Dramatic Changes Ahead in the EU Sugar Market

Summary
The EU sugar sector is entering a new period in its development with the abolition of sugar production quotas: boosting production at the same time as domestic consumption is contracting; lowering average prices; and doubling exports at the same time as imports are halved. This will impact not only on domestic EU markets but also international markets, given the growing global orientation of EU sugar companies and the increased price competitiveness of EU sugar production. This will transform the market context facing ACP sugar exporters as well as the competitive position of ACP producers on regional markets. This will make the continued use of non-tariff trade policy measures a critical policy issue. This adverse market situation will be compounded by the market effects of Brexit, a policy development not yet factored into EC projections given the uncertainty surrounding the final EU27/UK post Brexit trade arrangements.

…EU sugar production…

With the abolition of sugar production quotas EU sugar production is set to expand dramatically in 2017 to 20.5 million tonnes, up from 16.8 million in 2016 (+22%) (2). Subsequently production levels will gradually fall as producers in different regions of the EU adjust to the new price and market realities. Higher cost EU producers will exit; while low costs sugar producers will expand production. Average EU sugar production costs will then fall, increasing the competitiveness if EU sugar exports (1).

Average EU sugar production from 2018 to 2022 is projected at around 19.56 million tonnes some 15% above the average of the five years from 2012 to 2016 (17.02 million tonnes). Average production from 2023 to 2027 is projected at 19.1 million tonnes, falling to 18.9 million per annum in the following three years to 2030 (2).

Projected EU28 Sugar Production 2017-2030 (million tonnes)

	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Production	20.5	20.0	19.7	19.5	19.3	19.3	19.2	19.2	19.1	19.0	19.0	18.9	18.9	18.9

Past EU28 Sugar Production 2005-2016 (million tonnes)

	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Production	21.1	16.5	16.1	14.9	16.4	16.1	18.5	17.1	16.7	19.6	14.9	16.8

Source: EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, tables, December 2017:
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf

…EU sugar consumption trends…

This expansion of EU sugar production will occur at the same time as EU sugar consumption is declining in response to health concerns around the high levels of sugar in processed food and drinks. According to the EC’s latest report EU sugar consumption is projected to fall from ‘18.5 million tonnes in 2017/18 to 17.5 million tonnes by 2030/31’ (-5.4%). The EC reports retail sales confirming this trend towards reduced consumption of high sugar content food and drinks, with around a 1-2% reduction in ‘per capita consumption of confectionery and soft drinks in the EU28 over the last 5 years’.

According to the EC ‘several food companies have responded to the changes in demand and regularly announce their commitment to reduce added sugars in recipes’. This trend is being further stimulated by public policy interventions in the form of taxes on the sugar content of food and drinks. According to the EC such taxes are already under implementation ‘in Finland, France and Hungary (broadened to all products with unhealthy sugar levels)’ and are scheduled to be ‘implemented in Ireland and the UK’ in 2018 (1).

This trend towards reduced sugar consumption in the EU contrasts sharply with trends in global sugar consumption, which in the coming years is projected to grow at the same level as in the last decade at between 4 to 5 million tonnes per annum. Much of this consumption growth will be concentrated in Asia, with China, India and Pakistan accounting for 40% of growth in global sugar consumption (1). It should come as no surprise therefore that EU sugar companies are increasingly globally orientated (see companion article ‘Tereos Expanding its Presence the East African Sugar Sector’, 22 September 2017).

Projected EU28 Sugar Consumption 2017-2030 (million tonnes)

	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Consumption	18.5	18.4	18.3	18.3	18.2	18.1	187.0	17.9	17.9	17.8	17.7	17.6	17.6	17.5

Past EU28 Sugar Consumption 2005-2016 (million tonnes)

	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Consumption	21.0	18.1	17.5	17.8	17.1	18.9	18.6	18.6	19.1	19.6	18.5	18.4

…Price Effects of EU Production Expansion and Stagnation of Consumption…

This expansion of EU sugar production in response to both the removal of quantitative restrictions on sugar production from beet and the expansion of the area under beet will see EU sugar prices fall. The price fall will be particular dramatic in 2017, with a slight recovery in 2018. From 2018 to 2022 average EU sugar price will be around €401.8/tonne. This would be some 22.7% below the average sugar price in the period from 2012 to 2016 (€519.8/tonne). From 2023 to 2030 EU sugar prices are projected to average around €399/tonne, some 23.2% below the average sugar price in the period from 2012 to 2016 (2).

