Summary
The reduction of EU sugar imports forecast to occur following the abolition of EU sugar production quotas is well underway, with exports to the sugar deficit UK market from traditional ACP sugar suppliers coming under particular pressure. Given the proposed 21 month transition period in EU27/UK trade relations this is likely to continue until at least 1st January 2021 and may extend beyond, depending on the nature of the long term post-Brexit EU27/UK trade arrangement set in place.
EU sugar exports are also growing faster than projected, with this reportedly contributing to the decline in world market sugar prices which has been underway. In the longer term growing EU export volumes could threaten production in less competitive sugar producing countries including in Africa (particularly West Africa and high cost Eastern African sugar producing countries). Against this background sugar sector trade policy could become a contested area in EU-Africa relations.
Trends in EU Sugar Imports
At the 3rd meeting of the EU Sugar Market Observatory there was a general consensus on the projected decrease in EU sugar imports being well underway (1). DG Agriculture is now projecting an even steeper decline than the December 2017 EC Agricultural Outlook report (2), with the latest estimates suggesting total imports by the end of the 2017/2018 season will be 100,000 tonnes below earlier expectations at a total 1.2 million tonnes (1).
According to figures presented to the 12 April 2018 Sugar Market Observatory meeting, by week 27 of the 2017/18 season EU imports of ACP/LDC sugar had reached only 283,000 tonnes compared to 586,000 tonnes by week 27 in the 2017/18 season. This represented a decline of 52% over the corresponding period in 2016/17, by which time 44% of total annual exports had taken place. What is more there has been a dramatic fall in prices paid for both ACP/LDC raw cane sugar and refined sugar of around 30% and 22% respectively (3). A continuation of this trend would see ACP/LDC exports by the end of the 2017/18 season reaching only 643,000 tonnes.
The fall in the WTO TRQ utilisation rate in 2017/18 has been even more dramatic. By week 27 only some 7.5% of the total available TRQ had been taken up (only some 55,000 tonnes out of a total of 736,000 tonnes). This compares to a 62% utilization in the corresponding period in 2016/17 (some 437,000 tonnes out of a total of 705,000 tonnes).These TRQ exports attract a duty of €98/tonne in the context of difference in EU and world market prices of only €80/tonne.
Under bilateral EU trade agreements which provide quota limited duty free access, the utilization rate at 27.9% was somewhat better (some 79,000 out of 283,000 tonnes) compared to a utilisation rate of 93.8% in the corresponding period in the 2016/17 period.
In addition, the low EU prices in 2017/18 are expected to see a dramatic decline in the use of ‘inward processing’ arrangements, which allow sugar to be imported duty free for use exclusively in products destined for export beyond the EU’s borders (8).
The impact of EU sugar production quota abolition and the consequent expansion of EU sugar production has made itself felt particularly severely on the sugar deficit UK market, to which ACP countries have traditionally exported a disproportionate amount of their sugar destined for the EU. In 2017 the UK took 26.5% of total ACP sugar exports to the EU despite the UK only accounting for 17.6% to total extra-EU sugar import (see companion epamonitoring.net article ‘Parliament Committee Warns of Disastrous Consequences for the UK food and Drink Industry of a ‘No Deal’ Brexit’, 7 May 2018).
In its submission to the House of Commons Environment, Food and Rural Affairs (EFRA) Committee inquiry into ‘how the sugar industry will be affected by Brexit and the options for an optimal trade policy surrounding sugar following-Brexit’, the ACP/LDC Sugar Industries Group argued the abolition of EU production quotas has already seen EU27 sugar export volumes to the UK hovering between 500,000 and 600,000 tonnes (6). This compares to a Department of Environment, Food and Rural Affairs (DEFRA) estimate of 402,000 tonnes of UK sugar from EU27 member states in 2016 (7).
It was argued by the ACP/LDC Sugar Industries Group that given the geographical proximity of EU27 beet producers, once the UK left the EU it UK would become ‘a dumping ground for EU exporters’, if current trading arrangements were extended. The ACP/LDC Sugar Industries Group was highly critical of the production and consequent trade distorting effects of EU voluntary coupled support (VCS) in the sugar sector. It was pointed out estimates suggest that within EU27 countries ‘VCS supports production of 3.6 million tonnes of sugar production that, by definition, would have otherwise been unsustainable’ (6).
Against this background the ACP/LDC Sugar Industries Group argued any future UK-EU27 trade agreement must ‘prevent unrestricted access of sugar (and alternative sweeteners such as isoglucose) thus protecting UK beet growers and processors, the UK refining sector and developing country suppliers’.
It based this proposal on the finding of the recent UK government white paper (“Preparing for our future UK Trade Policy”) that some ‘reasonable trade protection intervention can be warranted to address genuinely unfair practices’. The ACP/LDC Sugar Industries Group believes ‘VCS in the sugar sector is a genuinely unfair practice’ which is ‘unfair to developing countries, UK beet farmers and UK processors of beet and cane’.
It was maintained that without this type of protection, in the post-Brexit period ‘the UK refining sector (and the ACP suppliers of bulk raw sugar) would find it difficult to compete with the surpluses created in the EU’ and that as a consequence the UK market would be almost exclusively served by ‘UK beet and subsidised imported EU27 refined sugar’ (6).
