With the ending of sugar quotas in October, the EU sugar industry enters an uncharted territory. For the industry, shielded from the ravages of the market place for over 50 years, it now finds itself dictated by the throes of volatility and uncertainty. Following the reform of the sugar regime in 2006, the industry went through a seismic upheaval informing rationalization on a grand scale. Five member states ceased producing sugar and sugar production in six member states declined by over 40%. Over the last decade, nearly half of sugar factories in the EU have closed, from 189 to 109, leading to the loss of 4.5 million tonnes of production capacity. Beet acreage in the EU 28 decreased from 2,193,583 ha in 2005/06 to 1,313,697 ha in 2015/16. Over the same period, the number of beet growers decreased from 304,890 to 137,354, while the number of permanent and seasonal workforce decreased from 52,279 to 27,9861.
Against this backdrop, the industry has gradually become competitive to be jettisoned in the market-driven space. Over the last 25 years, beet sugar production costs in the EU has on average increased by only 0.4% annually, compared with the inflation rate of 2.3% – meaning, constant reduction of costs relative to inflation has driven industry’s competitiveness. Investment in R&D and effective collaborative structure between the processors, researchers and growers have driven beet productivity – with sugar yields on average increasing from 9.4 t/ha in 2005/06 to 12.5 t in 2014/15 (see figure). Further, the reform catalysed expansion in economies of scale (or increase in production capacity of factories). For example, AB Sugar which used to produce around 1 million tonnes of sugar from 17 factories now produces the same amount from 4.
Trends in beet sugar yields in EU 28
The reform and the rationalization of the industry also ushered in significant consolidation whereby nine sugar companies (Sudzucker, Nordzucker, AB Sugar, Tereos, Pfeifer & Langen, Cristal Union, Royan Cosun, Polski Cukier, SFIR) now produce over 90% of the sugar. With the end of quotas and export restrictions, most of these companies have been planning well in advance to increase sugar output. British Sugar anticipates an increase in 2017/18 sugar output at 1.4 million tonnes from 0.9 million tonnes last year. Sugar output in Germany is expected to increase in the current campaign by 23% on last year to 4.98 million tonnes. Further, reports of three new build beet sugar factories awaiting planning permission in the UK, Belgium and Spain is further evidence of confidence in the sector.
With beet sugar producers resisting expanding factory capacity in favour of extending campaign, only time will tell as to whether this is a sound strategy. While increasing campaign length from 100 to 150 days can reduce fixed costs by 33%2, vagaries of weather and increase in beet rot3 from an extended period in a beet pile may counter any gains. Whether beet growers will shoulder the risk will depend on their contracts.
EU sugar policy was supported by three pillars: production quotas, a sugar reference threshold and trade measures in the form of import duties. The latter remains to shield the industry from imports of sugar from countries with non-preferential access in its market with prohibitive import duties of €339 per ton on raw cane sugar for refining and €419 per ton on white sugar. Though cane sugar refiners seem to have been left behind by the reform. Due to the policy, they continue to face limited access to both duty-free supplies of raw sugar from developing countries and CXL quota which attracts the tariff of €98/tonne. For them, only the beet sugar producers enjoy the level playing field in the EU sugar market. The refiners are seeking suspension of CXL €98 duty and free trade agreements which will give them access to competitively priced raw sugar. With EU engaged in free trade negotiations with various countries, its policy makers face a challenging task of ensuring the long-term viability of both its sugar industry and cane sugar refining sector.
2 Christer Sperlingsson (2016) Yield progress and sustainable production during long campaigns – the challenge for beet sugar value chain. Proceedings of the 75th IIRB congress held in Brussels.
3 J-L Streibig and P Mery (2017) Impact of increasing campaign length on sugar content of stored beet. Int Sugar Jnl, 119 (1418):110-114