Summary
EU sugar production estimates have been revised down, with the prospect of a greater market balance and some price recovery emerging. However a ‘no-deal’ Brexit could push 550,000 tonnes of EU27 white sugar back onto the EU27 market, exerting a downward pressure on EU27 sugar prices. In contrast shortages of sugar would be likely to emerge on the UK market which would increase demand for imports of both raw cane sugar and refined sugar from preferred suppliers as well as an increase in UK sugar prices. With spot market prices currently above contracted sugar prices ACP exporters may need to re-evaluate their marketing strategies. However not only is their uncertainty over the basis of the UK’s departure from the EU but also over which existing trade agreements the UK will succeed in ‘rolling over’ by November 2019. The EC is busy preparing for a ‘no-deal’ Brexit in the sugar sector. The ACP Ambassadorial Working Group on Sugar should initiate a dialogue with the EC on the nature of these preparations and the likely implications for ACP sugar producers, given the profound effects EU policy measures can have on the functioning of the EU sugar market.
At the April meeting of EU Sugar Market Observatory (SMO) sugar sector stakeholders expressed concern over the current situation on the EU sugar market which was described as ‘problematic’ (1). Despite EU sugar production forecasts having been revised down for the 2018-19 season to 17.5 million tonnes, average EU sugar prices remained low at €314/tonne up to January (3) (down from € 371 in January 2018) (2) and €312 in February 2019.
However it was highlighted how this low price reflected earlier contracts which had been concluded at ‘beginning of the marketing year when production forecasts were more optimistic’ (1). Spot market prices it was suggested were much higher. In April 2019 Reuters reported EU spot market sugar prices were recovering from the 2018 lows, reaching €422/tonne in late March (compared in global white sugar prices of around $330/tonne which were close to the record low of the last decade of $307.5/tonne). This followed reduced EU sugar output in 2018/19 MY and declining EU sugar stocks which fell 16.4% year on year (3).
Some SMO participants however questioned the spot prices being cited suggesting the data was incomplete. Against this background the importance of ‘timely and accurate forecasts’ to proper price formation in the sugar sector was emphasised.
In the light of sugar spot market price developments some SMO participants suggested EU sugar imports could be higher than projected, while EU sugar exports could well be lower (1). Indeed, the EC’s spring 2019 ‘Short-term outlook for EU agricultural markets in 2018 and 2019’ suggest ‘a significant decrease in EU sugar exports by 49% is forecast for 2018/2019, down to 1.7 million t. It also suggests ‘slightly higher estimated import levels at 1.5 million t compared to 2017/2018’ (2). It was in this context that in January 2019 EU imports were estimated at 163,000 tonnes around double the level in January 2018 (3). However despite these rising EU imports the EU would remain a net sugar exporter (2).
In terms of EU sugar production the reduced area under sugar beet (e.g. Sudzucker is reducing output by 700,000 tonnes (3)), the ban on neonictotinoids, alongside dry spring weather is expected to lead to lower production, moving the EU closer to a balance with internal EU sugar demand (1).
At the global level sugar prices ‘remain relatively low after a slight increase at the end of 2018—despite the announced world deficit for marketing year 2019/20’. This gave rise to a ‘rather pessimistic view on the world price evolution’ in the sugar sector. This is despite more Brazilian sugar cane being directed into ethanol production and reduced Indian export sales (1).
The EC is proceeding with its ‘BREXIT preparedness actions’, in the sugar sector, which aim to ‘mitigate market disturbances in case of a “no deal” scenario’ (1).
