Summary
The nascent recovery of the EU sugar market which was getting underway in the 2019/20 marketing year has been reversed by the Covid-19 pandemic. The collapse of global sugar prices is making raw cane sugar imports cheaper and EU sugar exports less competitive. While some ACP sugar exporters are increasingly focussed on trade into sugar deficit markets in the EU (region 3), where prices are on average stronger, these average prices mask large differences in contracted prices and between different contracted prices and spot market prices. This makes marketing strategies and contract negotiations critical to the overall revenue position of ACP sugar exporters to the EU market. Other ACP exporters remain dependent on the UK market where profound uncertainties are faced. The future basis for UK/EU trade and the arrangements for the management of the UK’s Autonomous Tariff Quota will be critical to future UK sugar market price developments. With the recessionary effects of Covid-19 likely to profoundly impact on sugar sector consumption and the structure of demand, ACP exporters will need to pay close attention to evolving policy developments and market conditions in the coming 6 months.
According to reports from the International Confederation of European Beet Growers from early April 2020, before the Covid-19 crisis ‘after two years of severe crisis following the end of quotas’ the EU market was recovering, with optimism prevailing for the 2020/21 season. This was welcomed news, with the results from Royal Cosun, Cristal Sugar and Associated British Foods highlighting how in recent years no EU sugar companies have been producing sugar profitably (2). However, the Covid-19 pandemic’s impact on ‘sugar consumption caused by European countries in lock down and a potential increase in EU sugar imports’ is threatening to dent this earlier optimism and drive a renewed increase in EU sugar stock levels (1).
While in the face of the Covid-19 pandemic there has been increased home consumption of sugar, with a sudden surge in sales as people stockpiled in preparation for the lock-down, direct sugar consumption makes up only 10-15% of EU sugar consumption. More significantly, the hospitality sector and manufacturing sugar usage has fallen dramatically. Illustrative of the impact on manufacturing demand, Coca-Cola (a major sugar user) has reported global sales volumes down 25% on a year on year basis in the first two weeks of April (3). Against this background, overall, the impact of the Covid-19 pandemic is seen as being negative, ‘with a decline in total EU sugar demand expected’. Czarnikow estimates EU sugar consumption will fall by some 700,000 tonnes due to the effects of the Covid-19 pandemic (1).
In terms of the price effects, after 7 months of price improvements EU spot market prices began to fall in the first week in April. It was estimated at the time ‘EU sugar prices would now move closer to the sugar reference threshold of €404/t than to the €500/t expected before the sowing season had started in the EU’. Meanwhile, ‘New York raw sugar and London white sugar on the front term closed respectively at 10.3 cts/lb and $336,5/t on 3rd April 2020’ (1).
While an 11-year high deficit for global production was projected for the 2019/20 season, with a continuation of this trend being projected for 2020/21, the pandemic is expected to suppress global demand considerably. The overall market effects of reduced global sugar demand will be compounded by the ‘strong depreciation of the Brazilian currency that sank to a record low’ (-35% to April 2020) and ‘a plunge in crude oil prices’ (1). This has seen more Brazilian cane being channelled into sugar production away from ethanol (1). As a consequence of these two trends, in the second week of May the global sugar deficit estimate was revised down from 8.33 million tonnes raw value equivalent to 3.98 million tonnes (3).
This is creating a situation where raw cane sugar imports to the EU are becoming cheaper and EU white sugar exports are becoming less price competitive.
At the end of May 2020, the EC reported EU sugar exports had collapsed since October 2019. By the end of May 2020 export volumes were less than 1/3 of the previous marketing year. Amongst ACP countries the most import destination market for EU sugar exports was Ghana which took fully 6% of total EU sugar exports in the 2019/20 marketing year up to the end of May. Even before the Covid-19 pandemic it was apparent that much lower EU sugar exports than in 2017/18 was likely in future to be a structural feature of the EU sugar sector.
In terms of imports CIBE has expressed concern over the fall in world market prices ‘to around €350/t for zero duty preferential imports’, with fears this could suck in preferential imports under the CXL TRQ where a duty of only €98/tonne is levied (2). This has reinforced the call made by the CIBE in April for the EC to ‘monitor the EU spot price closely and to implement import safeguard measures … as soon as this price falls below the reference threshold’. Indeed, it strengthened its April call for the EU to consider safeguard measures which took ‘the form of additional duties, calculated to prevent EU sugar market price from falling below this threshold’ (4). The need for such action is reinforced by the return of more normal weather conditions which will see a slight increase in EU sugar production despite a 1.6% reduction in the area under beet (3).
