Summary
Both Tereos and Cristal Union have announced plans to expand sugar beet plantings by 25% in the 2017/18 season, as EU sugar companies’ battle for market position in a post-production quota EU market. The corresponding contraction of sugar production in areas less favoured for sugar production is however undermined by continued deployment of coupled sugar specific sugar to producers in 10 EU member states accounting for 35% of the total area under sugar beet in the EU in 2016/17. These payments range from €67 to €518 per ha. The trade effects of these policy driven distortions will be most severely felt by traditionally preferred ACP sugar exporters, as EU sugar imports contract and exports expand. ACP sugar exporters will need to radically rethink their market positioning strategies if they are to profitably export to the EU.
Despite sugar futures reaching a 16 month low in mid-June 2017 (at 13.06 cents a pound for October delivery) (1), the French farming cooperative Tereos, which is the third largest sugar producer in the world, has announced plans to expand its sugar beet production by 25% in response to the abolition of EU sugar production quotas in October 2017 (2).
Tereos, has announced its ‘processing volumes in 2017-18 will hit 19m tonnes’, having offered its producers ‘clear, fair and long-term contractual arrangements’ with ‘a guaranteed price for the crop’ beyond the termination of EU sugar production quotas (2).
Tereos sees itself as well placed to profitably expand its presence on the EU sugar and ethanol markets post-quota abolition, given the efficiency of its farmer owners who ‘typically achieve yields comfortably above 80 tonnes per hectare, ahead of figures of 70 tonnes per hectare more common in the Nordic countries and the UK, and 40 tonnes per hectare or so in Romania’. Investments have already been made in expanding capacity to cope with the increased production (2).
With investments already having been made Tereos has reported an increase in earnings before interest, tax, depreciation and amortisation (ebitda). At the end of March 2017 Tereos reported after-tax earnings of ‘€107m, compared with a €40 loss a year before’ (2).
Tereos is not alone in its expansion plans, with its national rival Cristal Union, Europe’s fourth largest sugar producer, also forecasting ‘a 25% rise in beet sowings’, although actual production growth could be held back by the dry conditions prevailing in the EU (2).
Sucden has projected a 15% expansion in EU sugar beet sowings with France and Germany leading the way (together these two EU member states account for 49% of the area under sugar beet in the EU) (8). USDA for its part is expecting EU sugar production of 18.6 million tonnes, with exports increasing 50% to 2.2 million tonnes (2) (for more details see companion article ‘USDA foresees greater price instability as EU sugar production quotas end’, 25 May 2017).
ISO meanwhile is warning of a strong draw down on global sugar stocks, which could ease price pressures despite a return to a global sugar production surplus of ‘about 3 million tonnes’. Increased EU sugar production is expected to be offset by a down grading of estimates for sugar production in Brazil, China, Thailand and the US (3). The situation is however uncertain, given low oil prices, which have given rise to an ethanol parity price of 12.75 cents a pound (the ethanol parity price is the price at which ethanol production becomes more attractive for Brazilian mills to manufacture ethanol rather than sugar from cane production) (1).
