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EU to emerge as a major driver of global sugar markets

14 June 2014

According to the website Agrimoney.com, sugar market analysts at the UK-based broker Marex Spectron have suggested that the EU “is to become one of the two main drivers of values” on global sugar markets, with its influence second only to that of Brazil. This reflects both the deregulation process already under way in the EU sugar sector and “the greater freedom among EU farmers… to raise or lower production of beet” for use in sugar manufacturing, in response to EU and world market sugar prices. The annual nature of EU beet production could lead to widely varying levels of EU sugar production, depending on the relative prices of sugar beet and other arable crops.

The Marex Spectron analysts commented that “if the world price is too low, EU farmers can respond by sowing the minimum…, turning the EU into a substantial importer [of sugar],” while “if world prices are high enough to incentivise EU farmers to plant the maximum, the EU could again become an annual exporter.” EU sugar production could then range from a low of 14 million tonnes to a high level of 21 million tonnes, depending on prevailing prices. In this context, “the EU could be an importer of up to 2.5m tonnes, or an exporter of up to 4.5m tonnes.”

It was noted that only the Centre South region of Brazil has a comparable range of sugar production, given the ability of producers to switch between production of sugar and ethanol.

The analysts said that from 2016 there would be “two huge swing factors at work in the sugar market – one based on the EU cost of production, and the other on the Centre South Brazil cost of production,” with both capable of very rapid reaction to price changes. The play of these two “swing factors” could give rise to very different outcomes in international sugar prices.

Marex Spectron estimate the EU beet growers’ production cost – i.e. the level at which farmers will receive a profit incentive to grow the crop – at about 19–20 US cents/lb (US$0.19–20/0.45 kg), and that of Centre South Brazil’s producers at 17–18 US cents/lb.

Looking at EU production costs, EU sugar producer Südzucker issued a warning in April 2014 of further declines in the profitability of its operations. Up to the end of February 2014, revenues fell by 1.8% (to €7.74 billion) and operating profits fell by 32% (to €658 million) year on year. A further decline in revenues (to €7 billion) and profits (to €200 million) in the year beginning March 2014 is foreseen. This is attributed to “the expectation of an increasingly deteriorating economic environment in the European sugar and bioethanol markets”, with “prices undermined by increased imports” of both sugar and ethanol and “the prospect of an end to quotas in 2017”. 

Editorial comment

EU beet sugar production takes place alongside and in rotation with cereals production. Many EU beet processing companies also process cereals and are therefore well placed to respond to price signals from both EU and global cereals and sugar markets. Many EU-based beet companies are also exploring non-sugar uses of sugar beet. This creates a situation where, even in a context of import controls on sugar being retained, EU beet producers will be well placed to respond to market signals.

ACP sugar producers, for their part, will need to prepare for dealing with far more volatile sugar prices, given the ability of both EU and Brazilian producers to adjust rapidly to changing price signals. 

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