Summary
The expansion of EU sugar production in addition to reducing the volume and value of ACP sugar exports has also undermined the profitability of EU sugar beet processing companies, with major operators such as Suedzucker looking to shut some processing plants in response to low EU sugar prices. In 2017/2018 regional EU sugar price trends in part correlated with trends in sugar production, with price falls being most dramatic in areas where the production increase was greatest. Meanwhile voluntary coupled support has held back the geographical redistribution of EU sugar production. Some ACP exporters remain dependent on the UK market while others have diversified, targeting sugar deficit regions of the EU where sugar prices have held up better. Longer term trends in EU sugar consumption do not bode well for traditional ACP sugar exporters. Brexit uncertainties will need to be taken on-board in the marketing decisions of ACP sugar exporters in the 2019/20 marketing year, with various Brexit scenarios being explored and export markets to be targeted identified accordingly.
- Profitability of Leading EU Sugar Company Takes a Hit as EU Production Expands
Europe’s largest sugar refiner, Germany’s Suedzucker, has reported for 2018 ‘a third-quarter operating loss in its sugar business of 85 million euros, from an operating profit of 38 million euros a year earlier’. The company forecast ‘its sugar business will suffer a 2018/19 full-year operating loss of between 150 million and 250 million euros, against an operating profit of 139 million euros the previous year’ (1). This has seen Suedzucker set in place plans ‘to shut five plants next season in a bid to combat overproduction’. Despite the planned reduction of sugar production by ‘700,000 tonnes per year starting next season’, Suedzucker nevertheless ‘expects to make another operating loss in its sugar segment of 200-300 million euros in 2019/20’ (2). The difficult market situation in the EU is reflected in the financial situation of other leading EU beet sugar processing companies including for example British Sugar) (3) and Tereos, the second largest EU sugar producers which also ‘expects a full-year loss for 2018/19’ (2).
According to a Suedzucker spokesperson these losses are a result of market liberalization in the EU which has meant that EU sugar prices are much more vulnerable to ‘falling world prices’ which now ‘depress prices in Europe’. It was reported ‘raw sugar futures ended 2018 at their lowest in 10 years, pressured by heavy global oversupply’ (1).
However EU sugar market price trends cannot be divorced from the production response to the abolition of EU sugar production quotas. EC data posted at the end of March 2019 highlighted how between the 2016/17 and 2017/18 seasons, EU fresh sugar production rose 26.6% on the back of a 19.1% expansion of the area under sugar (4) There were particularly strong production increases in Germany (+45%), the Netherlands (+52%), France (+38%), Belgium (+34%) and the UK (+49%) (5). All these countries are classified by the EC as region 2 countries, where the average white price of sugar in the EU fell 28% over this period from October 2017 and January 2019.
This compares to a price declines of only 17.9% for region 3 countries (6), where production increases in response to quota abolition were less marked (+28% for Romania and +18% for Spain) or production declines occurred (-37% for Croatia and -19% for Italy) (5).
It was the overall increase in EU sugar production as much as lower global sugar prices (to which the expansion of EU sugar exports contributed), which accounted for the decline in EU sugar market prices and the consequent loss of profitability for major sugar producers such as Suedzucker.
Provisional figures for EU sugar production in the 2018/19 season project the expansion of production in region 2 will be partially reversed. Production is projected to fall in Germany by 20%, in Belgium and France by 18% in the Netherlands by 15% and in the UK by 17% on a year on year basis. Overall this is projected to contribute to a 16% decline in EU sugar production (7).
However this would still leave EU fresh sugar production in 2018/19 some 6.1% higher than in 2016/17, the last season before the abolition of EU sugar production quotas (4). This production decline is however expected to support a price recovery (32). Indeed, in early April Reuters reported ‘spot EU white sugar prices were at 422 euros ($474) a tonne in late March, according to price provider S&P Global Platts, while global white sugar prices on ICE are currently at around $330 a tonne’ (2). It is maintained ‘the rise in spot EU prices is not captured in official European Commission data’, since EC figures are based ‘on invoices paid by buyers who booked their purchases at the start of the season’, where average prices at end-January 2019 were at only €312/tonne (2).
- The Impact of Voluntary Coupled Support
While between 2016/17 and 2018/19 the area under sugar and sugar production in 5 of the EU member states deploying coupled support fell, overall in all EU member states deploying sugar sector voluntary coupled support, the area under sugar actually rose. This was largely driven by the expansion in Poland, Spain and the Czech Republic, with this more than outpacing the decline in production in other countries where voluntary coupled support was deployed. This meant that despite the decline in projected EU sugar production for the 2018/19 season the share of total EU sugar production from countries deploying voluntary coupled support is projected to increase from 22.8% in 2017/18 to 24.9% (5, 7).
