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Where the margin is 2019
IKAR in Mass and Industry Media
Europe’s sugar firms fear an October surprise
As a system of strict sugar quotas ends, some will get more cash; others pain.
Many of Europe’s sugar businesses are looking to October with a sense of fear and uncertainty as the sector faces its biggest overhaul in decades.
At the beginning of the month, Brussels will lift a purdah that has shielded beet growers from the ravages of the open market since the 1960s.
The European Commission now runs the sugar market, specifying how much sugar beet countries can grow while simultaneously paying farmers a fixed price. This system — in parallel with high tariffs on sugar cane imports from the rest of the world — largely cossets beet farmers from the boom and bust of other commodity markets.
But this sugar regime ends on October 1 — an event many fear will spur previously hamstrung businesses to churn out more sugar and send prices tumbling.
There’s a precedent for such a scenario. In 2015, the Commission ended milk quotas, which — alongside a disastrous combination of lower oil prices and Russia’s food import ban — led to vast milk overproduction, sending prices into a death spiral and forcing thousands of farms to shut. Brussels mobilized €1 billion to stave off total collapse.
Brussels and most farmers have drawn lessons from that crisis and are confident a sugar shock won’t compare to the milk one. While some are certain to go out of business, most worry about the uncertainty of modifying a system whose fundamentals have puttered along unchanged since its introduction in 1968.
“This is a new era,” said Rafał Strachota, the director of the Polish beet growers’ lobby KZPBC. “We do not really know what will happen.”
Marie-Christine Ribera, director general of sugar manufacturers’ lobby CEFS, said that the overriding feeling was one of uncertainty.
Brooding in beet country
Europe’s sugar sector is dominated by sugar beet, a turnip-shaped root that thrives in the damp and loamy soils of Northern Europe. Some 1.5 million hectares of the European Union — an area slightly larger than Montenegro — are devoted to the crop.
The Continent’s relationship with beets is a global exception, however. The world receives about 80 percent of its sugar through cane, a tropical crop, while beet processing in Europe makes up the remainder.
This quirk harks back to the Napoleonic wars, when British gunboats blockaded the trade routes to France’s Caribbean possessions, effectively cutting off mainland Europe’s access to sugar. French Emperor Napoléon Bonaparte invested heavily in embryonic beet-refining technology to overcome the shortage.
In 1968, Brussels was designing a farm policy to keep consumer prices fair while seeking to avoid extreme market volatility. The Commission introduced its production quotas and a floor price, which is set at €26 per metric ton.
“It’s been a very stable system,” Ribera said.
The great fear is discarding this system will mean competitive farms use their newfound freedom to plant more beets, which would flood the market and depress prices.
CEFS, the sugar lobby, and agricultural workers’ union EFFAT, warned in March of a “harsher market environment” after quotas. “This could have consequences for the 28,000 direct workers and 137,000 farmers that depend on the sector, as well as for the vulnerable rural communities, of which sugar factories are often the economic backbone,” the two groups said.
Overproduction fears are justified. Europe’s largest sugar companies are all set to exploit the new situation to ramp up exports.
Britain’s AB Sugar, for example, says it expects to produce 50 percent more after October.
Wolfgang Heer, the CEO of Europe’s largest refiner, Germany’s Südzucker, said: “We know that volatility in our sugar sector will increase,” Reuters reported in July. He expects the deregulation to allow his company to expand.
No milk crisis 2.0
Brussels anticipated a milk-style market catastrophe and began releasing sugar-pricing data in July to help businesses and farmers better track the market. It will also allow governments to top up agricultural subsidies for sugar farmers in order to cushion any shocks.
Ruud Schers, a sugar analyst at Rabobank, said the milk and sugar sectors are incomparable. Beet farmers tend to grow other crops such as cereals or potatoes, which shields them from too much market turbulence.
Growers can also switch strategy from one year to the next because the beet harvest is annual, he added. Dairy farmers, in contrast, tend to be specialized and cannot as easily rid themselves of cows they bought during flush years.
Europe already ran the gauntlet of a harrowing sugar reform in 2006. The Commission pushed to pivot the sector closer to world markets by opening up imports from developing countries while lowering the guaranteed sugar price by 36 percent.
Grower numbers dropped from some 300,000 in 2005 to about 140,000 in 2016, while the number employed in sugar processing fell from about 50,000 to about 30,000 over the same period.
“We have prepared ourselves,” Ribera said, adding that one factory out of two closed during the 2006 reform.
Many think that Europe’s small but historic cane refiners will receive the strongest post-quota thumping.
Newer EU countries such as Romania, or those with deep ties to former colonies in the tropics such as Britain and Portugal, still have refineries that use cane sugar — which they buy under import tariffs they argue are prohibitively high. These refiners fret that even-cheaper beets will undercut them.
Miguel Geraldes, the CEO of Portuguese cane refiner RAR, said imports account for 70 percent of his costs and he has already slashed personnel. “If we continue to pay high premium to our suppliers we will be out of business,” he said.
He added that to compete fairly with beet growers, the Commission needs to reduce import tariffs. “The problem is that the Commission doesn’t care,” he said, adding that he would support leaving the EU.
Tate & Lyle Sugars — Britain’s cane refiner — backed Brexit for the same reason.
Brussels points to the fact that cane refiners can import duty-free from developing countries. However, the refiners argue they need access to large producers such as Brazil.
For both cane and beet, the end of sugar quotas heralds a great unknown. Yet few really imagine a Europe without its sugar industry.
Ribera said of October 1: “It really is a revolution — but it’s just a date.”
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