London, 25 March 2011

Czarnikow Group: The European Sugar market is facing significant stress following its reform which has resulted in marked changes to the EU’s relationship with the world market. Since the beginning of the year prices in some parts of the EU have strengthened above €900/mt, while the Commission has had to announce a duty-free import quota for 300,000 tonnes to bring in additional supply.

This is an unplanned development for the world’s largest beet growing region, which until recently used to be the world’s largest whites exporter. European stocks have been run down over the last few years in line with the decline in European support prices, in contrast to rising world market prices, resulting in tight supply in the domestic market today.

While the repercussions of the reform process and lower European production were slow to be recognised, last year’s decision to allow exports above WTO commitments seems a long way away.

Policy and results

• In 2003, the European Commission introduced reforms that brought sugar in line with the broader reforms to the Common Agricultural Policy (CAP).

• Reforms resulted in improved yields and increased efficiencies for the beet industry.

• Following reform, EU production quotas were set at 13.3 million tonnes of sugar, and with consumption at 16 to 16.5 million tonnes the European market is structurally short of around 3 million tonnes of sugar a year.

• With the market in deficit, imports from existing trading partners and least developed countries (LDCs) are an important part of the balance sheet.

Recent Developments

• Problems began to appear in the EU balance sheet this year.

• Beet plantings were slightly delayed in early 2010 and harvesting proved to be very difficult indeed, as adverse weather conditions impacted.

• As a result, EU sugar production ended up 1.8 million tonnes lower than the previous year.

• EU imports totalled around 2.5m tonnes in 2009/10, with a similar volume expected this year. However, imports from LDCs have been disappointing.

• The tightness in the EU balance has been reflected by an increase in marginal EU domestic prices, with prices in some regions trading above €900/mt, over twice the €404/mt the Commission modelled as part of the reform process.

• The Commission has acted to stop the upward pressure by electing to lift the duty on CXL imports, reclassifying 500,000 tonnes of out-of-quota production into the domestic market, and opening an import quota for an additional 300,000 tonnes of duty-free raw and white sugar, which will need to be sourced from the world market.

Conclusion

• The 2010/11 season has been the year when the EU has had to face up to its structural deficit. This has been the result of a draw-down in stocks, a disappointing crop and lower-than-expected imports.

• EU producers will nonetheless see the current cycle as positive, with prices diverging from the price path envisaged under the reform programme.

• Producers have also seen additional demand from non-sugar sectors at competitive levels and an opportunity to potentially re-coup domestic market share as a result of the shortfall in import supplies.

• When we last looked at the European balance in detail in September 2008 (Review no. 2008 e 105) we cautioned that falling EU prices and rising global values could expose EU consumers to supply volatility in the medium term.

•  It now appears that the fragility in the balance sheet has been exposed even faster than we had imagined.

Peter de Klerk, Czarnikow analyst, said: “Although the EU reforms have produced a number of efficiencies in beet sugar production, the market deficit has not been met by imports as expected and the EU balance sheet is fragile as a result. EU prices therefore will need to be competitive to attract imports.”

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