As the December 2017 study by Wageningen Economic Research on the Impact of coupled EU support for sugar beet growing concluded, this results in ‘more production’ and ‘lower prices’ (18).
- Trends in ACP Sugar Exports to the EU
These trends in EU sugar production post quota abolition didn’t only impact on the profitability of EU sugar companies but also the volume and price paid for EU imports of sugar from EBA/EPA countries.
Between 2016/17 and 2017/18 total extra-EU sugar imports fell 48% from 2,517,000 tonnes to 1,308,000 tonnes, while imports from EBA/EPA signatories fell 58% from 1,324,000 tonnes in 2016/17 to 557,000 tonnes in 2017/18 (8, 9).
This occurred against the backdrop of a precipitous fall in average import prices of ACP sugar in 2018, with prices reaching a low of €311/tonne for raw sugar and €366/tonne for white sugar by the end of the 2017/18 season (10).
In the early part of the 2018/19 season EBA/EPA sugar exports to the EU recovered increasing 58%, By week 29, import volumes reached 508,000 tonnes (up from 321,000 tonnes in the corresponding period of the 2017/18 season) accounting for 52% of extra-EU imports (11). This took the EBA/EPA share of extra-EU sugar imports back to 2016/17 levels, (the corresponding EPA/EBA share in 2017/18 had been only 42.6%). However this occurred on the back of an overall reduction in EU import volumes compared to 2016/17.
In addition the EC reports that following the granting of zero duty TRQ under the SADC-EU EPA to South African sugar producers, imports from South Africa have come to account for 13% of extra-EU sugar imports in the first five months of the 2018/19 marketing year (8),down from 15% in the whole of 2017/18 (9).
This increased EU import volumes from EBA/EPA suppliers reflects reduced EU sugar production in a context where dwindling EU stock levels (down from 15.2 million to 12.7 million) have created supply concerns which have seen a surge in spot market prices to levels substantially above EC recorded average price levels. This is creating more favourable market conditions for ACP spot market sugar sales (2).
- Patterns of EBA/EPA Sugar Exports to the EU
In terms of patterns of EBA/EPA exports to the EU currently there is a high concentration on the UK market, which in the first 5 months of the 2018/19 marketing year took 38% of total EU imports. A further 45% of exports went to region 3 countries where the average EC recorded EU white sugar price declines have been less pronounced than elsewhere in the EU.
However the dependence on the UK market in the first 5 months of the 2018/19 was lower than for the 2017/18 season as a whole, when the UK took 53% of total EBA/EPA sugar exports to the EU (12).
Nevertheless at the country level in the first 25 weeks of the 2018/19 marketing year Belize and Guyana had particularly high levels of dependence on the UK market, with Swaziland having diversified to a certain extent away from the UK market with high levels of exports to both Italy and Portugal (12), with Fiji also undertaking a level of diversification away from the UK market.
- Sugar Consumption Trends in Europe
In the longer term sugar consumption trends in the EU are not favourable to ACP sugar exporters. In Germany there are growing calls for ‘food manufacturers to voluntarily reduce sugar, fats and salts’ in processed foods. Germany’s federal minister of nutrition, Julia Klöckner has called on food manufacturers to ‘reduce sugar content in breakfast cereals by 20%, and in soft drinks by 15 to 20%’. The government hopes to see a ‘two-digit reduction in sugar content over the next six years’ (14).
However the initiative has been criticized by the advocacy group Foodwatch which maintains a ‘voluntary approach is not sufficient’. Foodwatch has called for regulatory measures including the introduction of a traffic light labelling system, ‘advertising restrictions on unhealthy children’s products’ and a soft drinks sugar content tax, as recently introduced in the UK (14).
Data on expected revenues from the recently introduced UK soft drinks sugar levy reveals revenues generated will be half of the expected level, as manufacturers have reformulated their products to reduce sugar content, thereby avoiding the imposition of the tax (15).
In the UK the sugar levy forms part of twin track approach with ‘voluntary reductions’ also being called for. The ‘voluntary’ component of this approach is given added weight by the prospect of regulatory action if manufacturers don’t respond appropriately. Thus we find in February 2019 Public Health England called for a 20% cut in the use of sugar in drinking yoghurts, as part of this voluntary approach, against the background of the sugar levy on soft drinks (16).
This suggests that voluntary measure can work best when the prospect of effective regulatory action encourages food manufacturers to undertake voluntary reformulation initiatives to reduce sugar content.
Meanwhile progress continues to be made with the development of high sweetness alternative sweeteners, such as Stevia, with this greatly assisting the reformulation efforts of manufacturers in the face of sugar content levies (17).