Projected EU28 Sugar Prices 2017-2030 (€/tonne)

	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
EU €/t	359	402	423	403	399	402	400	403	403	400	400	396	396	394
World €/t	344	367	383	363	359	361	360	363	362	360	360	357	356	354
EU premium	+15	+35	+40	+40	+40	+41	+40	+40	+41	+40	+40	+39	+40	+40

Past EU28 Sugar Prices 2005-2016 (€/tonne)

	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
EU €/t	631	626	606	565	488	515	679	723	600	425	428	443
World €/t	325	262	250	283	419	543	440	392	355	351	388	445
EU premium	+306	+364	+356	+282	+69	-28	+239	+331	+245	+74	+40	-2

…The Import Demand Effects of EU Sugar Reforms…

In 2017 EU import demand is put at only 56.5% of the level in 2016 (1.3 million tonnes compared to 2.3 million), with only a marginal recovery in some years to 1.5 million tonnes. On average between 2018 and 2030 annual imports are projected at 1,384,615 tonnes. This compares to an annual average import level of 2.99 million tonnes over the 2007 to 2016 period (a reduction of 53.7%) (2).

Projected EU Sugar Imports (million tonnes)

	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Imports	1.3	1.3	1.4	1.4	1.5	1.5	1.5	1.4	1.4	1.4	1.3	1.3	1.3	1.3

Past EU Sugar Imports (million tonnes)

	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Imports	4.3	3.1	2.7	3.2	2.7	3.4	3.3	3.6	3.1	2.7	2.9	2.3

…The Export Effects of EU Sugar Reforms….

In 2017 EU sugar exports are projected to increase dramatically to 3 million tonnes, before stabilising at between 2.6 and 2.8 million tonnes in the years to 2030 (average 2,676,923 tonnes).

Projected EU28 Sugar Exports 2017-2030 (million tonnes)

	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030
Exports	3.0	2.8	2.8	2.6	2.7	2.7	2.6	2.6	2.7	2.7	2.7	2.7	2.6	2.6

Past EU28 Sugar Exports 2005-2016 (million tonnes)

	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Exports	6.9	1.5	1.5	1.2	2.4	1.0	2.0	1.3	1.4	1.4	1.3	1.3

Source: EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, tables, December 2017:https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf

This contrasts to average exports of 1.48 million tonnes over the period from 2007 to 2016 (an average 81% increase in export volumes compared to the past decade) (2).

…The Global Context of Increased EU Exports and Reduced EU Imports…

After a period of a deficit in global sugar production in 2017/18 global sugar production will once again return to a surplus situation. The EC expects global sugar production to expand in line with consumption growth. In this context the situation of surplus production is expected to continue. Brazil and Thailand will play a major role in this expansion of global sugar production, producing 33% and 46% more respectively according to EC projections (1).

This return to surplus global sugar production has seen global sugar prices falling ‘from € 513/t in February 2017 to €310/t in September 2017’. Looking forward the EC projects global sugar prices at around €260/tonne to 2030 (1).

It is noteworthy that the net trade effect of EU sugar sector reforms is equivalent to around 2.8 million tonnes of additional sugar being placed on the global market, in a context where production is projected to increase between 4 to 5 million tonnes per annum in the coming years in line with growing global consumption. The market effects of EU sugar reforms can thus be seen as quite significant given the return to a global sugar production surplus.

