EU sugar market update and outlook

25th October 2018

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Portrait of the month

After the post-quotas surge in EU exports of sugar, the EU may return to a net trade balance in 2019/20 __________________________________ 2

EU sugar prices may at last be on the rise _______ 3

UK Agriculture Bill will “free up” £150m for environmental protection ___________________ 3

Government and stakeholders contemplate a “no deal” Brexit _______________________________ 4

Cane sugar can be carbon neutral _____________ 5

Disclaimer ________________________________ 5

Focus on … correlation between EU and international sugar prices Before quotas were abolished, there was literally zero correlation between EU and international sugar prices → R2 = 0%.

We only have 11 data points for the post-quota period (including the EC reported price of 350 € t-1 for August 2018), so not enough data to draw any valid conclusions, but, with R2 = 62%, MS Excel™ spits out a delicious formula for the regression line that EU prices in 2017/18 were London #5 plus $110 pmt. Meanwhile, the EC forecasts that EU prices in the medium term will be #5 + 30 to 40 € t-1.

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After the post-quotas surge in EU exports of sugar, the EU may return to a net trade balance in 2019/20 Faced with the prospect of lower domestic and export prices after the abolition of quotas in 2017, EU sugar processors negotiated to expand production and lengthen the beet campaign, in France for example by 20 days to 134 days. Production in the EU28 expanded to over 21 million tonnes in

2017/18 and exports surged to 3.6 million tonnes. In 2018/19, the overall beet area is estimated down 1% to 1,665,000 ha, with the Greek area down 375% to 1,300 ha and Croatia and Austria down 34%, but Poland up 3%, Germany up 2%, Lithuania up 11% and Finland up 13%. Badly affected by poor yields this year, EU28 production is expected to be around 18.7 million tonnes. Sugar consumption is always

extremely difficult to estimate, but it’s possible to extrapolate “domestic disappearance” ex-mill from the available data on production, stocks and trade. Provisional data for the 2017/18 marketing year would suggest EU28 domestic disappearance amounted to 18.4 million tonnes, including human, industrial, bio-ethanol and sugar exported in processed products. There appears to be no concrete statistical evidence – yet – to suggest that domestic disappearance will be anything other than unchanged in 2018/19 or indeed in 2019/20. Given the above estimates, and taking at face-value the European Commission’s estimate of ending stocks of 1.9 million tonnes for the end of September 2019, the net trade position for the EU28 could therefore change from being a net exporter of ≈ 2.2 million tonnes in 2017/18 (with imports of 1.3m and exports of 3.6m tonnes) to a net exporter of only just over 1m tonnes in 2018/19. Production in 2019/20 will probably be significantly lower given the absurd ban on neonics for use in pelletted beet seed. We may note that Tereos has asked growers to cut 2019 beet area by 5%, but even if we assume no change in total production and unchanged stocks, the EU28 would become a net exporter of only ≈ 250,000 tonnes in 2019/20. Given continuing low prices, the neonic ban and the expiry of multi-annual beet supply contracts,

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there is every reason to believe it may even be possible for the EU to return to become a net importer of sugar in 2019/20, although a balanced external trade position seems a more likely outcome.

EU sugar prices may at last be on the rise It’s small, but it’s an increase: the EU reported price for August 2018 was 350 €/t, up 4 €/t, whilst in the “deficit areas” (“Region 3”), prices were reportedly up 10 €/t to 381 €/t. True, there are anecdotal horror stories of prices in the very low 300’s DDP, but these reported data (which “are what they are” despite skepticism about their validity), coupled with the 42% rise in New York #11 raw sugar futures prices (yes, 42%!) encourage one to believe that sugar prices may at last be on the

rise in Europe, bringing cheer to both ACP/LDC sugar producers and the domestic industry. On the front page of this newsletter, the correlation between EU and #5 prices was noted to be #5 plus $110 pmt with R2 = 62%. If this correlation is true – a huge if because there isn’t enough data to be statistically confident – then, with $/€ = 1.14, the average EU reported price ought to be 436 €/t.

