JRC-MARS highlights concerns for EU sugar beet crop

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1 EU Sugar Market Update & Outlook October 2018 By Julian Price Key EU sugar estimates Tonnes 2017/ /19 Δ Outlook EU production 21.15m 19.40m 1.75m ACP imports 1.32m 0.70m 0.62m EU exports 1.31m 3.40m 2.09m JRC-MARS highlights concerns for EU sugar beet crop Monitoring Agricultural ResourceS ( MARS ), a division of the European Commission s Science Hub (JRC) uses remote sensing and emerging space technologies to provide information concerning crop areas and yields. The latest MARS bulletin reports that drought is still persisting in October 2018 in eastern Germany, western Poland and the Czech Republic, and the rain deficit remains significant in large parts of Europe, however, there has been a surplus of rain in Spain and Italy. Taking these remote sensing data into account, MARS forecasts an EU28 average sugar beet yield of 72.7 tonnes/hectare, which would be 2.8% below the five-year average. Source: European Commission Sugaronline,

2 In 2018/19, the overall EU28 beet area is estimated down 1% to 1,665,000 ha, with the Greek area down 80% to 1,300 ha and Croatia and Austria down 25%, but Poland up 3%, Germany up 2%, Lithuania up 11% and Finland up 14%. Although the percentage of sugar in beets is higher this year, overall, the net sucrose/hectare is forecast lower, and EU28 sugar production is forecast for 2018/19 to be around million tonnes, down from million tonnes in the 2017/18 campaign. EU may return to net trade balance in 2019/20 after post-quotas export surge Faced with the prospect of lower domestic and export prices after the abolition of quotas in 2017, EU sugar processors negotiated to expand production and lengthen the beet campaign. In France, for example, the campaign was extended 20 days to 134 days. Production in the EU28 expanded to more than 21 million tonnes in 2017/18 and exports surged to 3.6 million tonnes. Sugar consumption is always extremely difficult to estimate, but it s possible to extrapolate domestic disappearance ex-mill from the available data on production, stocks and trade. Domestic disappearance is the quantity of sugar which physically leaves the sugar beet factories and refineries; it isn t necessarily consumed by people; indeed it may even be wasted. Provisional data for the 2017/18 marketing year would suggest EU28 domestic disappearance amounted to 18.4 million tonnes, including human, industrial, bio-ethanol and sugar exported in processed products. There appears to be no concrete statistical evidence yet to suggest that domestic disappearance will be anything other than unchanged in 2018/19 or indeed in 2019/20. Source: European Commission Sugaronline,

3 Given these estimates and taking at face-value the European Commission s estimate of ending stocks of 1.9 million tonnes for the end of September 2019, the net trade position for the EU28 could therefore change to being a net exporter of just over 1 million tonnes in 2018/19 from being a net exporter of around 2.2 million tonnes in 2017/18 with imports of 1.3 million and exports of 3.6 million tonnes. Given these estimates and taking at face-value the European Commission s estimate of ending stocks of 1.9 million tonnes for the end of September 2019, the net trade position for the EU28 could therefore change to being a net exporter of just over 1 million tonnes in 2018/19 from being a net exporter of around 2.2 million tonnes in 2017/18 with imports of 1.3 million and exports of 3.6 million tonnes. Production in 2019/20 will probably be significantly lower given the absurd ban on neonics for use in pelletted beet seed. We may note that Tereos has asked growers to cut 2019 beet area by 5%, but even if we assume no change in total production and unchanged stocks, the EU28 would become a net exporter of only around 250,000 tonnes in 2019/20. Given continuing low prices, the neonic ban and the expiry of multi-annual beet supply contracts, there is every reason to believe it may even be possible for the EU to return to become a net importer of sugar in 2019/20, although a balanced external trade position seems a more likely outcome. EU sugar prices may at last be on the rise It s small, but it s an increase: the EU reported price for August 2018 was EUR350/tonne, up EUR4/tonne, whilst in the deficit areas ( Region 3 ), prices were reportedly up EUR10/tonne to EUR381/tonne. True, there are anecdotal horror stories of prices in the very low EUR300 s DDP, but these reported data (which are what they are despite skepticism about their validity), coupled with the 42% rise in New York #11 raw sugar futures prices encourage one to believe that sugar prices may at last be on the rise in Europe, bringing cheer to both ACP/LDC sugar producers and the domestic industry. Source: European Commission, JulianPrice.com Sugaronline,