…The Brexit Effect…

While the EC’s projections do not factor in the impact of the withdrawal of the UK from the EU given the final post-Brexit trade arrangement remains unknown, it nevertheless makes some interesting observations in regard to the context and impact of Brexit in the sugar sector. The analysis notes how ‘in terms of trade, while exports from the UK to non-EU countries are minimal, the UK exports close to 0.4 million t to EU-27 countries’. The UK also imported some 500,000 tonnes of white sugar from EU27 members in 2016/17. The UK also accounted for ‘23 % of overall EU-28 imports of raw sugar over the last five marketing years’, although only ‘slightly over 0.3 million t in 2016/2017’ (1).

It further notes how ‘sugar beet production in the UK has shown a steady decline over the years’, from an area under beet of ‘around 170 000 ha in the early 2000s… to around 90 000 ha in 2015-2017’. According to the EC in the UK the ‘sugar beet yield is on average 4 % lower than in the rest of the EU-28’, while ‘the sugar content of beets processed into sugar in the UK has been 2 % higher’. The EC estimates UK sugar production at ‘almost 1.1 million t in 2017/2018, up from 0.9 million t in the preceding marketing year’. (1) However ABF the sole UK beet processor estimates UK sugar production at ‘in excess of 1.4 million tonnes’ for 2017/18 (2).

Comment

It is noteworthy that EC projections in the December 2017 outlook report are projecting higher EU production (+5%) and significantly higher levels of EU sugar exports (some 22.8% higher on average)than in the December 2016 prospects report. This suggests EU sugar companies in competitive sugar production zones are expanding production more extensively in response to production quota abolition than projected in December 2016 and that the contraction of production in less competitive sugar production zones is slower given the continued deployed of coupled sugar sector payments. This has occurred despite the deterioration in global sugar market price prospects as a result of a return to a global surplus in sugar production.

In terms of the price effects of EU sugar sector reforms, with an average EU sugar price premium of only €40/tonne in the coming years, this is likely to discourage imports of CXL sugar into the EU given the €98/tonne duty imposed. According to the EC this will create a situation where ‘most post-quota imports will come under the duty-free agreements’. This will mean only preferred suppliers, such as those in the ACP, are likely to be able to export profitably to the EU.

However not all ACP exporters will be in the same position. High cost ACP producers in the Caribbean and Pacific, unless subsidised by the state or exporting value added or quality differentiated sugars, are likely to be unable to compete with lower cost ACP sugar producers in Southern Africa, particular South Africa with its newly established TRQ of 150,000 tonnes (12.5% of projected EU27 import demand).

Actual sugar trade flows from Southern and Eastern Africa to the EU however are likely to be determined by the profit maximisation strategies of those regional sugar companies with a strong corporate presence in the EU, notably via the Illovo/ABF corporate link and the Altea/Tereos corporate link.

The observation that the UK imported some 500,000 tonnes of white sugar from EU27 members in 2016/17 and has exported around 400,000 tonnes of white sugar to EU member states suggests that a ‘hard’ Brexit could leave both EU27 and UK exporters looking for alternative markets for around 900,000 tonnes of white sugar. The placing of part of this tonnage on the world market would be additional to the projected increase in export volumes of 1.2 million tonnes.

A ‘hard’ Brexit in which the EU27 and the UK imposed standard MFN duties on mutual trade in sugar could thus be expected to have important price effects on global sugar markets, given projected global trends in production growth which will match consumption growth.

This would account for why both EU and UK sugar companies are positioning themselves to expand sugar sales into African markets. The most notable recent developments in this regard are the expansion of the international marketing activities of Tereos into Africa (see companion article ‘Tereos Expanding its Presence the East African Sugar Sector’, 22 September 2017) and the full take-over of Illovo by Associated British Foods

Sources
(1) EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, Full Text, December 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-fullrep_en.pdf
(2) EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, Tables, December 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf
(3) ABF, ‘Associated British Foods Annual Report and Accounts 2017’,
https://www.abf.co.uk/documents/pdfs/arcr-2017/abf_ar_2017.pdf