Original publication: May 2016
Authors: Institute of Agricultural and Food Economics – National Research Institute, Poland: Piotr Szajner, Ph.D, Barbara Wieliczko, Ph.D, Marek Wigier, Ph.D, Mariusz Hamulczuk, Ph.D, Wioletta Wrzaszcz, Ph.D
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In the European Union (EU) the sugar industry is a strategic division of the food sector. Sugar is the primary sweetener and maintenance of production is an important element of food security. The sugar industry is of economic, environmental and social importance in the EU.
The sugar market in the EU is one of the most regulated food markets, and market regulations strongly interfere with the market forces. The regulatory system is based on production quotas, official prices and regulations of foreign trade. The quota system will end as of 30 September 2017. Reform of this system will lead to big changes in the functioning of the sugar industry in the EU.
Elimination of sugar production quotas and isoglucose and the minimum purchase price of sugar beet will cause a significant change in market conditions. This applies to the production and distribution of sugar, and therefore the elimination of production quotas will change the rules of competition between producers (oligopolistic behaviour), the risk posed by substitute products, the possibility of entry of new players, and the bargaining power of growers (position in the supply chain, because of the elimination of the minimum purchase prices).
In the season 2015/2016 the amount of sugar produced in the EU (13.5 million tonnes) is lower than the demand on the internal market and the rules on non-quota disposal of sugar are restrictive. Elimination of production quotas will mean that the internal market more supplied from production.
Other instruments of market regulation, above all in the field of foreign trade, will not change. As a result of current trade agreements, developing countries will still be able to export sugar to the EU under preferential conditions. Elimination of production quotas and unchanged regulations of foreign trade will mean that foreign trade will play a greater role in the balance of the market in the EU. In addition, the liberalisation of the conditions of production will ensure that the EU internal market will be more strongly linked to the world market. The impact of the world economic situation will be stronger than ever, as shown by the experience of recent years.
The global sugar market in the long term will show moderate growth development, and the determining factor will be the increasing demand. World demand will grow by approximately 2% per annum and the growing population and changing consumption patterns in developing countries will have the key impact on the level of growth in demand. Growing demand will be a stimulator of production. Production of raw cane sugar will increase in many regions. The potential for increase in production occurs mainly in South America. In Africa, the increase in production will require large investments, and in Asia production is characterised by high volatility due to climatic conditions. Growing global demand creates an opportunity for the sugar sector in Europe, including in the EU.
World sugar prices are highly volatile and the business cycle lasts approximately five years. Sugar prices are determined by the supply and demand situation (e.g. the level of closing stocks) and are correlated with oil prices. These trends will continue in the future, and therefore the forecasts of developments in the world and the EU markets should take into account cyclical economic fluctuations. Monitoring of these trends and the ability to interpret and use this information should be an important element of market regulation (e.g. market monitoring).
The aim of the study on “The post-quotas EU sugar sector” is to look at the options for the future EU sugar policy. The study includes:
- General overview of the current situation on the EU and international sugar markets.
- Scenarios of development of the sugar market in the EU after 2017.
- Proposals for future sugar market regulations in the EU.
There are three scenarios presented concerning the development of supply-demand situation in the EU, depending on the economic situation and the level of prices on the world sugar market. It also includes the level of fuel prices, which will determine the consumption of sugar beet for bioethanol production.
- The first scenario assumes that the world prices of white sugar in the long term will be maintained at the current level (EUR 350 per tonne). In conditions of relatively low prices restructuring would be required in the EU sugar industry. The area of sugar beet cultivation will decrease and this decrease would be compensated by higher yields per hectare. Reduced consumption of sugar beet for bio-ethanol production would cause a slight increase in sugar production (to 17.0 million tonnes). Owing to the decline in demand in the internal market (to 17.1 million tonnes) a reduction in imports and increase in exports would occur. Self-sufficiency in the EU market would improve. Sugar prices would oscillate around EUR 400 per tonne.
- The second scenario assumes a bigger long-term fall in prices on the international market (EUR 250 per tonne), which would put pressure on prices in the EU. In these market conditions, deep restructuring of the sugar industry in the EU would be necessary. The cultivation of sugar beet and sugar production would remain only in the most competitive regions, mainly in the EU-15. Sugar production would decrease (to 16 million tonnes) and substantial imports would be necessary to meet demand. EU would be a net importer. Deep restructuring transformation would result in the elimination of many of the sugar factories and the reduction of the area under sugar beet leading to very adverse economic, social and environmental effects.
- The third scenario envisages that world sugar prices will rise (500 EUR per tonne) due to the decrease of supply (e.g. weather conditions) or the improvement of the overall economic situation and the increase in fuel prices. This is an optimistic scenario, as in such market conditions there is no risk for the sugar industry in the EU. World prices would be higher than the reference price, and in such conditions it would possible to increase the production of sugar beet and sugar. It is expected that sugar production in the EU could rise to approximately 18.7 million tonnes and would exceed domestic demand. Imports would be reduced to the duty-free quotas, and the surplus supply would be exported (approximately 4 million tonnes).
The liberalisation of the EU sugar market would result in a stronger integration with the world market and the effect of this would be greater volatility of market conditions (including price) and an increased risk of doing business. The sugar industry in the EU is of economic, environmental and social importance. Therefore, market policy should include a broad set of instruments and regulations (i.e. a safety net) which would enable sugar production in the EU to be maintained, which would be also a feature of food security policy. The policy towards the sugar sector should include income support for farmers, regulation of foreign trade, the possibility of intervention, promotion and monitoring of the current market situation.
Link to the full study: http://bit.ly/573-446
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