Ben Eastick Written by Ben Eastick

EU Import Duty Tariff Bid Up To Support Beet Sugar Producers.

9th July 2012
Market Position
The current position for sugar can be summed up as follows. A global sugar surplus estimate for the 2012/13 crop is 9.3 million tonnes as a result of increasing prices in February which has spurred an increase in planting area for sugar. The global production surplus has seen a reduction of hedge fund activity (limited potential for funds to generate significant growth) which has resulted in a softening of world prices since March. The lower prices will be challenged by the combination of Brazil’s lack of investment in production, uncertainty whether India can become a stable exporter and the continued Asian demand for sugar, especially from China. These three factors along with continued weather risks have meant supply has been unable to meet demand which in turn has resulted in higher prices. The volatility of the market in the last few years appears to be stabilising, albeit at higher prices than seen in the past. A reduction in world market prices will discourage producers to continue production growth, thus reduce further expansion which is needed to supply the increasing Asian demand.

Europe
In March we reported about the UK driest winter since records began in 1921, with 30% below average rainfall. The following three months also broke records for being the wettest since records began, alleviating the drought conditions and returning the water table to normal levels. European farmers encouraged by high prices and availability for out of quota exports have increased the area of beet planted. The following favourable spring weather across Europe should result in another EU record beet crop for 2012/13. During the summer months and prior to the next sugar beet campaign there remains potential supply tightness. The EU Commission has approved the further reclassification of 250,000 tonnes of out-of-quota sugar into the internal market. The recent softening of the world price has seen the demand increase which has resulted in the EU import duty tariff duty level bid up to support the EU beet sugar producers who would otherwise struggle to be competitive due to their higher production and labour costs. So falling world prices will not reduce the price in the EU, which currently is double that of the world prices. The reforms in 2006 gave developing countries 15% access to the EU demand, duty free. When these countries could not meet the demand, alternative supplies were obtained from non-preferential countries, Brazil, India and Thailand which are subject to €300m/t import tariffs. The European Commission is proposing to remove these tariffs in 2015, but this needs approval from the European Parliament and member countries. The beet refiners and developing countries are lobbying for an extension of the quotas until 2020.

Brazil
While the rest of the world’s sugar exporters are increasing production, Brazil is facing difficulties. The industry is experiencing reduced productivity through ageing cane and reduced utilisation of milling capacity which is raising costs, further exacerbated by the falling ethanol price being held below the rate of inflation. The government is trying to stimulate economic activity with aggressive interest rate cuts, which is resulting in the withdrawal of foreign investments. Cane acreage has not expanded since 2008 and the sugar sector has not utilised Brazil’s much expanded industrial base. This will impact many of the world’s sugar refineries as Brazil is the preferred supplier. Despite a delayed start in April, the crushing is well under way, forecasts for the 2012/13 crop is for an increase in sugar output to an estimated 33 mln tonnes, helped by much needed rain in April after drought earlier in the year.

Thailand
With the campaign coming to an end the sugar industry is looking to process 100 million tonnes of cane to produce 11.2 mln tonnes of sugar. The Thai industry has improved their capacity utilisation with a 40% increase in cane throughput availability which will result in further exports onto the world market after a decade of limited growth.

India
Sugar production is expected to exceed the 2010/11 season by around 1 million tonnes to 27.8 mln tonnes, over 2 million tonnes higher than domestic consumption. This is critical if India is to become a stable exporting nation. However, recent softening of world market prices and continuing increase in agricultural costs will impact on the future of India’s exporting capability. The amount of sugar that is exported will depend on the world market price, relative to domestic prices. In May the cap on exports was lifted, resulting in a firming of domestic prices.

USA/Mexico
US domestic supply has been improved by an increase in beet production to 4.6 million tonnes, but supply remains tight with no changes made to the demand for sugar in the US. The USDA announced it would re-evaluate domestic supplies in the month of June. In Mexico sugar production has fallen to 5 million tonnes, down 7% on last year due to the worst drought on record during the latter part of 2011 and the beginning of 2012. Domestic supplies may not be sufficient to meet demand.

China
Despite the country achieving near historic highs for both cane and beet production, there remains a domestic shortfall which will result in China becoming the largest sugar importer in 2012.