Elsewhere in Europe moves to front-of-package labelling are gaining ground with calls for compulsory front-of-package traffic light labelling in the UK and France. The governments of Belgium and Spain are also looking at using the French developed Nutriscore labelling system (14).
| Comments and Analysis
The ACP Groups has focused on the impact of EU voluntary coupled support in sustaining sugar production in EU member states, in the context of a CAP reform process, involving a shift from coupled to decoupled support, intended to promote a process of geographical redistribution of EU sugar production, with sugar production shifting from high cost production zones to low cost production zones. This was intended would see the expansion of production in more efficient sugar beet production zones of the EU more or less balanced by declines in production in less competitive EU production zones. However this process of geographical redistribution of EU sugar production is distorted by the deployment of EU voluntary coupled supports. Far from contracting, sugar production in areas receiving voluntary coupled support has overall expanded. This is contrary to the envisaged impact of this aspect of the CAP reform process. This is largely attributable to the halting of the decoupling process, as a result of political pressure from EU member states governments in less efficient sugar beet production zones. It is against this background that the ACP Group has called on the EU to end voluntary coupled support so as to give ACP suppliers some respite from the difficult conditions on the EU market. The ACP Group has highlighted how in the sugar sector ‘the weighted average EU domestic price has fallen to a new low of just 31.4 euro cents/kilo, and imports from ACP and LDC countries are currently less than a third of the levels recorded before quotas were abolished’. The root cause of these trends is seen as overproduction in the EU (19). However any reduction of voluntary coupled support is unlikely given the political pressure for an expansion of the scope for the deployment of voluntary coupled support in the current discussions on the forthcoming round of CAP reforms (see companion epamonitoring.net article, ‘What Issues Arise in Relations with Developing Countries From the EU’s 2020 CAP Reform Proposals?’ 16 May 2019) In terms of patterns of ACP sugar exports to EU28 markets there are two contradictory trends. On the one hand there is a growing focus on exports to region 3 countries in the EU where sugar price declines have been less pronounced and localised sugar shortages exist. This is potentially a positive development since it offers opportunities for higher raw sugar prices to be secured by ACP sugar exporters, particularly through spot market sales. On the other hand for some ACP sugar exporters a continued high dependence on the UK market amidst ongoing uncertainties over the final basis of the UK’s withdrawal from the EU greatly complicates marketing decisions (see companion epamonitoring.net articles, ‘The UK’s Proposed New MFN Tariff Regime: Protects ACP Interests in the Short Term But…..’, 14 March 2019). In this regard from an ACP perspective the sugar sector is quite unique in terms of the impact of a ‘no-deal’ or ‘hard’ Brexit. A ‘no-deal’ or ‘hard’ Brexit involving the application of standard MFN duties to sugar imports from EU27 suppliers could bring some real short term market opportunities for preferred ACP sugar exporters; most notably for LDC sugar exporters and ACP sugar exporters whose governments have been able to reconsolidated existing duty free-quota free access to the UK market through the conclusion of ‘Continuity Agreements’ with the UK government (see companion epamonitoring.net articles, ‘UK Signs Continuity Agreement with ESA Governments’, 4 February 2019, ‘UK Signs Continuity Agreement with Caribbean ACP Countries’, 28 March 2019, ‘Fiji and Papua New Guinea Sign onto Continuity Agreements with the UK’, 18 March 2019). Currently this gives Belize, Guyana, Fiji and Mauritius an inside track compared to Swaziland and South Africa. Unlike the latter, the former already have ‘Continuity Agreements’ with the UK in place. However should a UK-SADC EPA Group ‘Continuity Agreement’ be concluded which includes the removal of current TRQ restrictions on South African access, then South African sugar exporters would be best placed to capitalise on any sugar market opportunities arising as a result of a ‘no-deal’ Brexit. This would undermine the value of the sugar sector preferences rolled over under the Caribbean and Pacific bilateral ‘Continuity Agreements’ with the UK. A no-deal Brexit could also see large volumes of EU27 sugar returning to the EU27 market, with this serving to depress prices on the EU27 market. Alternatively it could see an aggressive expansion of EU sugar exports to 3rd country markets including ACP markets with intensifying competition for ACP sugar suppliers on regional markets, particularly in Africa (see companion epamonitoring.net