EU to be net sugar importer despite reform

A plan to abolish European Union sugar production limits would lead to a modest increase in output and softer EU beet sugar prices, but the bloc would still remain a net importer for three years or longer. The latest reform plan announced on October 12 would end the EU's system of national sugar production quotas and minimum beet prices from 2015, not in 2016 as had been suggested in earlier drafts of the reform plans.
The move is designed to boost production and avoid a repeat of the current sugar shortage on the European market, while allowing an increase in EU sugar exports, which are currently capped at 1.35 million tonnes a year under world trade rules. "The abolition of quotas would free EU producers to produce as much sugar as they want, but the EU will not return as an exporter of 6-7 million tonnes of white sugar," said Stefan Uhlenbrock, soft commodities analyst with Germany's F.O. Licht. "There will be more competition between EU member states to produce sugar," Uhlenbrock added.
First, the Commission's proposals must be approved by EU governments and lawmakers in the European Parliament, however, and that is a process of political horse-trading expected to last up to two years. The EU used to be a leading net exporter of sugar while its producers were protected against more efficient rivals such as Brazil and Thailand. The dismantling of the sugar regime in recent years to create fairer trade in the world market transformed the EU into a major net importer.
Total EU sugar production is currently capped at 13.3 million tonnes, and within this quota growers benefit from a minimum sugar beet price of 26.29 euros per tonne. EU sugar production in the October 2011-September 2012 crop year is expected to rise to 17.3 million tonnes, including out-of-quota sugar, from 15.7 million in 2010/11, according to the London-based International Sugar Organisation (ISO).
The ISO forecasts EU sugar import demand in 2011/2012 at 3.1 million tonnes, compared with 3.3 million the previous year. A sugar market analysis published by the European Commission said the abolition of production limits would result in an increased sugar beet area, though offset by lower yields, leading to a 2 percent increase in EU sugar beet production by 2020 from current levels.
That higher production would push EU sugar beet prices down by about 8 percent and white sugar prices by 3.5 percent, it forecast, adding there would be little impact on world prices. Most analysts agreed with the EU that the bloc is likely to remain a net importer, noting that farmers in countries such as Ireland and Portugal, who ceased production after the last major reform in 2006, were unlikely to return to the market to compete with more efficient producers in France and Germany.
"Production capacity is much smaller than before," Uhlenbrock said. EU sugar beet producers, meanwhile, questioned the Commission's analysis, saying it had underestimated the likely increase in EU output of alternative sweetener isoglucose - a syrup produced from maize (corn).
Isoglucose is currently subject to an EU annual production limit of 700,000 tonnes, which would also be scrapped in the reform. Beet producers fear that a sharp increase in isoglucose production would eat into their market share. "The potential for isoglucose substitution according to some analysts could be about 3 million tonnes - much more than the Commission impact assessment suggests - and that could greatly impact sugar beet production," said Elisabeth Lacoste, secretary general of the International Confederation of European Beet Growers.
EU officials said a key argument for scrapping quotas is that the move would lead to a lifting of a World Trade Organisation (WTO) limit on European sugar exports - imposed because the bloc's quota system is regarded as an unfair cross-subsidy for the industry.
But while EU officials have said the scrapping of quotas would be sufficient to end the WTO limit on exports, some have questioned the true extent of the EU's proposed liberalisation. The Brazilian Sugarcane Industry Association (UNICA) said the lifting of the WTO limit on EU exports was not guaranteed, because the bloc has proposed maintaining its existing reference price for sugar of 404 euros per tonne.
Under EU rules, if sugar prices fall to 85 percent below the reference price, it triggers the opening of private storage aid, which helps to keep prices at a level near the reference price. World sugar prices are currently well above the bloc's reference price, with December white sugar futures on Liffe trading at $697 per tonne (505 euros) on Friday.