Summary
While USDA maintains EU sugar prices will need to fall if EU projections for growth in sugar exports in the post-quota period are to be met, this neglects the long experience EU sugar companies have of operating within a dual price system. It is possible substantial price premiums could be maintained on the EU sugar market, with this raising the issue of what regulatory initiatives are required to ensure traditional ACP suppliers share in any EU sugar market prices premiums. This would appear to require an extension of the EC’s current regulatory initiative on UTPs to ACP-EU sugar supply chains. This could potentially include regulatory requirements mirroring those which govern relations between domestic EU sugar beet growers and EU sugar beet millers.
Expanding EU exports of sugar and more importantly high sugar content products under newly implemented FTAs constitute an area to which ACP governments in sugar surplus regions will need to pay close attention as they move forward with EPA implementation.
According to analysis from the USDA, EU sugar exports will be higher than initially projected. USDA projects sugar exports of 2.5 million tonnes for the 2017/18 season, the highest level in 8 years (1).
This USDA estimate is however below both EC (2.8 million tonnes) (2) and ISO (2.88 million tonnes) projections for total EU sugar exports in the 2017/18 season (1).
The latest EU production data has raised forecast production by 900,000 tonnes to 20.5m tonnes, ‘up an “astonishing” 3.8m tonnes year on year’. Given the size of the increase in EU sugar production for the current season this is seen as likely to have a significant market impact both within and beyond the EU. This will further increase EU sugar exports ‘as the additional supply will simply force producers to export more’ (6).
Against the background of the projected expansion of EU sugar exports it should be noted that in the first six months of the 2016/17 season 6 African ACP destinations accounted for no less than 15% of total EU white sugar exports, with most of these exports being concentrated in West and Central Africa. It should be noted that in the past there has been no clear correlation between sugar prices and EU sugar export volumes in terms of the timing of EU sugar exports (4).
EU Sugar production, Exports, Imports Human Consumption, Ending Stocks (‘000 tonnes)
| 2015/16 | 2016/17 | 2017/18 | % change 215/16-17/18 | |
| Beet sugar production | 14,017 | 16,222 | 19,820 | +41.4% |
| Cane sugar production | 266 | 278 | 280 | +5.3% |
| Total sugar production | 14,283 | 16,500 | 20,100 | +40.7% |
| Raw sugar imports | 2,251 | 1,900 | 1,500 | – 33.4% |
| Refined sugar import | 804 | 850 | 500 | -37.8% |
| Total sugar imports | 3,055 | 2,750 | 2,000 | -34.5% |
| Raw sugar exports | 5 | 5 | 5 | 0% |
| Refined sugar exports | 1,543 | 1,545 | 2,495 | +61.7% |
| Total sugar exports | 1,548 | 1,550 | 2,500 | +61.5% |
| Domestic human consumption | 18,700 | 18,700 | 18,700 | 0% |
| Ending stocks | 1,241 | 241 | 1,141 | -8.1% |
Source: USDA, ‘EU First Post-Quota Sugar Production Up to Pre-2007 Reform Level’, EU Sugar Semi-annual
report, 29 September 2017
The USDA projections reflect the boost given to EU sugar production by the end of production quotas. This has seen the EU area under sugar beet increase 22.7% between the 2015/16 and the 2017/18 season. Over this period in the top six EU sugar producers which account for ¾ of the EU area under sugar, this area is up 22.6% (France), 28.3% (Germany), 34% (Poland), 22.2% (UK), the Netherlands (46.2%) and 21% (Belgium). In only 4 EU member states is the area under sugar in 2017/18 below the area under sugar in 2015/16 (3) Nevertheless USDA sees the declines and stagnation of the area under sugar beet in some EU member states as offering ‘new market perspectives’ for sugar suppliers (3). Overall ‘Stratégie Grains predicts production of white sugar will rise by almost one third (31%) over the next four years, with prices dropping accordingly’ (5).
While it is acknowledged that high quality EU white sugar ‘may command a price premium over world market prices’, according to USDA EU prices will need to converge with world market prices if the projected expansion of EU sugar exports is to be achieved. According to USDA this implies a weakening of EU sugar prices (1).
However based on EC data Agrimoney.com reports ‘European sugar prices have proved resilient to the prospects of market liberalisation and surging production’, with in July 2017 the EU sugar price premium over world market prices being in excess of 50%. However Credit Suisse is reporting EU sugar producers have concluded ‘forward supply contracts at levels below the official spot price, at around €450-plus per tonne’ a level below the €500 a tonne price of a year before. It is maintained this is ‘nowhere near the collapse that might be implied by the export parity price’, with the price decline being ‘pretty modest in the circumstances’. This modest price response is seen as reflecting lower EU stock levels (1).
This being noted the USDA analysis focusses more on the prospect of weaker EU sugar prices in the coming years, with prices becoming more closely aligned with world market prices, given the absence of a guaranteed beet price and increased competition between EU sugar producers for market share in the post quota period (1). Overall the USDA foresees a period of ‘increased market volatility’ ahead for the EU sugar sector until the increased competition finds a new equilibrium (3).
The USDA analysis also highlights the decline in EU sugar imports which are projected to fall to 2 million tonnes (3). This decline is seen as falling particularly heavily on traditional raw cane sugar suppliers. This level is substantially above the EU’s own projections of an import demand of 1.5 million tonnes in the 2017/18 season (2).
