EU sugar market and the world market for sugar

The European sugar market

In Europe the production of, and trade in, sugar beet and sugar are governed by the EU agricultural policy. The EU sugar regime currently in force was introduced in 2006 following an extensive reform. The aim of the reform was to reduce the European sugar production and export, as well as EU beet and sugar prices substantially.

 

The restructuring scheme

A key element in the reform was a restructuring scheme, which offered producers to sell their EU production quota to a restructuring fund. This was financed by a production levy imposed on all quota production in the EU. The period since 2006 has seen a drop in the number of EU beet sugar-producing countries from 23 to 18 member states, and production has been concentrated, with France, Germany, Poland, UK, Holland and Belgium accounting for 75% of the EU quota output.

 

Overall, total EU sugar production quota has gone down to 13.3 million tonnes sugar against 17.4 million tonnes before the reform.

 

EU sugar quotas

tonnes of sugar	Sugar Quotas
Austria	351.027
Belgium	676.235
Denmark	372.383
Finland	80.999
France	2.956.787
DOM	480.245
Germany	2.898.256
Greece	158.702
Italy	508.379
Netherlands	804.888
Spain	498.479
Sweden	293.186
UK	1.056.474
Czech Republic	372.459
Hungary	105.420
Lithuania	90.252
Poland	1.405.608
Slovakia	112.320
Azores	9.953
Romania	104.689
IN TOTAL EU-29	13.336.741

 

 

EU institutional prices

Under the sugar reform of 2006, the EU sugar reference price was reduced by 36%. The reference price is used as as measure for the EU Commission in its management of the balance of the sugar market. The minimum sugar beet price was reduced by 39.7% in the same period.

 

The EBA Initiative

A main driver behind the reform of the EU sugar regime in 2006 was the conclusion of the Everything But Arms Initiative (EBA) in 2001.

 

This Initiative grants free access to EU markets for the the world’s 49 least developed countries (LDC) in respect of all other products than arms.

 

The EBA Agreement does not prohibit so-called swaps, which means that an LDC can import sugar from e.g. Brazil at the world market price to cover its national consumption and export its own sugar output to the EU. In order to discourage such swaps, it was necessary to make a very substantial price reduction in the EU before the EBA Initiative took full effect.

 

Export from the EU

Before the sugar reform EU was the second largest sugar exporter after Brazil. EU was exporting typically around 5-6 million tonnes of sugar on a yearly basis to the world market. About half of this was quota sugar export with export restitution, and the other half was non-quota sugar exported without any restitution. This export was challenged by three large sugar exporters, Brazil, Australia and Thailand through the WTO, which ruled that EU was only allowed to export 1,4 million tonnes of sugar on a yearly basis. EU decided to ban export with restitution, so today there is only a limited export of non quota sugar out of the EU.

 

Import to the EU

In general import duties are imposed on sugar imports to the EU, which means that export of sugar to EU's is not economically viable. However some countries have preferential access to the EU market.

 

For many years, the EU imported about 1,8 million tonnes of raw cane sugar on a yearly basis for refining in dedicated sugar refineries. The major part of this sugar was imported under the so-called ACP (African Caribean Pacific) protocol granting countries in this region quotas which they could sell to the EU at the EU price level. This protocol expired in 2009 and has been replaced by an Economic Partnership Agreement (EPA).

 

Today, there is free access with no quotas for the EPA countries and LDCs (49 Least Developed Countries). However, should the total volume imported exceed 3.5 million tonnes, the EPA import will be restricted, while there will be no restrictions on the LDC import.

 

Other preferential import arrangements include a quota to the Balkans of 380,000 tonnes and 677,000tonne CXL quotas to a substantially reduced import duty. 334,000 tonnes of the CXL quota is reserved for Brazil, and most of the remaining quantity can go to different third countries.

 

All in all, the EU Commission estimates the 2009/10 preferential sugar import to be 3,2 million tonne. While this figure is subject to significant uncertainty, the volume is expected to increase in the future as some of the countries, which now are not restricted by quotas, will expand production based on these new export opportunities.

 

Sugar for non-food purposes

Besides the option of exporting non-quota sugar,the non quota sugar can also be sold for industrial usage other than food production, e.g. the manufacture of pharmaceuticals and enzymes. Before the 2006 EU sugar reform, these industries received a production refund to compensate for the difference between the EU's price level and the world market price for sugar. The EU can open up for quotas for the non-food industry to import sugar from the world market; for 2009/10 there is such a quota of 400,000 tonnes.

 

Inward Processing Relief

The former EU export refund system has been supendend for both sugar in its natural state and for sugar used in processed products. Producers of such sugar-containing products are eligible to apply for Inward Processing Relief (IPR). Under this arrangement, sugar from the world market can be used for the products exported out of the EU. Nordic Sugar imports world market raw cane sugar from for instance Brazil and refines it on own sites in order to supply sugar to exporters of processed products.

 

The world market for sugar

The world sugar production in 2008/09 is estimated at around 154 million tonnes.
Only a very small proportion of this output is sold under free world market conditions. The vast majority is sold on domestic markets protected by import duties. For many years, this has allowed an excessive world market production, with the surplus being exported at world market prices that were below the production costs in most countries. In the period 1998 to 2008, which saw a major gobal excess production of sugar, the world market price for white sugar averaged  USD264 per ton. This price was around one third of the EU price and, generally speaking, was perhaps the most commonly used argument in the criticism of the EU sugar regime before the 2006 reform.

 

Today, the trend has reversed. World sugar  production is estimated to be below consumption, and some shortage of sugar is foreseen. In 2009, this resulted in  the highest price level seen for 28 years. At the end of September 2009, world market prices exceeded USD 600 per ton, compared to the EU reference price of EUR 404.40, valid until the expiry of the current EU sugar regime in 2015.

 

The main reason behind the current world deficit of sugar is a huge drop in production in India. In 2008/09, production was estimated at about 16 million tonnes, down from nearly 29 million tonnes the previous year.

 

Brazil dominates the world sugar market

The very low world market prices were mainly due to Brazil significantly expanding its production. Between 1997/98 and 2008/09, Brazil’s sugar exports rose from 8.5 million tonnes more than 24 million tonnes. Brazil accounts for almost half of world market exports. Brazil has particularly good climatic conditions for highly effective sugar cane production, but production was also helped when, some years ago, the Government introduced an subsidy scheme for an ethanol programme for mixing ethanol with petrol. The ethanol is manufactured from sugar cane, and over the past few years more than half of Brazil’s sugar cane production has been used for ethanol. When sugar prices are high, more cane is likely to be diverted into sugar production. Most of the cars now sold in Brazil have flex-fuel engines that can run on pure ethanol, pure petrol, or any mixture of the two.

 

The future trend in world market sugar prices  will depend on several factors. Speculative funds have been especially active in the large raw material markets, including sugar. At times, their presence triggers dramatic price fluctuations, but they are also contributing to increased liquidity in the market, which is positive.

 

With the EU's exit as a major player in the world market for sugar, Brazil’s market dominance will be even more pronounced, and hence world market prices will depend even more on such factors such as the Brazilian ethanol policy (mainly the percentage of ethanol/petrol blending) and weather conditions. Consequently, the significant fluctuations seen in world market prices in recent years in particular will certainly continue and probably become even more pronounced.

 

Nordic Sugar A/S