The calls from the CIBE for EC action on imports need to be seen in the context of fears that ‘a third year of non-remunerative prices for the EU sugar beet sector and in particular for EU sugar beet growers would be catastrophic and unsustainable’ (1). By 11th May, CIBE was estimating there had been a €100/tonne loss in EU sugar market value directly related to the consequences of the Covid-19 crisis, with this representing a cumulative loss to the sector of €1.6 billion if the market situation continued (4).
While CIBE expressed the view in its 11 May report that a rebound in global sugar price was unlikely with further price falls being possible, reports from the FAO at the beginning of June indicated the sugar price rose 7.4% in May compared to April, recovering half of the April decline. This occurred on the back of a ‘rebound in international crude oil prices as well as lower-than-expected harvests in India and Thailand’ (5).
However, the bulk of the recent price decline resulting from the Covid-19 pandemic occurred in March (-21.21%) with a further 11.54% decline in April. This meant the ‘bounce back’ in May still left the No. 11 Sugar Futures End of Day Settlement Price at 11.94 c/lb at the beginning of June, some 64% below the average price in February 2020 (6). Future longer- term prospects need to be seen in the context of a projected 18.5% year on year expansion of Brazilian sugar production for the 2020/21 season. This is likely to limit the sugar price bounce back identified by the FAO in its review of price developments in May.
Meanwhile, the EC in its end of May EU sugar market review reported considerable price differences between different EU member states. In March 2020 sugar prices in Region 3 countries (Bulgaria, Spain, Greece, Croatia, Italy, Portugal and Romania) were 21.9% higher than in March 2019 and 22.25% higher than in Region 2 countries (Belgium, Germany, France, Netherlands and the UK), where the most competitive EU sugar beet production occurs (6). These regional price differences have become an important feature of the post-Quota abolition EU sugar market. However, it is currently unclear what the impact of the Covid-19 pandemic on relative sugar price levels across the EU has been since March 2020.
In terms of total EU27+UK imports in the 2019/20 season Spain led the way with 269,000 tonnes (26%) followed by the UK with 208,000 tonnes (20%) and Italy with 177,000 tonnes or (17%).Of total EU sugar imports up to the end of March 51% came from EBA/LDC suppliers, 4% from South Africa, 16% from Central America and the Andean Pact region, 14% from Brazil, 2% from the Balkans and 13% from other sources (7).
However, by the 26th May EU sugar import volumes from EPA/EBA suppliers were reported as being 17% lower than in 2019, while only 175,000 tonnes of total available WTO sugar import quotas of 616,000 tonnes had been taken up (only 28.4% of the available quota eight months into the marketing year) (7). This would require a dramatic upsurge in imports in the coming 4 months for CIBE fears to be realised.
In terms of imports from ACP countries, until the end of May 2020, the main destinations for EPA/EBA sugar exports to the EU in the 2019/20 marketing year were the UK (34%), Italy (19%), Spain (16%), Portugal (8%), with total exports until the end of May just under 500,000 tonnes. The main ACP exporters to the UK market (a Region 2 country) were Swaziland, Belize, Guyana, Fiji, and Mauritius. The leading exporters to Italy (a Region 3 country) were Mauritius, Swaziland Fiji; to Spain (a Region 3 country) Mauritius, Mozambique, and Swaziland; and to Portugal (a Region 3 country) Guyana and Swaziland.