article ‘EU Sugar Exports to ACP Markets Are Falling After Record Levels of EU Exports in 2018’, 3 June 2019). What is clear is that depending on how their fellow ACP competitors position themselves for different outcomes to the Brexit process, ACP sugar exporters will be impacted differently. As contract negotiations get underway to supply EU markets in the 2019/2020 marketing year individual ACP sugar exporters will need to make a careful assessment of the market effects of the most likely outcome to the Brexit process. Indeed, given current spot market prices in the EU, ACP sugar exporters may need to review the balance between their contracted sales and spot market sugar sales. In addition, the sugar market effects of Brexit stretch beyond the EU. As a consequence ACP sugar producers will need to look at the likely level of competition on 3rd country markets which EU27 sugar exporters may seek to serve if exports to the UK become commercially non-viable following the imposition of standard MFN duties on imports by the UK. |
Sources
(1) Reuters, ‘Suedzucker swings to operating loss on low sugar prices’, 10 January 2019
https://www.reuters.com/article/suedzucker-sugar-results/update-1-suedzucker-swings-to-operating-loss-on-low-sugar-prices-idUSL8N1ZA0WD
(2) Reuters, ‘EU sugar rises as regional market tightens, world prices languish’, 8 April 2019
https://www.reuters.com/article/us-eu-sugar-prices-graphic/eu-sugar-rises-as-regional-market-tightens-world-prices-languish-idUSKCN1RK0LF
(3) See for example: proactiveinvestors.co.uk, ‘Difficulties in AB Foods’ sugar business to offset better-than-expected profits at Primark’, 4 July 2018, https://www.proactiveinvestors.co.uk/companies/news/200168/difficulties-in-ab-foods-sugar-business-to-offset-better-than-expected-profits-at-primark-200168.html and marketscreener.com’ ‘Associated British Foods : Primark cushions AB Foods as sugar earnings dissolve’, 24 April 2019, https://www.marketscreener.com/ASSOCIATED-BRITISH-FOODS-9583547/news/Associated-British-Foods-Primark-cushions-AB-Foods-as-sugar-earnings-dissolve-28468456/
(4) EC, ‘EU fresh sugar production and beet areas by marketing year’, Sugar Market situation, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(5) EC, ‘2017/18 – Sugar Production (final data January 2019)’ Sugar Market situation, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(6) EC, ‘EU and regional market prices of white sugar’, Sugar Market situation, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(7) EC, ‘2018/19 – Sugar Production (Provisional production – 26 March 2019)’ Sugar Market situation, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(8) EC, ‘Imports EPA/EBA in 2018/19 –EPA/EBA weekly cumulated sugar imports 2018/19 and 2017/18 (situation 18 March 2019 -0.435 mio t)’, Sugar Market situation, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(9) EC, ‘Imports from EPA/EBA’, Market situation Arable crops, Sugar team DG Agriculture and Rural Development European Commission, Sugar Market Observatory, 12 April 2018
(10) EC, ‘ACP average import prices’, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(11) EC, ‘EU Total imports – EU cumulated imports (CN 1701)’ Sugar Market situation’, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 25 April 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(12) EC, ‘Imports EPA / EBA in 2018/2019 – EPA/EBA sugar imports by origin and destination’, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 28 March 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/market-situation_en.pdf
(13) EC, ‘Imports EPA / EBA in 2017/2018’, Sugar Market situation AGRI G 4, Committee for the Common Organisation of Agricultural Markets, 29 November 2018
(14) foodnavigator.com, ‘Germany calls for food manufacturers to voluntarily reduce sugar, fats and salts’, 8 January 2019
https://www.foodnavigator.com/Article/2019/01/08/Germany-calls-for-food-manufacturers-to-voluntarily-reduce-sugar-fats-and-salts#
(15) foodnavigator.com, ‘Cut sugar supplies and push up prices to incentivize reformulation, report urges’, 21 February 2019
https://www.foodnavigator.com/Article/2019/02/21/Cut-sugar-supplies-and-push-up-prices-to-incentivise-reformulation-report-urges
(16) foodnavigator.com, ‘UK challenges drinking yoghurt industry to cut sugar by 20%’, 5 February 2019
https://www.foodnavigator.com/Article/2019/02/05/UK-challenges-drinking-yoghurt-industry-to-cut-sugar-by-20
(17) beveragedaily.com, ‘The stevia story has changed! Purecircle on the evolution of the natural sweetener’, 11 March 2019
https://www.beveragedaily.com/Article/2019/03/11/The-stevia-story-has-changed!-PureCircle-on-the-natural-sweetener
(18) Wageningen Economic Research, ‘Impact of coupled EU support for sugar beet growing: More production, lower prices’, December 2017
http://edepot.wur.nl/430039
(19) ACP, ‘ACP and LDC sugar industries call for a level playing field for all stakeholders’, 28 Feb 2019
http://www.acp.int/content/acp-and-ldc-sugar-industries-call-level-playing-field-all-stakeholders