Sugar Surge to Dampen Prices as EU Scraps Production Quotas
The EU has scrapped domestic production quotas for sugar, in a long-awaited move which analysts say is set to boost the bloc’s output and dampen global prices.
The reform, which was implemented on 30 September, will remove limits on the volume of sugar that EU beet growers can produce. It was first agreed four years ago as part of a bigger package of measures which the European Commission said was aimed at improving environmental sustainability and the market orientation of EU farming. (See Bridges Weekly, 27 June 2013)
However, the shift in policy will mean fiercer competition for countries in tropical regions that produce sugar cane. While Brazil, India, and Thailand are the biggest producers, many African, Caribbean and Pacific countries also grow the crop and export sugar – including through preferential market access arrangements to the EU.
“The end of the quota system represents an important turning point for our European sugar sector and marks another important step in the market orientation of the Common Agricultural Policy,” said Phil Hogan, EU Commissioner for Agriculture and Rural Development, in a statement.
Hogan also said he was confident that the EU sugar industry had taken steps to adjust since the reform was first announced.
A flooded market
“The market will be a bit flooded,” said Jean Luc Mastaki, Senior Economist at the UN Food and Agriculture Organization, in comments to Bridges.
Mastaki said that France, Belgium, Germany, and Poland were among the countries with the capacity to increase sugar beet production in the wake of the move, which could almost double for some producers.
The increased competition could hit some developing countries harder than others, though, he said – with African countries that have integrated in regional trade blocs, such as Swaziland, potentially less vulnerable than small island nations in the Pacific or Caribbean which remain heavily dependent on sugar exports to the EU market.
Competitive sugar exporters in other regions meanwhile remain concerned that the EU sugar market remains highly protected.
“Global sugar producers are effectively locked out of the European market,” argued Géraldine Kutas, head of international affairs at the Brazilian sugarcane industry association UNICA, in an online article on Monday.
Kutas said that exporters without preferential access faced an import tariff of €339 a tonne at current international prices.
Sugar, ethanol, and grains
With many countries converting part of their sugar output into ethanol for use in cars, a complex relationship exists between energy markets and agriculture, analysts said.
For decades, Brazilian sugar production has helped fuel its fleet of flexible-fuel cars – with the US more recently also moving to convert part of its maize harvest into ethanol as well.
With oil prices currently low, demand for sugar as a biofuel feedstock has been weaker. But a drop in sugar prices combined with upward movement in the price of oil could see more sugar diverted towards the energy sector, Mastaki said.
Analysts pointed out that, in the EU, farmers’ production decisions would also depend on price movements for other temperate crops that are produced in areas where sugar beet grows well.
“When we say beet growers, we actually mean arable farmers that grow sugar beets,” noted Rabobank analyst Ruud Schers, in an article posted online.
Schers said that prices for crops such as wheat, barley, and rapeseed could ultimately also affect sugar markets, by influencing farmers’ land use decisions.