EU Sugar Shake-up: How Farmer Decisions Affect the Post-Quota EU Sugar Market
In this first article in our series on the new EU sugar regime, we look at the impact on beet growers. Under new EU regulation, planting decisions will become more important as growers are set to face more volatility in beet and other commodity prices, which has an effect on the union’s total sugar output.
Between 2011 and 2014, EU sugar prices outperformed most other agri commodities (see Figure 1) and the subsequent profitability of sugar beets made it easy for farmers to satisfy demand from sugar factories, in terms of what size of beet area to sow. When we say beet growers, we actually mean arable farmers that grow sugar beets. The distinction matters, as these farmers grow various crops, of which sugar beet is one, accounting for up to a quarter of the crop plan, with the remainder mainly consisting of grains, oilseeds and potatoes. So new regulations that influence price have a strong potential to sway a farmer’s planting decisions.
Figure 1: EU sugar prices soared above other commodity prices, 2011-2017
Post-quota: an easy start?
On 1 October 2017, the new EU sugar regime will go into effect, eliminating country and EU-wide restrictions on sugar and isoglucose (HFS) output. Also, the minimum beet prices for growers will be eliminated, liberalising the bloc’s internal sugar market. In terms of trade, the export limit for EU sugar will be lifted, while the import regime remains unchanged, which continues to give preferential access to developing countries and selected countries. This may turn the tables and the first resulting challenge for beet growers may come very soon.
As the majority of the bloc’s sugar producers have indicated their ambition to increase output as per the 2017/18 season, it is key to secure enough ‘beet stock’. The new beet pricing models in most cases include a base beet price, which can be topped up by a premium in the case of higher sugar prices in the EU. Moreover, the duration of these contracts may vary from annual to multi-year contracts. Bearing in mind that a lower throughput volume will augment break-even production costs for sugar producers, a good arrangement with growers is pivotal. With EU and global prices at fairly attractive levels during Q1 2017, this demand for increased sugar beet volume was met by farmers who had an outlook for attractive beet revenue.
Global drop affects the next cropHowever, both global and EU prices have become less attractive during 2017, with both London white futures and EU spot prices losing about one-third of their value. With EU spot prices in a position to make a further drop as the beet campaign picks up steam by Q4, the outlook for beet prices in the next season becomes less attractive. Referring to the base beet price, which in a number of cases is set below the former EU minimum beet price of EUR 26.29/tonne, beets may be a less lucrative crop to farmers if they don’t get the top-up premium.
The impact of other crops
50% of EU sugar is produced by grower cooperatives (i.e. beet growers that also own the sugar factories where the beet are processed). These growers are less likely than independent growers to make radical changes in beet area in response to declining prices as they have an interest in beet processing. Moreover, prices for the mainstream grains & oilseeds which have been low since 2013 make a full shift to other crops unlikely.
But is it possible to predict where the issues may arise in terms of beet areas being smaller than required by sugar factories? A key determinant for all farmers is wheat, which accounts for up to half of the farmed area in the key regions (see Figure 2). But there’s more to it, as the other crops vary per region. In Spain, France, and the UK, barley is a relevant crop, rapeseed is to be taken into account in Germany, France, and the UK, and in the Benelux potatoes are a major crop. This shows that there’s no one-size-fits-all-approach, as prices of these various crops are often not correlated, especially in the case of sugar and potatoes vis-à-vis grains & oilseeds.
Figure 2: Wheat is number one in total European farmed area
Outlook for 2018/2019
Key points for the 2018 EU beet crop and subsequent sugar output for the 2018/19 marketing year are sugar price developments both in the EU and globally, as they determine profitability for sugar producers and therefore determine the outlook for beet prices. On the other hand, the price developments of wheat, barley, and rapeseed are of major relevance as they will eventually determine how much area will be dedicated to beet-growing. Whereas in the past EU sugar producers could easily steer beet areas, in the new reality farming dynamics will start to play a role, making flexible and sustainable supply arrangements a key priority.
In the coming weeks, we will publish a number of web articles concerning EU sugar reform, which will go into effect 1 October 2017. The articles will address the impact of the farmer’s decision-making on the EU sugar market, the repositioning of beet sugar production across the bloc, new EU pricing dynamics, changes in intra- and extra-EU trade flows, and the role of isoglucose in the EU market.
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Where to go from here
Ruud SchersSenior Analyst
RaboResearch Food & AgribusinessPO Box 17100 (UC 053) 3500 HG Utrecht, The Netherlands