UK Agriculture Bill will “free up” £150m for environmental protection The DEFRA minister, Rt Hon Michael Gove MP, has set out a vision of post-Brexit UK agriculture policy to “invest in the environment and take back control for farmers after almost 50 years under EU rules”. A spokesman for DEFRA called the new Agriculture Bill ↗ “really exciting” because it will, if passed into law in Parliament, affect real change “on our own terms, changing the way we fund agriculture and the environment for the next 25 years”. In cash terms, the Bill would phase out area and per-head payments to UK farmers between 2021 and 2027, freeing up £150m per annum which would be spent on WTO compatible (amber box) payments to improve the environment, i.e. air,

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water, wildlife, flood risk, public access, etc. The Bill will get its second reading in Parliament on 10th October 2018. Meanwhile on the other side of the English Channel in June, the European Commission presented legislative proposals ↗ on the common agricultural policy (CAP) beyond 2020 for the EU27 after Brexit. Under these proposals, Pillar One payments (mostly comprising the Single Farm Payments) would essentially be maintained. As Professor Alan Matthews noted, “it is very much business as usual”, although the CAP share of the overall EU budget is expected to fall to around 27% in 2027.

Source: http://capreform.eu/cap-spending-in-the-next-mff/

Readers will recall that the EU intervention prices for sugar were reduced by 36% in 2006/09 and farmers compensated by the inclusion of EU sugar beet and cane into the Single Farm Payment (SFP)(see: Council Regulation (EC) No 2011/2006). Not including additional Voluntary Coupled Support, the SFP attributable to sugar from 2016 onwards currently amounts to around €1.5 billion. Both agricultural policy proposals are very complex and contain many scenarios and options for the countries in each Union (the member states of the EU and the devolved administrations of the UK), and moreover, what’s proposed may not be agreed in parliaments, however, it seems clear that UK policy will diverge EU27 policy, with farmers likely to face the Single Farm Payment being phased out in the UK whilst it is continued in the EU27. Under such circumstances, one might ask whether it is appropriate to compensate for this divergence by means of import tariffs between the UK and EU27.

Government and stakeholders contemplate a “no deal” Brexit In the “worst case” scenario of the UK leaving the EU without a Withdrawal Agreement, i.e. “no deal”, the UK government confirmed in a public communication on 22nd October (1) that the UK and the EU27 would have to face each others’ WTO tariff schedules, however, the UK would have the option to apply smaller tariffs below the maximum bound rates. Several scenarios could be envisaged, e.g. maintain the EU tariffs in €/t, or complete liberalization, or the UK opening Autonomous Tariff Quotas for specific quantities of specific goods likely to be in short supply. The objective would be to minimise disruption, and the Government seems keen to insist that any such measures taken would be temporary.

1 https://www.gov.uk/government/publications/partnership-pack-preparing-for-a-no-deal-eu-exit

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Cane sugar can be carbon neutral The world must invest $2.4 trillion in clean energy every year through 2035 and cut the use of coal-fired power to almost nothing by 2050 to avoid catastrophic damage from climate change, according to the United Nations’ Intergovernmental Panel on Climate Change (IPCC).

Source: https://library.wmo.int/doc_num.php?explnum_id=5188 ↗

It is timely, then, to remind ourselves that the carbon footprint of cane sugar is low by comparison with other agricultural products, particularly when full use is made of energy production in conjunction with sugar. Throughout its commercial lifecycle, the carbon footprint of the sugar cane industry is favourably impacted by the use of the natural fibre in sugarcane (bagasse), which provides the fuel source for its own milling and for the production of sugar, molasses, fuel and potable ethanol, and electricity for the local grid. Indeed studies have shown that a cane sugar industry set up efficiently for maximum power generation can actually show a negative carbon footprint (2).

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2 http://www.issct.org/pdf/proceedings/2010/2010%20Rein,THE%20CARBON%20FOOTPRINT%20OF%20SUGAR%20.pdf