Trends in EU Sugar Exports
The April 12th 2018 meeting also revealed an even higher increase in EU exports than projected in December 2017, with revised EU figures suggesting EU exports could reach 3.2 million tonnes (1) up from the December 2017 projection of 2.8 million tonnes for 2018 (2). In the first 3 months of 2018 the EU exported 820,000 tonnes of sugar (compared to 3 million for the whole of 2017). This was on top of 1 million tonnes of EU sugar exports in from October to the end of December 2017, the first period during which exports could take place without any WTO restrictions (9).
Private sector analysts suggested the overall EU export volumes could run out even higher than this expanded EC forecast. This is based on ‘the fact that the leading sugar producers have invested heavily …in export logistics to benefit from new market opportunities’ (1) (see companion epamonitoring.net article ‘French Exporters Lead The Charge for African Sugar Markets’, 3 May 2018).
While there has been a weather delayed start to beet plantings in France and other major beet growing areas of the EU this is unlikely to have a major impact on EU sugar production. While beet yields are expected to be down, despite recovering prices for maize and barley changes in the area under sugar beet are likely to be limited (only a 1% decline) (8), given the conclusion of multi-annual supply arrangements with beet processing companies in the run up to production quota abolition. For the 2017/18 season EU production is projected to be down around 3% on 2017/18 levels. This is likely to only marginally affect the pressure on EU and global sugar prices which are expected to ‘remain at their current low levels’ (8).
| Comment and Analysis
Since under the proposed EU27/UK ‘Withdrawal Agreement’ existing EU27/UK trading arrangements are scheduled to remain in place until at least the 1st January 2021, three difficult years would appear to lie ahead for those ACP exporters with a high dependence on the UK market. This is likely to be most severely felt by higher cost ACP sugar exporters, notably: Guyana; Jamaica; Fiji; and Belize. However in recent years Fiji and Belize have been reducing their dependence on the UK market in their sugar exports to the EU. It is far from clear whether Guyana and Jamaica will be able to continue to profitably export to the UK market and whether they will be able to finds any alternative market opportunities on EU27 markets in the coming years. Dependence of the Most Vulnerable ACP Sugar Exporters to UK Sugar Market Developments
Source: EC, Market Access Data Base http://madb.europa.eu/madb/statistical_form.htm While the minutes of the 12th April 2018 Sugar Market Observatory meeting spoke of EU companies responding to ‘new market opportunities’ it is far from clear what these new market opportunities are. In April 2018 world market sugar prices hit levels almost 40% below the price levels in October 2016 and almost 10% below the average price in October 2017 (4). According to reports carried by Reuters world sugar prices lost over half of their value in the year to February 2018 (9), with price declines continuing into April. The pressure on global sugar prices is not unconnected from what the ISO has described as ‘massive production gains’ in the EU, China and India, alongside ‘record production in Thailand’ (5). The the principal factor which has changed creating ‘new market opportunities’ has been the lifting of WTO quantitative restrictions on EU sugar exports, following the abolition of EU sugar production quotas which were seen as generating a twin pricing system for sugar which de facto allowed the EU to unfairly subsidise sugar exports. Of course the expansion of EU sugar exports also needs to be set against lower EU sugar prices which for white sugar stood at €369/tonne (with a London sugar price of €290/tonne) (3), having lost 8% since December 2017. According to the EC’s Spring 2018 Short term outlook for EU agriculture in future EU sugar prices are ‘expected to align more closely on world prices’ (4). This is likely to fuel a continued growth in EU sugar exports, particularly as health related concerns in the EU reduce sugar utilisation in food and drink products. |
Sources:
(1) EC, SMO, ‘Meeting summary 12 April 2018’, 13 April 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/reports/2018-04-12-report_en.pdf
(2) EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, 18 December 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf
(3) EC, SMO, ‘Market situation Arable crops’, Sugar team DG Agriculture and Rural Development, European Commission Sugar Market Observatory, 12 April 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/reports/smo-12-04-18-market-presentation.pdf
(4) Indexmundi, ‘Sugar Monthly Price – US Dollars per Kilogram’
https://www.indexmundi.com/commodities/?commodity=sugar&months=120
(5) Agrimoney.com, ‘Sugar price rally looks rather unlikely says ISO lifting stocks estimates’, 1 March 2018
https://www.agrimoney.com/am-sugar-news-alert/am-sugar-news-alert/sugar-price-rally-looks-rather-unlikely-says-iso-lifting-stocks-estimates-54490
(6) Written evidence ACP/LDC Sugar industries Group (BTS0003)
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/environment-food-and-rural-affairs-committee/postbrexit-trade-in-sugar/written/78499.pdf
(7) Written evidence submitted by the Department for Environment, Food and Rural Affairs (Defra) (BTS0016)
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/environment-food-and-rural-affairs-committee/postbrexit-trade-in-sugar/written/79064.pdf
(8) EC, ‘Short-term Outlook for EU Agricultural Market in 20 and 2019’, Spring 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/short-term-outlook/pdf/agri_short_term_outlook_spring-2018_en.pdf
(9) Reuters, ‘EU well placed to compete in oversupplied sugar market –Tereos’, 5 February 2018
https://www.egypttoday.com/Article/3/42021/EU-well-placed-to-compete-in-oversupplied-sugar-market-%E2%80%93Tereos