By: Leigh Edwards
On October 1, 2017, the European Union’s (“EU”) domestic production quota system for sugar ended after more than a decade of import quotas and tariffs, production quotas, and a minimum floor price.[i] As the EU waived goodbye to their quotas, the European Commission (“Commission”) remained confident that the scrapping of 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.”[ii] However, other states remain skeptical, and believe that the EU “deliver[ed] a crippling blow to trade that once made up almost a fifth of its entire import, and has sustained developing-country sugar cane farmers since.”[iii] It clear Europe is about to get a lot sweeter,[iv] however, what does it mean for rest of the world?
Sugar is the only agricultural sector in the EU where production is subject to a quota system. This policy, apart of the EU’s Common Agriculture Policy, (“CAP”)[vii] was introduced with the first rules on the sugar common market organization (“CMO”) 1968, along with support prices for producers set a level significantly above the world market price.[viii] At the time, the recently introduced CAP had as one of its main objectives the self-sufficiency and security of the EU for its food production by encouraging agriculture production with stable prices for farmers.[ix] The quotas, therefore, gave a welcome incentive to achieve these goals in the EU’s sugar sector.[x] The total EU production quota of 13.5 million tons of sugar was divided between the twenty EU Member States (“Member States”).[xi] Production in excess of the quota, which was governed by strict rules, was exported up to the EU’s annual World Trade Organization (“WTO”) limit, and then sold for industrial non-food uses or stored and counted against the following years sugar quota.[xii]
In 2013, as part of the process of making European agriculture more market-oriented, (i.e., lowering sugar prices and enhance its farmers’ competiveness) the European Parliament and Member States agreed to end the sugar quota system. By ending the quota system, the Commission believed it would give “producers the possibility to adjust their production to real commercial opportunities, notably in exploring new export markets.”[xiv] The Commission further explained that its decision to end the quotas was a reflection of the fact that CAP is a “dynamic policy,” which responds to changing economic conditions and the realities of food production, farmers’ needs, and environmental concerns.[xv] Therefore, in this case, the initial objective of the quota, which was to encourage farmers to produce sugar in Europe to ensure security of supply, had become less relevant.[xvi]
Preparing the EU Sector for the End of Sugar Quotas:
As soon as the decision was made to end quotas, the CAP began implementing a number of measures to continue supporting the EU sugar sector to prepare for new markets’ challenges.[xviii] Examples of tools that CAP has provided to the EU sugar sector after the quotas ended include Member States having the option of providing income support for farmers in the form of direct payment or an optional program, known as “voluntary coupled support,” where Member States have the choice to provide support linked to production to address sectors in difficulty.[xix] Additionally, the EU has erected a “substantial import tariff” (outside preferential trade agreements) and the possibility to give support for private storage and crisis measures, which is meant to stabilize the market in situations where the market price rises or falls sharply and to ease costs for struggling sectors.[xx] In total, the EU has contributed close to € 5.4 billion to help the sector get ready for end of the quota and remain confident that it should be prepared to properly react to market signals.[xxi]
Impact on the Market, Post 2017:
As a result of sugar firms in the EU being able to produce and export as much as they want, it is clear that there are likely to be major changes in the global sugar trade.[xxii] That said, although the industry has been readying for the change for years, was the sugar sector actually ready for quotas to an end? At least in the short term, the end of the quotas appears to have yielded some positive results. According to Madelines Breguet, a sugar market analyst at Strategies Grains, “[t]here [should] be an increase of sugar beet production, so there will be very strong competition on the supply side, so that’s good news for all the sugar users.”[xxiii]
The EU is the world’s leading producer of beet sugar, producing about 50 percent of the total.[xxiv] However, beet sugar represents only 20 percent of the world’s sugary production, with the remaining 80 perfect is produced from sugar cane.[xxv] According to the USDA, the EU accounts for about 10 percent of the global sugar production.[xxvi] However, with the end of the quota system, these exports will no longer be limited by the WTO, creating for the opportunity to expand its presence in the global market.[xxvii] The Commission’s medium term outlook report analyzed the situation for the coming post quota years.[xxviii] The outlook estimates that between 2016 and 2017, sugar production is expected to increase by 6 percent.[xxix] In terms of production, EU output may reach 20 million tons, a jump that is about 20 percent.[xxx] In light of the potential for increased production, imports are expected to drop from 3.0-3.5 million to 1.8 million and exports are predicted to increase almost by 50 percent, growing from 1.3 million tons to 2.5 million tons.[xxxi]
