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EU sugar quota removal to create ‘new era’ of lower prices

The end of the EU sugar quota could create a new era of lower sugar prices, with implications for farmers, sugar processors, food manufacturers and end consumers, according to one analyst.

The removal, which took effect on 30 September, is the biggest upheaval in the EU sugar market for a number of years, says head of Investec commodities team, Callum Macpherson.

He explains, “The removal of the quota will enable EU sugar production to increase. Ultimately, the end of the quota could result in cost reduction for food, pharmaceutical and other manufacturers who use sugar, and this may result in a cost reduction for the end consumer.

“If it does cause sugar prices to fall, the abolition of the quota could help to offset the financial impact of the UK sugar levy on soft drinks manufacturers that is due to be introduced in April 2018 and so hamper the effect the government is trying to bring about.”

Macpherson adds that if it does cause sugar prices to fall, the abolition of the quota could help to offset the financial impact of the UK sugar levy on soft drinks manufacturers that is scheduled to be introduced in April 2018.

He adds, “Farmers have dramatically increased planting of beet leading to forecasts that the EU will be broadly self-sufficient in sugar over the October 2017 to September 2018 harvest season. In theory this should erode the significant premium that EU sugar currently enjoys over international prices, which have been falling, partly on anticipation of higher EU production. A knock on effect could be lower imports of cane from the international market.

“While, if EU prices begin moving in line with international prices it could lead to greater volatility than sugar users in the EU have experienced in the past. However, thus far prices for sugar supply contracts in the EU going into the post quota period are still being agreed at a significant premium to international prices.”

The move has also been welcomed by the European Sugar Users (CIUS), describing it as a “major step towards sustainable supplies of sugar” for the food and drink industries. CIUS president Robert Guichard notes, “This is a significant change and new opportunity for the whole sugar supply chain: farmers, sugar industry and sugar users. Each actor within the supply chain must adapt in order to benefit from the new market environment. As producers and buyers become more familiar with the risk management tools that are available today, they will be able to handle the expected increase in volatility and strengthen their positioning in global markets.

“With the removal of production and export restrictions, we see that European sugar producers are increasing their output to develop their sales globally. We wish them every success.”

However, Guichard expresses concerns about an important remaining anomaly: as of 1st of October, exports of European sugar will no longer be restricted, however imports of sugar into the European Union will still be very limited.”

He notes, “CIUS would like to see this unbalanced market framework corrected as soon as possible. We would like to see fair competition between cane refiners and beet manufacturers. And we need to have direct access to alternative sources of supply in case of shortages. We are therefore counting on the EU to include some duty free access to raw and white sugar in all future EU trade agreements.

“Europe benefits from the positive trade balance and growing exports of high European value add sugar containing food and drink products. In order to continue to succeed in increasingly competitive local, European and global markets, we depend on the security and competitiveness of supply of sugar.”

 

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