| Comment and Analysis
The higher EU sugar spot market prices (+35%) which currently prevail suggests a number of ACP sugar exporters may need to rethink their marketing strategies for the 2019/20 marketing year to get a better balance between forward contracts and spot market sales. This will be by no means a straight forward process given the very uncertain policy and market context. Future marketing strategies for 2019/20 will need to take into account not only projections of likely EU27 sugar production but also the state of play in the Brexit process. While reduced European sugar beet production is likely to see an EU sugar market which is more in balance, a ‘no-deal’ Brexit at the end of October would see standard MFN tariffs applied on imports from EU27 countries. This would virtually exclude EU27 sugar supplies from the UK market, which has recently taken 550,000 tonnes of EU white sugar exports. This would push sugar back onto EU27 markets, exerting a downward pressure of sugar prices across the EU27 markets. In contrast a ‘no-deal’ Brexit would be likely to create shortages of sugar on the UK market in a context where around 25% of UK consumption is currently supplied by EU27 producers. This could create commercial opportunities for preferred ACP sugar exporters on the UK market, particularly for refined sugar. This could in part account for why investments are underway in Belize to allow an expansion of the production and marketing of ‘products that attract higher prices in the international markets than raw sugar’ (4). This includes investments up to October 2020 to ‘improve the factory’s production capacity of food grade sugar’, with EU and Caribbean markets being targeted (5). However if a UK-SADC Continuity Agreement were to be concluded then sugar exporters in South Africa and Eswatini (where sugar production is projected to reach record levels in the coming season) would be well placed to capitalise on opportunities on the UK market, given their capacity to produce and export refined sugars to UK standards. The Mauritius sugar sector would also be well placed to export refined sugar to the UK market, given its past track record of exports of refined sugar and the conclusion of a UK-Mauritius Continuity Agreement in January 2019 (6). In addition 2 of the 10 main ACP sugar suppliers to the UK market are LDCs, who have guaranteed duty free-quota free access to the UK market under the UK’s planned replication of the EU’s EBA scheme. Main ACP Sugar Exporters to the UK 2013-2018
* LDC The competition these combined developments would give rise to on the UK market would reduce the commercial prospects of CARIFORUM and Fijian sugar exporters secured through the concluded ‘UK-only’ Continuity Agreements. However should the UK’s departure from the EU be further deferred, then the recovery of sugar prices on EU27 markets which is now underway would be likely to continue, as the UK would remain a major outlet for EU27 sugar exports. ACP sugar exporters would however continue to face high levels of competition on the UK market. ACP sugar exporters would clearly benefit from more ‘timely and accurate forecasts’ of EU production, trade and price trends. In formulating marketing strategies for the coming period ACP sugar exporters would also benefit from better political intelligence on the Brexit process and the implications of different possible Brexit scenarios and UK policy choices, for price formation in the sugar sector. Against this background the ACP Ambassadorial Working Group on Sugar could usefully initiate an exchange of views with the EC on its ongoing ‘BREXIT preparedness actions’, in the sugar sector. In April 2019 having highlighted sugar and livestock products as sectors where EU27 exports to the UK are particularly vulnerable to disruption, Agriculture Commissioner Hogan expressed the belief the EU’s existing tool box was up to the task of mitigating potential disruptions. According to Agriculture Commissioner Hogan the EU policy response is likely to include ‘a mix of some or all of public intervention, private storage aid, withdrawal schemes and targeted aid, with in addition a relaxation of EU rules on state aid provided by national governments (7). This dialogue with the EC will need to include a critical review of the EC’s proposed market disturbance mitigation measures, to ascertain to what extent these mitigation measures could impact on the functioning of 3rd country markets where ACP sugar producers also have a marketing interest (for details of the EU’s evolving pattern of sugar exports see companion epamonitoring.net article, ‘EU Sugar Exports to ACP Markets Are Falling After Record Levels of EU Exports in 2018’, 3 June 2019). |
Sources:
(1) EC, ‘Sugar market Observatory meeting 26 April’, 7 May 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/reports/2019-04-26-report_en.pdf
(2) EC, ‘Short-term outlook for EU agricultural markets in 2018 and 2019’, Spring 2019
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/short-term-outlook-spring-2019_en.pdf
(3) 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
(4) idbinvest.org, ‘IDB Invest supports Belize’s sugar industry together with Belize Sugar Industries Limited’, 20 February 2019
https://www.idbinvest.org/en/news-media/idb-invest-supports-belizes-sugar-industry-together-belize-sugar-industries-limited
(5) lovefm.com, ‘IDB Invest funds part of phase two of sugar expansion project’, 20 February 2019
http://lovefm.com/idb-invest-funds-part-phase-two-sugar-expansion-project/
(6) ‘Agreement establishing an Economic Partnership Agreement between the Eastern and Southern Africa States and the United Kingdom of Great Britain and Northern Ireland’, London, 31 January 2019
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/776564/MS_4.2019_ESA_v1_pt1.pdf
(7) EC, ‘Remarks of Commissioner Phil Hogan at Press Conference on Brexit Preparedness’, 8 April 2019
http://europa.eu/rapid/press-release_SPEECH-19-2050_en.htm