Importance of the UK Market in ACP Sugar Exports (1701) to the EU28 – Tonnes 2019
| UK | EU28 | UK % EU28 | EU27 Region 3 | EU27 Region 2 | EU27 Region 1 | |
| ACP | ||||||
| Belize | 161,091 | 176,911 | 91.1% | Italy 13,769
Portugal 1,763 |
Poland 120 |
|
| Fiji | 57,000 | 125,429 | 45.4% | Spain 34,072
Bulgaria 33,878 |
Germany 239 | Czech Rep 240 |
| Guyana | 47,951 | 62,561 | 76.6% | Portugal 14,610 | – | – |
| Mauritius | 29,224 | 254,170 | 11.5% | Spain 54,800
Greece 55,160 Italy 52,027 Bulgaria 6,174 Romania 4,912 Portugal 892 |
France 24,654
Belgium 8,591 Germany 6,471
|
Poland 4,530
Austria 2,328 Sweden 306 Czech Rep 863 |
| Mozambique | 21,284 | 162,288 | 13.1% | Bulgaria 29,967
Portugal 28,958 Italy 25,298 Spain 25,020 Greece 740 |
Netherlands 571
Germany 432 |
Hungary 8,845
Lithuania 660 Czech Rep 293
|
| Zambia | 11,590 | 11,590 | 100% | – | – | – |
| Jamaica | 6,600 | 6,600 | 100% | – | – | – |
| Malawi | 921 | 15,383 | 6% | Spain 6,069
Italy 1,682 Cyprus 1,260 Bulgaria 281 |
Belgium 307
Netherlands 120 |
Sweden 1,905
Lithuania 1,323 Finland 1,071 Poland 336 |
| Barbados | 300 | 300 | 100% | – | – | – |
| Zimbabwe | 0 | 24,902 | 0% | Spain 19,909
Italy 4,993 |
||
| Eswatini | 0 | 279,472 | 0% | Portugal 91,144
Italy 84,642 Romania 21,824 |
Germany 2,412
Belgium 2,110 Netherlands 754 |
Poland 495 |
| Sub-Total | 335,961 | 1,119,596 | 613,844 | 46,661 | 23,315 |
Source: EC, Market Access data Base
| Comment and Analysis
A number of ACP sugar exporters are increasingly targeting sugar exports to the EU on Region 3 markets where average sugar prices tend to be higher than elsewhere in the EU. This includes Mauritius (white sugar exports, where 68% of total exports to the EU go to Region 3 countries), Malawi (60%), Mozambique (68%), Eswatini (70%) and Zimbabwe (100%). In the first 8 months of the 2019/20 marketing year the three leading Region 3 countries (Italy, Spain, Portugal) took fully 43% of total ACP sugar exports to the EU + UK market (compared to 55% in the calendar year 2019 – see table above). This being noted average sugar prices can be highly misleading, with wide variations in contracted prices and between contracted prices and spot market sugar sales. This highlights the importance of the marketing strategies adopted by individual ACP sugar exporters. However, these marketing strategies can be assisted or constrained by the nature of the corporate linkages between ACP sugar sector enterprises and EU sugar sector companies. This is an issue which ACP governments will need to remain alert to, as they seek to maximise the contribution of their individual sugar sectors to wider national economic development. ACP governments and sugar exporting companies will also need to stay alert to the recessionary economic effects of the Covid-19 pandemic in different EU member states, with Region 3 countries being particularly severely affected economically by the pandemic, in ways which are likely to profoundly depress national sugar consumption (e.g. tourism dependent southern European economies whose season and hence earnings will be disrupted by the Covid-19 pandemic). However, other ACP sugar exporters maintain a high dependence on the increasingly uncertain UK market, most notably Belize (91%), Guyana (77%), Jamaica (100%), and Barbados (100%, although Bajun exports consist largely of specialist premium sugars). Fiji meanwhile straddles these positions, having greatly reduced its dependence on the UK market in recent years. This needs to be seen in a context where in 2019 the UK took fully 30% of ACP sugar exports to the EU28, compared to only 18.5% of total EU28 sugar imports. For these ACP exporters a number of critical questions arise, including: · Will the UK leave the EU customs union without a trade deal in place? · In the event of a no deal UK departure from the EU customs union, will the UK · How will the UK’s proposed Autonomous Tariff Quota of 260,000 tonnes be · In the absence of a UK/EU trade deal, how will the UK sugar market evolve? The announcement of the UK’s 260,000 tonne duty free tariff quota as part of the UK’s new MFN regime appears to be designed to provide Tate & Lyle Sugars access to world market priced sugar. This is something Tate & Lyle Sugars has long been campaigning for. Depending on UK sugar market conditions this could serve to boost capacity utilisation at its Thames refinery above the uneconomic levels which have been seen in recent years. If sugar production at the plant were substantially expanded, demand for raw cane sugar for refining would correspondingly increase, with the commercial effects of Tate & Lyle Sugar’s access to quota restricted zero tariff world market priced sugar being correspondingly reduced. However, if a surplus of sugar supply were to emerge in the UK market, the commercial situation of Tate & Lyle Sugars could remain under pressure, with duty free world market priced sugar then being likely to replace ACP raw cane sugar. This could create substantial problems for Guyana’s GUYSUCO. The situation of Belize is more complicated given