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This is a transcript of episode eleven of the Down to Agribusiness podcast. Visit the show page here.

A new era for European sugar: What it means now that EU sugar production quotas have been abolished

Chris Horseman

Hello and welcome to episode eleven of the Down to Agribusiness podcast. I’m Chris Horseman. It’s a new era for the European sugar industry. Production quotas, which have limited EU sugar outputs since 1968 were finally abolished as from the beginning of October, and for the first time EU sugar producers can produce as much sugar as they can sell. But is this really the start of a new golden age for European sugar? Will the EU re-establish itself as a major sugar exporter? Or will it struggle to compete against alternative sweeteners? What do the changes mean for Europe’s traditional cane sugar suppliers?

To discuss some of these questions, I’m joined today by Stefan Uhlenbrock, Senior Commodity Analyst at F.O. Licht. Hi Stefan, thank you for joining us today.

Stefan Uhlenbrock
Hi Chris, it’s great to join you.

Thank you Stefan. So, in practical terms, in your view, what does the elimination of quotas really mean for the European sugar industry?

This means that the producers can now produce and sell to whomever as much sugar as they want. Previously they could produce as much as they want, but the fields for food use were restricted to a company’s individual production quota and this effectively limited output because sales for non-food use were not that attractive for the sugar producers.

Yes, so of course, although the EU can produce as much as it wants, nobody can actually produce sugar unless they have the capacity to process the beet. So, realistically speaking, what is Europe’s production capacity and could we see any significant investment in new capacity now that the quota limits have gone?

This question will only be answered over the next two or three years. In theory, you can of course take the daily beet processing capacity of each factory, and multiply it with an assumed campaign length and then get a total for the EU 28, as far as potential production is concerned. This may be somewhere in the region between 20 and 21 million tonnes and in comparison to this, we estimate output in the new 17/18 season at 19.2 million tonnes. This is still well below the historical production record for the EU which was established in the 1997/1998 season at 21.5 million tonnes but in those days there were still some 100 additional sugar factories in operation which have been closed in the wake of the 2005 EU sugar market reform.

So, given that we have seen only factory closures over the past decade but not a single new plant coming online, the targeted rise in production will come from expansions of the daily beet processing capacity at some existing factories, but for the most part, from targeted extension of the campaign length at the factories. This comes with a higher degree of weather risks because frost and thaw events could make part of the harvested beet crop unprocessable in the factories. So, the reality check for the EU’s new production capacity is still up in the air. As far as the second part of your question is concerned, relating to new investment terms, the question is who invests some €300 million for a brand new factory when the prospect is for low prices and dependency on exports to the volatile world market. I would therefore expect that the investment will most likely remain confined to efficiency improvements and possibly some smaller expansions here and there at existing factories instead of new green fields.

The only exception is that we are currently hearing that a proposal is on the table for a giant new beet sugar factory to be built by Dubai’s Al Khaleej in the United Kingdom. This plant is targeted to have a daily beet processing capacity of some 36,000 tonnes which would result in up to 750,000 tonnes of additional sugar per season in the UK market. The question is whether this sugar is needed because AB Sugar is already able of producing some 1.4, 1.5 million tonnes of sugar per season.

Then Tate & Lyle’s refinery has a capacity of 1.2, 1.3 million tonnes per year, though it is only running at probably half capacity in recent years. So, the market would be completely over-supplied as far as the domestic market in the UK is concerned, and so this new plant would be entirely dependent on the volatile world market too.

Yes, and of course the UK aspect to all this is particularly interesting with Brexit happening. Maybe we’ll talk about that in just a moment. Just to come back to the end of sugar quotas, what that also means is no more limits on production of isoglucose or inulin. Now, do you think there could be any significant increase in production of these alternative sweeteners to sort of spoil the party for sugar?

Yes, that’s a very interesting part of the end of the quota system, because isoglucose production has also been capped by the EU sugar market regime at some 700-800,000 tonnes per year, with production heavily concentrated in some eastern European grain surplus regions, such as Romania, Hungary and Slovakia, and to a smaller degree as well in western countries such as Belgium, Germany, Spain and Italy. Isoglucose, as a liquid sweetener, has of course potential for market growth, especially in liquid applications, such as beverages, canned foods, ice cream, jams, some confectionery, etc., and this would definitely happen.