| Comment and Analysis
Given the efficiency of French sugar beet production the plans to expand sugar beet sowings in response to sugar production quota abolition announced by French sugar companies should come as no surprise. This is wholly consistent with the logic of EU CAP reforms, which seeks to shift production of individual crops to the most agronomically suited regions of the EU, rather than having all regions produce all crops with the benefit of public aid. The other side of the coin of CAP reform is that production will contract in less favoured areas to balance the expansion in more favoured areas, leading to overall efficiency gains across the EU agricultural sector. Unfortunately this logic of CAP reform is being impeded by politically driven policy decisions which have expanded the scope for the deployment of ‘coupled’ support payments tied to the production of individual crops. In the sugar beet sector EU rules allow coupled support to be provided to beet production on up to 497,200 hectares (35% of the area under sugar beet in the EU in 2016/17) (7), with payments being made of up to € 354 euro per hectare (4). No less than 10 EU member states are making use of coupled payments, with this providing support to less advantaged sugar producing areas which are currently responsible for 26.2% of EU sugar production quotas. These coupled payments serve to sustain sugar beet production in these less favoured for sugar production and hold back a balancing contraction of sugar production in less favoured production areas, which is a necessary complement of expanded production in more favoured area such as France. This contributes to a far greater expansion of overall EU sugar production than would be the case in the absence of such targeted coupled farm payments. This higher level of EU sugar production will reduce both EU import demand and, as the USDA has pointed out, expand EU sugar exports by a projected 50% despite the current low global sugar prices. Coupled sugar beet payments by member state, area and €/ha 2015 -2020
Source: EC, ‘Voluntary coupled support – Sectors mostly supported, Notification of decisions taken by Member States by 1 August 2014’, Informative note 30 July 2015 While the EU speaks of deregulating the EU sugar market and is gradually moving towards allowing market force more play, the performance of the EU sugar sector is still strongly influenced by CAP policy choices made by national governments within the common policy framework. These policy choice have important trade effects impacting on both EU imports and exports of sugar. These trade effects are particularly important for ACP countries given the traditional preferential access enjoyed to the EU sugar market. Indeed between 1975 and September 2009, when the ACP-EU Sugar Protocol came to an end (5), ACP sugar supplies were an integral part of EC calculations of the overall EU market sugar balance. Those days are now well and truly coming to an end, with ACP sugar exporters now needing to radically rethink their market positioning strategies when trading into the EU (for more details see companion article ‘USDA foresees greater price instability as EU sugar production quotas end’, 25 May 2017). It should be noted that while ACP sugar exporters received substantial assistance through the Sugar Protocol Accompanying Measures Programme (6) to adjust to the end of the Sugar Protocol, two subsequent policy developments have occurred which exacerbate the adjustment challenges facing ACP sugar exporters. Firstly the continuation of coupled support payments in the sugar sector, which sustains EU sugar production at higher levels than would be the case in the absence of such payments. Secondly the UK’s departure from the EU which effectively removes between 17% and 26% of current EU sugar import demand (for more details see companion article, ‘Multiple challenges pending for ACP sugar exporters’, 1 May 2017). Against this background a case can be made for targeted market adjustment support to assist ACP sugar exporters in adjusting to the market consequences of Brexit and the continued deployment of coupled payments to EU sugar producers in nominally disadvantaged areas. |
Sources:
(1) Agrimoney.com, ‘Corn, coffee, cotton, soy, sugar prices hit multi-month lows’, 22 June 2017
http://www.agrimoney.com/marketreport/corn-coffee-cotton-soy-sugar-prices-hit-multi-month-lows–4145.html
(2) Agrimoney.com, ‘Tereos underlines industry scramble to exploit EU sugar shake-up’, 22 June 2017
http://www.agrimoney.com/news/tereos-underlines-industry-scramble-to-exploit-eu-sugar-shake-up–10825.html
(3) Agrimoney.com, ‘Sugar futures plunge – even as ISO warns against price gloom’, 1 June 2017
http://www.agrimoney.com/news/sugar-futures-plunge—even-as-iso-warns-over-price-gloom–10773.html
(4) EC, ‘Voluntary coupled support – Sectors mostly supported, Notification of decisions taken by Member States by 1 August 2014’, Informative note 30 July 2015
https://ec.europa.eu/agriculture/sites/agriculture/files/direct-support/direct-payments/docs/voluntary-coupled-support-note_en.pdf
(5) Agritrade, ‘The sugar protocol is denounced’, 8 November 2007
http://agritrade.cta.int/Agriculture/Commodities/Sugar/The-sugar-protocol-is-denounced
(6) For details of the EC approach see Agritrade, ‘A review of the EU sugar-sector action plan’, 14 February 2005
http://agritrade.cta.int/en/Resources/Agritrade-documents/Special-reports/A-review-of-the-EU-sugar-sector-action-plan
(7) EC, ‘Sugar market situation’, AGRI G 4, Committee for the Common Organisation of Agricultural Markets, 30 May 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/sugar/presentations/market-situation_en.pdf
(8) Eurostat, ‘Share of area under sugar beet by main EU Member States, 2015 (% of total EU-28 area under sugar beet)’
http://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Share_of_area_under_sugar_beet_by_main_EU_Member_States,_2015_(%25_of_total_EU-28_area_under_sugar_beet).png&oldid=331523
.png&oldid=331523){kind=link}
| Key words: Sugar, Tereos, Cristal Union Area for Posting: Sugar, CAP Reform, Corporate |