly competitive Southern African sugar producers). It may also be linked to contractual arrangements which leave little scope for accommodating the recent escalation in sea freight rates. These contracting and pricing issues may require a re-thinking of the marketing strategies of individual ACP sugar exporters. The nature of these revised marketing strategies is likely to be influenced by whether or not there is a long-term trend towards a reduction in EU sugar production from domestically grown beet. If there is a large-scale exodus of EU farmers out of sugar beet production, then this could greatly increase the scope for the co-refining of imported raw cane sugar, as, in the face of reduced indigenous sugar beet-based production, EU beet sugar refiners with installed co-refining capacity expand their operations in an effort to retain existing clients. In addition, it should be borne in mind that even increased uncertainties around sugar beet deliveries could create opportunities for spot market sales of ACP raw cane sugar for co-refining. Either of these developments could offer better opportunities for ACP raw cane sugar exporters to secure higher prices. This is particularly the case if co-refining for raw cane sugar was to offer greater opportunities for avoiding rules of origin complications under the EU/UK TCA which currently face full time raw cane sugar refiners, in their product offerings to manufacturers of high sugar content food and drink products (see epamonitoring.net article, ‘What Does the New EU UK Trade Agreement Mean for ACP Sugar Exporters?’, 21 January 2021). Whether these opportunities for expanded sale to EU beet sugar co-refiners emerge will depend on the accounting processes allowed for determining the originating status of co-refined raw cane sugar. ACP exporters should keep a close eye on developments in this regard. However, any expansion of co-refining of raw cane sugar by EU beet processors could create difficulties for dedicated raw cane sugar refiners, who would be faced with having to compete on price with co-refiners for raw cane sugar supplies, in a context where co-refining fixed costs are carried on their beet processing operations. In addition, if co-refiners were to enjoy an inside track in providing guarantees of originating status for food and drink manufacturers serving both EU and UK markets, then this could further erode the competitive position of full-time raw cane sugar refiners. This would account for why CIUS has expressed concern of the future commercial sustainability of dedicated raw cane sugar refiners (4). This would appear to be a particularly relevant concerns for Tate & Lyle Sugars Thames refinery, on which a number of ACP sugar exporters depend. Beyond these trends and issues, a potential area of concern for ACP sugar exporters arises from CIBE calls for ‘a radical shift’ in EU sugar sector trade policy, involving the establishment of ‘mirror clauses’ in trade agreements and even the extension of the EU’s mandatory forestry due diligence regulation to sugar. The ‘mirror clause’ would require third country suppliers to meet the same production process requirements as EU beet producers. This could place not only new production process requirements on ACP sugar producers, but could also generate substantial internal trade administration burdens, given the need to document compliance. The CIBE call for the extension of the EU forestry due diligence regulation to sugar is of less concern to ACP sugar producers, given most ACP production is not in forested areas. However, in the future it could raise issues for Caribbean exporters, such as Guyana and Belize. An additional area of potential concern is the call from CIUS for the establishment of a ‘traffic light’ system for sugar imports, which would allow increased duty-free imports of sugar at world market prices if EU sugar stocks fall below 1.5 million tonnes. The introduction of such a traffic light system would represent a significant adjustment to EU sugar sector trade policy. Depending on the future level of commitment of EU farmers to beet production, this could give rise to a further substantial level of erosion of the margins of ACP tariff preferences in the sugar sector. This could potentially see the establishment of a discretionary tariff rate quota for duty free raw cane sugar imports, which would be triggered once EU stock levels fell below a certain level. A last point to note is the substantial sugar price differentials across national markets in the EU, with this largely being determined by whether a region is a sugar surplus or sugar deficit production area. This creates a situation where opportunities may exist for ACP exporters to maximise earnings by selling to refiners in sugar deficit regions of the EU. A range of ACP sugar exporters already appear to be pursuing such revenue maximisation strategies in serving the EU markets. This being noted international sea freight disruptions and associated rising international sea freight costs, could serve to further worsen the position of these dedicated raw cane sugar refiners, compared to northern European beet processors. Against this background the overall situation facing ACP sugar exporters appears rather uncertain, with a close monitoring of development being required. Such close monitoring would then need to inform the future marketing strategies adopted by different ACP sugar exporters. |
Sources:
(1) EC, ‘Sugar Market situation’ AGRI G 4, Expert Group on Sugar Market Observatory, 09 November 2021
https://ec.europa.eu/info/food-farming-fisheries/farming/facts-and-figures/markets/overviews/market-observatories/sugar/expert-group_en#y2018
(2) Point of access for, CIBE, ‘Market situation for EU sugar beet farmers,’ 8 November 2021
https://ec.europa.eu/info/food-farming-fisheries/farming/facts-and-figures/markets/overviews/market-observatories/sugar/expert-group_en#y2018
(3) Sugar Market Observatory, Meeting Summary,’ 9 September 2021
https://ec.europa.eu/info/sites/default/files/food-farming-fisheries/farming/documents/sugar-mo-2021-11-09-report_en.pdf
(4) Point of access for, CIUS, The demand side of the sugar market: views of the European sugar users,’ 9 November 2021
https://ec.europa.eu/info/food-farming-fisheries/farming/facts-and-figures/markets/overviews/market-observatories/sugar/expert-group_en#y2018
(5) Point of access for, The European Association of Sugar Traders, ‘Meeting of the Economic Board of the Sugar Market Observatory,’ 9 November 2021
https://ec.europa.eu/info/food-farming-fisheries/farming/facts-and-figures/markets/overviews/market-observatories/sugar/expert-group_en#y2018
(6) EC, ‘EU Agricultural Outlooks: Prospects for EU Agricultural Markets and Income 2021 -2031
https://ec.europa.eu/info/sites/default/files/food-farming-fisheries/farming/documents/agricultural-outlook-2021-report_en.pdf