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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