Since 2017, international prices have dropped by 28 percent as a result of an estimated sugar surplus at world level after two consecutive years of deficit.[xxxii] However, EU sugar prices, which for years have been trading at a premium to the world price, have yet to decrease and fall in line with global rates.[xxxiii] Consequently, competitive sugar producers remain concerned that the EU sugar market will continue to stay highly protective and lock them out.[xxxiv] Currently, the Commission reports that the average EU prices are at about $590 a ton.[xxxv] That compares with world market prices that are being traded at about $361 a ton.[xxxvi] Fortunately, the Commission is confident that after one or two marketing years, beet and sugar producers will have fully adjusted to the new market.[xxxvii] Therefore, if EU sugar prices move closer to the world market level, it “could result in cost reduction for food, pharmaceutical and other manufacturers who use sugar . . . this may result in a cost reduction for the end consumer.”[xxxviii]
Impact on Developing Countries
Economics 101: as supply goes up, demand goes down. Applying this principle here, it is clear that as EU’s sugar production increases, imports will decrease.[xxxix] As a result, the removal of quotas is likely to eliminate weaker market players, according to a report by ING Groep NV analysts.[xl] The analysts explained that “efficient producers in NW Europe will increase output, pushing less efficient producers elsewhere.”[xli] Less efficient producers include impoverished sugar producers in the developing world that are likely to be “side-lined” as EU sugar producers may rely almost solely on domestic beet sugar.[xlii] More specifically, there is likely to be less demand for more than the ten nations that benefited from quota and duty-free access for about half of the EU’s imports of sugar.[xliii] The challenge, therefore, for African, Caribbean, and Pacific sugar producers is finding new markets.[xliv] However, these countries are likely to struggle to plug this shortfall because insufficient infrastructure makes deliveries between regions difficult and import duties lift the cost of sales.[xlv] In light of these concerns, the Commission has stated that it “remain[s] extremely attentive to the situation of cane farmers in developing countries.”[xlvi] To date, the Commission has allocated €1.2 bill for restructuring or diversification in the developing countries that have supplied raw sugar to the EU.[xlvii] In providing this assistance, the EU hopes that these countries can invest and move up the value chain or invest in new industries that will create demand for their products, such as ethanol production.[xlviii]
Impact on Sugar Consumption:
Although EU sugar production is set to increase, the Commission has stated, “EU sugar consumption is expected to remain stable or slightly decline.”[xlix] However, despite this assurance, there is much concern over “isoglucose,” a form of sugar that is commonly known as “high fructose corn syrup.”[l] As an ingredient, isoglucose can be used to replace sucrose, the name for the table sugar coming from either sugar beets or sugar cane.[li] The Commission is “aware that there is a debate on how exactly the sugar and the isoglucose market will react to the end of quotas and of discussions on the health consequences of high intakes of fructose in diet.”[lii] As a result, the Commission is currently a funding a review of scientific evidence and policies on high fructose syrups and obesity and health.[liii] Therefore, at the moment, it is unclear if the end of quotas means that EU consumers will consume more isoglucose and run higher health risks.
[i] See Agnieska De Sousa, Europe on Brink of Sugar Deluge as Decade-Long Quotas End, Int’l Trade Daily (BNA), No. 190 (Oct. 3, 2017).
[ii] See European Commission Press Release IP/17/3487, The Commission, EU Sugar Quota System Comes to an End (Sep. 29, 2017) [hereinafter EC Press Release] (emphasis added).
[iii] See Agnieska De Sousa, Europe is Waiving Goodbye to Sugar Cane, Bloomberg Businessweek, (March 17, 2017, https://www.bloomberg.com/news/articles/2017-03-16/sugar-trade-that-made-our-modern-world-longs-for-sweet-hereafter).
[iv] See Sousa, Europe on Brink of Sugar Deluge as Decade-Long Quotas End, supra note 1.
[vii] The CAP is the agricultural policy of the European Union.
[viii] See European Commission Memoranda MEMO/17/3488, The Commission, the End of the Sugar Production Quotas in the EU (Sep. 29, 2017) [hereinafter, EC Memo]
[xiv] See EC Press Release, supra note 2.
[xvi] EC Press Release, supra note 2.
[xxi] See Id.
[xxii] See Sousa, Europe on Brink of Sugar Deluge as Decade-Long Quotas End, supra note 1.
[xxiii] See Oliver Nieburg, How will the End of EU Sugar Quotas Impact Confectioners?, Confectionary News (Jan. 12, 2017, 11:45 AM), https://www.bloomberg.com/news/articles/2017-03-16/sugar-trade-that-made-our-modern-world-longs-for-sweet-hereafter.
[xxiv] See EC Memo, supra note 7.
[xxv] See Id.
[xxvi] See Sousa, Europe on Brink of Sugar Deluge as Decade-Long Quotas End, supra note 1.
[xxvii] See Sousa, Europe is Waiving Goodbye to Sugar Cane, supra note 3.
[xxviii] See EC Memo, supra note 7.
[xxxi] See id.
[xxxii] See Sousa, Europe on Brink of Sugar Deluge as Decade-Long Quotas End, supra note 1.
[xxxiv] See Nieburg, supra note 20.
[xxxv] See Sousa, Europe is Waiving Goodbye to Sugar Cane, supra note 3.
[xxxvi] See Id.
[xxxvii] See EC Memo, supra note 7.
[xxxviii] See id.
[xxxix] Almeida, supra note 5.
[xl] Benoit et al., “Sweet Times Ahead for France’s Sugar Industry as Quotas Expire”, Bloomberg Market. (Feb. 1, 2017), https://www.bloomberg.com/news/articles/2017-02-01/sweet-times-ahead-for-france-s-sugar-industry-as-quotas-expire.
[xli] See Agnieska De Sousa, Africa Sugar Growers Seen Unprepared for EU Import Quota End, Int’l Trade Daily (BNA), No. 64 (April 4, 2016).
[xlii] See Id.
[xliii] See Id.
[xliv] See id.
[xlv] See id.
[xlvi] See EC Memo, supra note 7.
[xlvii] see EC Press Release, supra note 2.
[xlviii] EC Memo, supra note 7.
[xlix] See id.
[l] See id.
[li] See id.
[liii] See Nieburg, supra note 20.