4 Before quotas were abolished, there was literally zero correlation between EU and international sugar prices R2 = 0%. Source: European Commission, JulianPrice.com We only have 11 data points for the post-quota period (including the EC reported price of EUR350 /t-1 for August 2018), so not enough data to draw any valid conclusions, but, with R2 = 62%, MS Excel spits out a delicious formula for the regression line that EU prices in 2017/18 were London #5 plus US$110/tonne. Meanwhile, the EC forecasts that EU prices in the medium term will be #5 + EUR30 to EUR40 t-1. Source: European Commission, JulianPrice.com If this correlation is true a huge if because there isn t enough data to be statistically confident then, with $/ = 1.14, the average EU reported price ought to be EUR436/tonne. Sugaronline,

5 UK Agriculture Bill will free up GBP150m for environmental protection The DEFRA minister, Rt Hon Michael Gove MP, has set out a vision of post-brexit UK agriculture policy to invest in the environment and take back control for farmers after almost 50 years under EU rules. A spokesman for DEFRA called the new Agriculture Bill really exciting because it will, if passed into law in Parliament, affect real change on our own terms, changing the way we fund agriculture and the environment for the next 25 years. In cash terms, the bill would phase out area and per-head payments to UK farmers between 2021 and 2027, freeing up GBP150 million per annum which would be spent on WTO compatible (amber box) payments to improve the environment, i.e. air, water, wildlife, flood risk, public access, etc. The bill received its second reading in Parliament on October 10, 2018 and is now in the Committee stage. Meanwhile on the other side of the English Channel in June, the European Commission presented legislative proposals on the Common Agricultural Policy (CAP) beyond 2020 for the EU27 after Brexit. Under these proposals, Pillar One payments (mostly comprising the Single Farm Payments) would essentially be maintained. As Professor Alan Matthews, Professor Emeritus of European Agricultural Policy in the Department of Economics at Trinity College, Dublin, Ireland, and author of the authoritative blog noted, it is very much business as usual, although the CAP share of the overall EU budget is expected to fall to around 27% in Source: Readers will recall that the EU intervention prices for sugar were reduced by 36% in 2006/09 and farmers were compensated by the inclusion of EU sugar beet and cane into the Single Farm Payment (SFP). Not including additional Voluntary Coupled Support, the SFP attributable to sugar from 2016 onwards currently amounts to around EUR1.5 billion. Both agricultural policy proposals are very complex and contain many scenarios and options for the countries in each Union (the member states of the EU and the devolved administrations of the UK), and moreover, what s proposed may not be agreed in parliaments, however, it seems clear that UK policy Sugaronline,

6 will diverge from EU27 policy with farmers likely to face the phase out of the Single Farm Payment in the UK whilst it is continued in the EU27. Under such circumstances, one might ask whether it is appropriate to compensate for this divergence by means of import tariffs between the UK and EU27. In the worst case scenario of the UK leaving the EU without a Withdrawal Agreement, i.e. no deal, the UK government confirmed in a public communication on October 22 that the UK and the EU27 would have to face each other s WTO tariff schedules, however, the UK would have the option to apply smaller tariffs below the maximum bound rates. Several scenarios could be envisaged, e.g. maintain the EU tariffs in /tonne, or complete liberalization, or the UK opening Autonomous Tariff Quotas for specific quantities of specific goods likely to be in short supply. The objective would be to minimise disruption, and the Government seems keen to insist that any such measures taken would be temporary. Cane sugar can be carbon neutral The world must invest US$2.4 trillion in clean energy every year through 2035 and cut the use of coalfired power to almost nothing by 2050 to avoid catastrophic damage from climate change, according to the United Nations Intergovernmental Panel on Climate Change (IPCC). Source: It is timely, then, to remind ourselves that the carbon footprint of cane sugar is low by comparison with other agricultural products, particularly when full use is made of energy production in conjunction with sugar. Throughout its commercial lifecycle, the carbon footprint of the sugar cane industry is favourably impacted by the use of the natural fibre in sugarcane (bagasse), which provides the fuel source for its own milling and for the production of sugar, molasses, fuel and potable ethanol, and electricity for the local grid. Indeed, studies have shown that a cane sugar industry set up efficiently for maximum power generation can actually show a negative carbon footprint. Julian Price is an experienced international sugar trader and broker who has negotiated and supervised contracts for the physical supply of sugar worth several billion dollars. Julian was elected eight years in a row as President of the European Sugar Traders Association ASSUC, comprising sixty sugar trading companies in Europe. A regular speaker at sugar trade conferences and recognized to possess wide experience, deep knowledge and empathy as a sugar trader and innovative market analyst at the heart of the trade between African, Caribbean, Pacific and Least Developed Countries and the European Union. Sugaronline,