Significantly the USDA report highlights the projected expansion of EU exports of sugar containing products, as a growing range of free trade area agreements enter into force and open up increased export opportunities for high sugar content products (3). In this context it should be noted the ‘Association of European Sugar Users (CIUS) whose members include confectionery and biscuit manufacturers, welcomed the end of what it called the market distorting quotas’. CIUS argued the competitiveness of EU industrial users had long been undermined by the EU’s restrictive sugar regime (5).
Finally the USDA analysis warns the changes currently underway could be compounded by Brexit related market changes, as British sugar processors capture a growing share of the domestic UK market as a consequence of the Brexit process. This is seen as having potentially serious consequences given the UK ‘is the largest importer of EU sugar as well as overseas raw sugar’. This trade could potentially be disrupted by a hard Brexit (3).
| Comment and Analysis
The USDA’s analysis which suggests EU sugar prices will need to fall to converge with world market prices if projected EU sugar export growth is to take place on the scale envisaged, ignores the long experience EU sugar companies have of operating in a dual price system. Against this background it is conceivable EU sugar companies could continue to operate a dual price system behind the protective wall created by the EU’s high MFN tariffs and a tightly managed import regime. In this context the convergence of EU sugar prices with world market prices could be more limited than the EC’s own projections suggest This then raises the question: could traditional ACP sugar exporters position themselves so as to share any price premiums which may remain on the EU market in the post-quota period? This is likely to be a tough proposition given the oligopolistic structure of the EU sugar sector and the long history of abuse of market power which EU sugar companies have. This question not only needs to be seen in the context of the corporate relationship which ACP exporters develop with EU partners (e.g. the partnership now being developed between the Mauritian sugar company Altea and the French farmers’ cooperative Tereos), but also whether the EC plans to extend the current initiative to combat unfair trading practices (UTPs) within EU agro-food sector supply chains to the functioning of ACP-EU agro-food sector supply chains (see companion article ‘Proposed EC Regulatory Initiative on UTPs Needs to be Extended to ACP-EU Supply Chains’, 8 September 2017). This issue of addressing UTPs along supply chains is a particularly important issue in the sugar sector given the integrated nature of ACP-EU supply chains within individual global corporate entities. For example in Southern Africa, along certain supply chains, the operation of sugar estates, millers, trading companies, European refiners and marketing activities all take place within a single corporate entity. Similarly in the Caribbean American Sugar Refiners owns both the main sugar miller in Belize (Belize Sugar Industries) and the main EU importer of Belize sugar (Tate & Lyle Sugars). Along these types of supply chains it is far from clear how the process of price formation at each stage of the supply chain actually works. There is a need for far greater transparency of price formation along these supply chains, with regulatory initiatives paralleling those which govern relations between EU sugar beet growers and sugar millers, being required. In terms of expanded EU white sugar exports West and Central African markets, where EU sugar companies already have a market presence (Sierra Leone, Ghana, Burkina Faso, Cameroon and Angola) seem likely to be target markets. In addition, the expansion of the marketing operations of Tereos in East Africa, could also make this region a target market for French sugar exporters (see companion article ‘Tereos Expanding its Presence the East African Sugar Sector’, 22 September 2017). The projected expansion of EU exports of high sugar content products resulting from improved market access negotiated under free trade area agreements is something which low cost sugar producing regions in the ACP such as Southern Africa will need to pay close attention to. Within the SACU there is a substantial sweets and chocolate industry, which takes a significant volume of locally produced sugar. Tariff free access for competing EU sweets and chocolate exports could not only impact on sales of locally produced sweets and chocolates (and hence local demand for sugar), but could also impact on the investment location decisions of major international sweets and chocolate manufacturers. This is an issue which regional sugar producers will need to pay close attention to, particularly those with a high exposure to industrial sugar users in their sales into the SACU market(e.g. Swaziland). |
Sources
(1) Agrimoney.com, ‘EU sugar prices ‘need to drop’ – to spur export surge’, 6 October 2017
http://www.agrimoney.com/news/eu-sugar-prices-need-to-drop—to-spur-export-surge–11075.html
(2) EC, ‘Short-term outlook for EU agricultural markets in 2017 and 2018’, Summer 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/short-term-outlook/current_en.pdf
(3) USDA, ‘EU First Post-Quota Sugar Production Up to Pre-2007 Reform Level’, EU Sugar Semi-annual
report, 29 September 2017
https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Sugar%20Semi-annual_Brussels%20USEU_EU-28_9-29-2017.pdf
(4) EC, ‘Sugar Trade statistics’, AGRI G 4 Committee for the Common Organisation of Agricultural Markets, 24 August 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/sugar/doc/trade-statistics_en.pdf
(5) Foodnavigator.com, ‘The end of EU sugar quotas:-Beet gets free rein but cane will still take a beating’, 3 October 2017
https://www.foodnavigator.com/Article/2017/10/03/The-end-of-EU-sugar-quotas-Beet-gets-free-rein-but-cane-will-still-take-a-beating
(6) Agrimoney.com, ‘Rabobank warns on EU sugar prices, as it lifts forecast for world supplies’, 9 October 2017
http://www.agrimoney.com/news/rabobank-warns-on-eu-sugar-prices-as-it-lifts-forecast-for-world-supplies–11082.html