Are You Ready for the End of EU Sugar Production Quotas?

EKA > Are You Ready for the End of EU Sugar Production Quotas?
Aug 01, 2017

Are You Ready for the End of EU Sugar Production Quotas?

August 01, 2017

 

 

On October 1 of this year, the EU sugar quota production system will come to an end. Part of the EU’s Common Agricultural Policy (CAP), the system was originally introduced in 1968 to guarantee stable, secure sugar supplies and support EU farmers. It divides a production quota of 13.5 million metric tons of sugar between 19 Member States, permitting out-of-quota (excess) sugar to be exported, sold for industrial non-food uses (e.g. biofuels), or carried forward to the next year’s quota. The EU’s sugar policy also limits sugar exports, imposes import quotas and tariffs, guarantees farmers a minimum price for sugar beet used for quota sugar, and provides suppliers from African, Caribbean and Pacific (ACP) states and Least Developed Countries (LDC) with duty-free, quota-free market access.

 

Following in Dairy’s Footsteps

 

Some industry players speculate as to whether the abolition of sugar quotas will mimic what unfolded after EU dairy quotas ended in 2015. Milk production increased by almost 10%, and market dynamics changed significantly in a relatively short time period, causing price volatility and general market turbulence.

 

It certainly seems as if the sugar industry is primed to follow in dairy’s footsteps. According to a report from the USDA Foreign Agricultural Service, the EU sugar beet processing industry has publicly stated it plans to aggressively grow business after production quotas are terminated. In fact, it has already contracted 12% more sugar beet for market year 2017/18 than it did for market year 2016/17. The current caps on EU sugar exports will also be lifted on October 1, and the beet processors intend to become major exporters and compete effectively (both within and outside the EU) by selling “cheap” sugar. To afford these price cuts they plan to increase processing capacity without significant new investments.

 

Isoglocose (aka high fructose corn syrup) could also play a part in altering market dynamics. Extremely strict quotas that prevent the sweetener from competing with beet sugar for use in food production will cease to exist, threatening the hold that beet sugar producers currently have on that market segment.

 

EU cane refiners, who depend heavily on raw cane imports, will be especially hard-hit by the end of sugar production quotas. Many already struggle to turn a profit due to the complex import quota and tariff system, and will find their margins squeezed even further as white sugar prices fall while the price of imports from efficient, low-cost producers like Mexico remain high. Refiners will be able to continue purchasing zero-tariff raw cane from ACP/LDC suppliers, but those countries account for only 65% of imports.

 

The Brexit Factor

 

The UK is the largest importer of EU sugar as well as overseas raw sugar. The impending exit of Great Britain from the EU in two years threatens a major export destination for continental EU sugar exports, and will make the UK a formidable competitor for raw sugar imports from ACP/LDP countries, many of which are former UK colonies. Brexit also stands to substantially impact the post-2020 CAP budget, as Britain is its second-largest contributor.

 

It will be hard to predict the specific ramifications of Brexit on the sugar industry until the final Brexit agreement is reached, but the stage is definitely set for a major market shift. It will be interesting to see what unfolds given that David Davis, Britain’s Secretary of State for Exiting the EU and chief Brexit negotiator, worked for leading European sugar refiner and supplier Tate & Lyle for 17 years – and spent much that time crusading against European sugar regulation.

 

Preparing for the Volatility Ahead

 

If what happened after the end of EU dairy quotas is any indication, the sugar industry is in for a period of market turbulence and volatility. Starting October 1, EU sugar producers and end users will no longer be protected against global price fluctuations that are likely to become more extreme due to increased competition. And with the floodgates open for EU producers to escalate production and exports, there will be consequences for all market participants. Furthermore, Brexit stands to have a significant impact on the global sugar industry that is difficult to envisage at this early stage of the game.

 

Market participants need advanced risk management solutions and the ability to tightly manage trading positions if they are to successfully weather the changes that lie ahead. Eka’s cloud-based and on-premise agriculture commodity trading and risk management (CTRM) solutions provide sugar traders, producers, refiners, and other value chain participants with all the tools required to succeed in complex, volatile markets. The next-generation CTRM platform maximizes profits by providing real-time data and business intelligence for optimizing physical trading, enterprise risk management, procurement, logistics, processing, and compliance.

 

Eka also offers a cloud-based analytics solution that uniquely complements its CTRM/ETRM platforms by aggregating real-time data from multiple applications and driving critical insights that improve decision-making and enable rapid responses to market-moving events.

 

Using advanced trading and risk management solutions such as Eka’s will be vital for sugar industry participants that want not only to survive but thrive after EU sugar production quotas cease to exist.