How China will get affected by EU removed sugar quotas 11-10-2017

The abolishment of sugar quotas in the EU is opening the world market for European producers. For the sugar industry in China, facing higher production costs and low innovation, this step adds more pressure to the business and urges for improvement.


 


With the last day of September in 2017, the EU sugar quota came to an end after lasting for almost 50 years. 

 

European sugar producers now have the opportunity to expand their trade on global markets, and with the right policy supports from the European Commission, providing timely and relevant market information, they might have a good chance to be successful. 



However, the EU sugar industry will still be supported by various authority’s measurements, like a substantial EU import tariff, as well as private storage opportunity for domestic market players. This protects farmers in case of market disruptions like sharp decreased in price. 



The European Commission has furthermore improved the transparency on the domestic sugar market in anticipation of the end of the quota system. A new organization, namely Sugar Market Observatory, provides short-term analysis and statistics about the sugar market, as well as analysis and outlook reports to help farmers and processors manage their businesses more effectively. 



This measurement comes as the European Commission has learnt from the mistakes of lifting milk quotas, where falling prices have forced many players out of the market. 



Sugar has been the last agricultural sector in the EU where production has been subject to a quota system. 



The EU is the global leading producer of beet sugar. However, beet sugar represents only 20% of the world’s sugar production. The other 80% is produced from sugar cane. EU sugar production in the 2016/17 marketing year corresponds to 16.84 million tonnes. As soon as there are no quotas for the upcoming harvest, it is expected an increase in production by roughly 20%. This increase results from an increase in area and higher yields because of good climatic conditions. 

 

Without regulatory limits on sugar production, sugar producers will optimise the use of their production capacity and reduce the unit costs of producing sugar. This will allow competitive suppliers to sell sugar on the world market which will not be limited anymore when the quotas expire.











The outcome of the abolished sugar quota will likely be a production boost of white sugar with falling prices coming along the increasing supply. 



The end of quotas affect the EU trade with developing countries 

The EU will export around 8% of the total production in 2016/2017. With the end of the quota system, these exports will no longer be limited by WTO rules, allowing producers to fully explore new markets and possibilities.




As for imports, the EU goes further than any developed economy to cater for the needs of developing countries. The EU will continue to offer trade preferences and remain the world's foremost provider of assistance to developing countries.


 

Sugar can be and will continue to be imported into the EU duty-free and quota-free under the Everything-But-Arms agreement for the least-developed countries and from countries that have concluded or implemented Economic Partnership Agreements with the EU. Most of that sugar will need to be refined in the EU. These preferential imports have declined in the recent years because of lower EU prices and other markets have become more attractive during the last two years. These imports will most likely further decline after the end of quotas as domestic prices will closely align to world prices.


Impact on China’s sugar industry 

China’s sugar industry is restricted by the natural environment and development conditions. This makes Chinese sugar less competitive, suffering high production cost, according to market intelligence firm CCM. The cost advantage in the EU, combines with the deregulation after the abolishment of quotas will likely lead to a growth of the output of sugar and hence extend the export to the Chinese market. To ease the pressure on China's market and protect the supply security of sugar and a healthy development of the sugar industry in China, necessary measures should be taken to protect and develop the domestic market. 

 

As a couple of possible measurements, China is under pressure to decrease the production cost and put more focus on high-tech innovation and mass production. Furthermore, the country might intrigue the demand for sugar in China and beyond. On the one hand, domestic demand can be spurred. On the other hand, foreign demand can be stimulated. By stimulating the demand outside China, the domestic market can maintain stable. All in all, domestic sugar producers should consolidate the market as well as explore the new market through providing quality and price-competitive products.




How did the EU quota system work 

The total EU production quota of 13.5 million tonnes of sugar is divided between 20 Member States. Production in excess of the quota is known as "out-of-quota" sugar and strict rules govern its use. It can be exported up to the EU's annual World Trade Organisation limit of 1.374 million tonnes, sold for biofuel or other industrial non-food uses, or be stored and counted against the following year's sugar quota.


If there were signs that there would be an excess of sugar on the EU market in the following marketing year, which runs from 1 October to 30 September, a decision could be taken to withdraw some quantities. If on the other hand, there was the risk of shortage, measures could be taken to increase supplies. The end of the sugar quotas means that there are no further limits to production or to exports, allowing production to better adjust to market demand, both within and outside the EU.



About CCM 

CCM is the leading market intelligence provider for China’s agriculture, chemicals, food & ingredients and life science markets.


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