Global Sugar Market Trends Could Increase Pressure on ACP Exporters to the EU Market

The EC has argued sugar imports under the CXL scheme will be discouraged in the coming period, given the much lower average EU market price premium. However world market sugar prices have got off to a bad start in 2018, losing 10.4% of their value by mid-January. These lower average world market sugar prices, by increasing the EU market price premium to around 22% above the EU’s CXL duty could encourage increased volumes of CXL sugar imports into the EU. This would then intensify competition for ACP sugar suppliers, in the context of a halving of EU import demand. This could potentially accelerate the process by which high cost ACP suppliers are squeezed out of the EU sugar market.

In 2017 sugar futures showed ‘the worst performance of the major agricultural commodity contracts’, falling 22% and ‘reversing 2016’s gains almost exactly’. This reflects a return to surplus global sugar production and a drop in consumption growth as a result of health related campaigns to reduce consumption of ‘hidden sugars’ in processed food and drink (1) (for more details see companion article ‘Health Based Sugar Taxes Gaining ground Globally’, 29th January 2018).

Sugar prices got off to a bad start in 2018 with reporting ‘raw sugar futures for March tumbled 4.2% to 13.59 cents/lb in New York’ on 16th January taking the price drop to mid-January for 2018 up to 10.4%. However this needs to be seen in the context of what is described as ‘accelerating gyrations’ between the upper and lower end of the price range for sugar futures (2). This does not bode well for world market sugar prices in 2018.

It is likely Brazilian ethanol policies will play an important role in actual 2018 sugar price developments, with this in part being linked to oil price trends.  This is a complex issue with reporting on the 17th January that the Government of Brazil has announced its decision to ‘remove a 20% tariff on ethanol imports from the US above 600m litres – in return for concessions on Brazilian beef exports to the US’. According to  this could result in imports from the US which ‘would in theory undermine prices of the biofuel in Brazil’, with this in turn impacting on the % of total Brazilian cane production going into sugar, with increased sugar production placing further pressure on global sugar prices (2). This would be consistent with price projections of market analysts reviewed by at the end of 2017. cited forecasts from ABN-Amro for 2018 suggesting sugar prices will remain under pressure given supply growth will out-pace demand growth.  This was confirmed by analysis from Commerzbank, Goldman Sachs and Citi Bank (1).

However Citi Bank forecasts that while sugar prices will ‘remain subdued through the first half of 2018’ there is scope for a more balanced market in 2018-19 with only ‘a modest surplus in 2018-19’ helping ‘support prices through the second half of 2018 and 2019’. Rabobank takes a similar view with prices seen as rising above 15 cents/lb in 2018. Societe Generale for its part foresees sugar prices of between 14.4 cents/lb in the first six months of 2018, rising only marginally over the year to an average of 14.5 c/lb (1).

Comment and Analysis

An average price of 14.5 c/lb would give a global sugar price of around $316.8/tonne, in contrast to an EC projection of average world market sugar prices of nearer $412/tonne.  Based on EC projections for average EU sugar prices in 2018 of €402/tonne, this would generate a European sugar market price differential over world market prices of €120/tonne. A level some €22/tonne in excess of the EU’s CXL duty.

This could encourage a greater uptake of CXL import licenses than the EC is assuming in its December 2017 sugar market projections (for details see companion article, ‘Dramatic Changes Ahead in the EU Sugar Market’, 11 January 2018). Average world market prices at the higher level of 15c/lb projected by Rabobank would only marginally reduce this EU sugar market price premium.

If EU sugar prices evolved as projected by the EC and global sugar price trends remain as projected by market analysts, then in the context of reduced EU import demand ACP sugar suppliers to the EU market could face intensified competition from CXL sugar suppliers.

This would arise despite December 2017 EC projections of a price differential between EU and world market sugar prices at a level less than half the CXL duty. A relative development in EU and world market prices which was projected to see competition from CXL sugar suppliers on the EU market greatly reduced. Initial indications suggest this EC projection could be some way off with serious implications following for certain ACP exporters.

The position of individual ACP exporters will depend on the marketing arrangements set in place. Those with advance purchase agreements with pre-existing price specifications are likely to be less severely affected that those making sales at spot-market prices.

(1), , ‘Will sugar futures prove ag’s worst performers in 2018 too?’, 16 January 2018
(2), ‘Evening markets: Sugar slumps, as Brazil mulls scrapping hurdle to imports of US ethanol’, 17 January 2018