This may be possible to raise isoglucose production at the existing plants, by switching between different syrups, but there’s also been investment by some of the players at the existing plants. For example, a private Hungarian firm is currently building a brand new plant in Hungary’s great plains that goes online this year and will be at full capacity in 2018. This plant alone is expected to produce some 230,000 tonnes of isoglucose when it is fully operational, but the necessary investment is not only in the side of the isoglucose producers, but also on the side of the food and beverage producers because if you switch from a solid non-liquid sweetener to a liquid sweetener, you need some switching to your production plant and low sugar prices currently are obviously reducing the incentive to make this switch.

All in all, I would expect that the isoglucose market may possibly double in size over the next two years, but further larger scale investments in new isoglucose plants do not seem to be on the rise.

Yes, and the sugar industry is of course not only looking to its own market but it’s also been bullish about its prospects for significantly expanding sugar exports from the EU. Now do you think this optimism is well-founded based on the world market as it currently stands?

Well, on the plus side, the European Union produces one of the most high-quality white sugars in the world, and there should definitely be a home for these sugars, but white sugar prices in the region of $375 per tonne, which at the current exchange rate is some €315-320 per tonne is definitely not what the EU producers have been dreaming of, and these price levels should contain EU exports to the world market at a rather modest level this season.

What we are currently seeing is that the surplus producers in the EU such as France, Germany, the Netherlands are trying to sell their surpluses in the deficit region in the EU, so prices in these deficit countries have fallen sharply although they are still above those on the world market. At the current rather strong euro, which is trading at 1.18, 1.19 against the US dollar, I do not think that will be much fun for EU sugar producers to export sugar on the world market unless the number 11 world sugar price climbs to about 18 cents per pound or higher.

To what extent is the current low-ish world market price an automatic function of the fact that the EU is now free to produce as much as it wants or are there other fundamentals happening elsewhere in the world which is pushing sugar prices down?

Yes, the expected rise in EU sugar output is of course a key component for the sharp drop in prices, especially white sugar prices that we have seen recently, where the white sugar premium, the difference between the white sugar and the raw sugar prices, currently trading at just about $50 per tonne, which is less than half of what we have seen earlier this year. It is not only the expected rise in EU white sugar production that has pressured the white sugar price but also an expected strong rise in production in Asian white sugar producers such as India, Pakistan, Thailand, which is currently combining for huge pressure on global white sugar prices.

So we’ve looked at the internal European market, we’ve looked at prospects for exports, one area where there is going to be no change is on the EU’s regime on sugar imports. Now, given that reality, given that there is still a protective wall around the EU market, do you think that there is still a future on the EU market for traditional suppliers of cane sugar from the developing ACP countries?

Yes, this duty-free sugar from the ACP countries, or the least developed countries of this world, this sugar may still find a home in some southern European markets and the United Kingdom, but the market for these sugars is surely shrinking. We have already seen in the recently concluded 2016/17 season that the imports of these duty-free sugars from countries with which the EU has struck the so-called EPA or EBA agreements have fallen to 1.3 million tonnes from 1.6 million the year before and in excess of 2 million tonnes in past years.

So, this market will probably only be open in the future for the most efficient among these countries which can offer sugar at a competitive lower price in the EU market, but for the less efficient ones, this produces a serious problem that the potential market in the EU is more or less disappearing.

Yes, and of course one of the major cane sugar refiners within the EU is the United Kingdom which is due to leave the EU in a couple of years’ time, and the UK has not yet specified what its external trade policy will be for sugar. What are the prospects of the UK really stepping up its refining activity and becoming perhaps a European centre for cane refining after Brexit happens?

This question is more or less impossible to answer at this time because we do not yet know how the import regimes for raw sugar will look like after Brexit, and this will be the make or break factor for the Tate & Lyle refinery in the UK. If they have access to duty-free sugar, they should be able to compete against beet sugar production in the UK and on the European market, but if they continue to have a problem that they have to pay duties on the sugar they are sourcing from the cane sugar world, this may be a major problem for them especially if you have in the future possibly competition not only from AB Sugar but from the new now discussed additional beet sugar plant from Al Khaleej.

Whether this will see the light of day or not is a completely different question, but this would of course increase the competition in the UK market even above the level of competition that we are already seeing right now from beet sugar. So, to sum it up, the key question for the viability of refined sugar, refined from imported walls, will be how the import regime after Brexit will look like.

Well, it’s a fascinating topic and Stefan, thank you so much for sharing your insights with us today. Thank you all for listening.

You can access additional content on the episode 11 page.

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