Ben Eastick Written by Ben Eastick

EU sugar production quotas: a free-for-all in freefall

The removal of EU sugar production quotas two years ago has radically altered the face of the global sugar market. Here we explore what caused this and if anything can be done to reverse the current trend. 

How did the quota system work?

Production quotas for sugar were first introduced in 1968 as part of the rules for the sugar common market organisation (CMO) along with support prices for producers at a level considerably above that of the world market. Through measures such as the recently implemented Common Agricultural Policy (CAP), Europe was aiming to become self-sufficient for food production. Support prices and quotas were identified as the ideal incentive to ensure the CAP achieved this goal.

The total production quota was 13.5 million tonnes each year, with this being divided across 20 member states. Any production outside of this was deemed as “out-of-quota” sugar and subject to strict rules regarding its use. It could be exported up to the 1.3 million tonne limit the EU had agreed with the World Trade Organisation (WTO), sold for non-food uses, or placed into storage to be counted against the following year’s quota.

If there was too little sugar on the market, enough was added to meet the quota; too much, and the quota had been surpassed, sugar was removed. Bringing an end to this system meant that were no limits on the amount of sugar that could be produced or exported. At the time, the European Commission (EC) said this would create a situation in which exports could better adjust to the market price both inside and outside the EU.

EU sugar production quotas gave producers security and kept prices stable. Ever since their removal in 2017, prices have crashed to nearly record lows.

What happened after the quotas were removed?

The situation that has developed in the post-quota sugar market has been a far cry from the EC’s contemporary optimism. Production quotas acted as a cocoon, allowing producers within the EU to operate in an artificial market that was sheltered from the highs and lows of the global sugar market. Once exposed to this fiercely competitive environment, prices and profits almost immediately fell off a cliff and excess sugar began to pile up across Europe, reaching an initial 11.5 million tonnes and soaring ever since.

Less than a year after the quotas were removed, Südzucker, the EU’s largest sugar producer, announced an operating loss of between 100-200 million euros. Removed from a quota-based haven, EU sugar prices were forced to rapidly fall in line with those of the global market, meaning that only a few months after the removal of production quotas white sugar fell to 374 euros a tonne, its lowest price since 2006. As a result, a spokesperson for Nordzucker, the EU’s second largest producer, claimed that “at the current price level, there is hardly a sugar company in Europe that can still produce break-even.”

What made removing the quotas even worse for the EU sugar market was that it coincided with a consumer trend away from sugar being used in food and drinks. Per capita sugar consumption had already been falling for decades and measures such as the UK’s sugar tax merely exacerbated the situation, leading to sugar, wholly unjustifiably, being regarded in almost the same light as tobacco. Only developing countries demonstrated an increase in demand, but, as they already benefitted from cheap sugar prices, this was of little solace to the EU sugar industry.

Having been so instrumental in wanting the production quotas removed, the EC needed to step in and rectify what was rapidly spiraling from a continent-wide to a global crisis. They did not, with prices tumbling and production surpluses continue to pile up even as we speak.

What is the present-day outlook for the EU sugar industry?

Earlier this year, Cristal Union, France’s second largest sugar group, claimed the removal of the production quotas brought about a sudden end to a golden age for the sector. Speaking at the Dubai Sugar Conference, the company’s CEO, Alain Commissaire, said he believes that prices are set to recover, but will never again match those experienced while the quotas were in place. Moreover, Cristal Union recently announced the closure of a further 15 facilities across the EU.

Falling prices have also caused European producers to reduce their beet planting areas every year since the removal of the quotas. Assuming an average yield, EU sugar production for 2019/20 is set to fall to around 18 million tonnes, three million tonnes down from the output in 2017/18, the first season after the quotas were abolished. As well as this, some producers are even turning away from sugar beet altogether and instead relying on more profitable crops that can better support their livelihoods.

The devastating impact of the decision to remove the production quotas is plain to see. Decades of industry has been plunged into a crisis that has no end in sight and could well deepen before it improves. What’s worse from a Ragus Pure Sugars and UK point of view is that the unresolved Brexit situation adds another layer of uncertainty to a market that is still trying to work out its new place in the world.