both Tate & Lyles Sugars and Belize Sugar Industries are both owned by American Sugar Refiners (ASR). At the overall corporate level, it would make more sense for ASR to access duty free world market priced sugar for its Thames Refinery, while directing Belizean production to its fully owned and co-owned plants in Portugal and Italy. The question arises: with potentially divergent price trends on the UK and EU following on from a no-deal UK departure from the EU customs union where do the interests of Belize sugar producers lie, and will these interests be accommodated in the corporate planning of ASR/TLS? Thus for those ACP sugar exporters focussed on the UK market the critical issue in the coming months will be whether or not a UK/EU trade deal is concluded before the end of 2020, which allows continued duty- free access for EU27 sugar. If the UK were to impose its standard MFN import duties on EU27 sugar, then this would halt the EU27 sugar export trade to the UK. In the past three seasons the EU has exported on average 513,335 tonnes of white sugar to the UK, accounting for approximately 28% of UK consumption. The market effect of a halting of EU27 sugar exports to the UK would thus be considerable. Analysts have made a convincing case for a major oversupply of sugar emerging on the UK market if both a UK-EU trade deal is in place and the new zero import duty Autonomous Tariff Quota (ATQ) is applied. It has been suggested given average UK production and imports and Covid 19 supressed demand the ‘ATQ would clearly be unnecessary to balance supply and demand of sugar in the UK market’. Indeed, it has been suggested, the UK market seems to be ‘heading towards a surplus of sugar supply compared with diminishing demand, with inevitable consequences for domestic UK sugar wholesale prices’, although it is acknowledged ‘much could change in the next months’ (2). There is what is more, additional uncertainty around how the UK’s Autonomous Tariff Quota (ATQ) will be managed, both in terms of the sequencing of its utilisation (monthly or quarterly allocation or a straight ‘first come first served’ basis) and its relationship to the tariff quotas established under ‘rolled over’ UK Continuity Agreements. It is for example, unclear whether the legal mechanisms for the implementation of UK only FTA duty free sugar TRQs will be in place by 2021. If these Continuity Agreement linked TRQs form part of this ATQ tonnage then the market effects of the new measure will be correspondingly reduced, if it is entirely separate then its markets effects will be greater. However, there is an additional rules of origin complication which would arise from the UK’s proposed ATQ in the context of a new UK/EU trade arrangement. Given this new ATQ would be significantly different from current EU trade arrangements for sugar (unlike rolled over Continuity Agreement duty free market access arrangements), special rules of origin and origin certification arrangements would need to be set in place for UK/EU trade in sugar and sugar containing products. This is likely to be administratively complex and may make industrial sugar users turn away from utilising sugar from companies processing sugar imported under the new ATQ arrangement, since the cost gains would be outweighed by the administrative complications. Of course, if special arrangements could be set in place for the use of sugar in manufacturing of food and drink products traded between the EU and UK where the same duty free-quota free access is enjoyed to both the UK and EU27 markets by the suppliers of the imported raw cane sugar, then the position of ACP sugar on the UK market would be strengthened, despite the newly established UK ATQ for sugar. What is clear is that profound Brexit related uncertainties overhang the future of the UK sugar market, with ACP sugar exporters needing to stay on top of developments in the coming months if revenues from sugar exports to the EU27+UK market are to be maximised |
Sources:
(1) CIBE, ‘EU beet sugar market update: Impacts of Covid-19 crisis’, 7 April 2020
https://www.cibe-europe.eu/Data/Files/CIBE-COVID19-marketupdate7April%202020%20-%20final.pdf
(2) julianprice.com, ‘European Union and United Kingdom sugar markets and update and outlook’, 2nd March 2020
https://www.julianprice.com/eu_market_20200302.pdf
(3) S&P Global Platts, ‘ As lockdown alters food and fuel demand, is it ‘mayday’ for European sugar prices?’, 11 May 2020
https://blogs.platts.com/2020/05/11/european-sugar-prices-lockdown-food-fuel/
(4) CIBE, ‘EU beet sugar market update: Impacts of Covid-19 crisis’, 11th May 2020
https://www.cibe-europe.eu/CIBENews?newsRecordID=99
(5) FAO, ‘FAO Food Price Index falls to 17-month low’, 4 June 2020
http://www.fao.org/news/story/en/item/1279022/icode/
(6) Indexmundi, ‘Sugar price’
https://www.indexmundi.com/commodities/?commodity=sugar
(7) EC, ‘Sugar Market Situation’, AGRI G4 – Committee for the Common Organisation of Agricultural Markets, 28th May 2020
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/sugar-market-situation_en.pdf