Sugar Industry Headed for a Shake-Up

May 17th, 2016

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Category: Sugar

Sugar TRQ(Wall Street Journal) – Sweeping changes to the trade barriers governing the sugar industry are redrawing the map for one of the commodity world’s most protected markets.

Many sugar producers protect their domestic industries through some combination of guaranteed payments to farmers, production restrictions or import limits. But the industry is gradually liberalizing in a series of moves that could push the price of sugar lower. That has refiners and exporters scrambling to work out what newly opened markets will mean for them.

In the biggest change, the European Union will remove production quotas and minimum payments for sugar-beet farmers from October 2017. Farmers are expected to push much of the additional supply to export markets, which would turn the EU into a bigger competitor abroad.

Separately, the World Trade Organization is considering whether Thailand, the world’s second-largest sugar exporter, is breaking trade rules by subsidizing its production in a case brought by Brazil, the world’s largest producer and a loud voice for liberalization. Market barriers in Africa also are under pressure from regional trade agreements.

“The entire sugar world is going to be shaken up,” said Hartwig Fuchs, chief executive of Nordzucker AG, Europe’s second-largest sugar producer.

Mr. Fuchs estimates that Europe has the potential to add an extra 3.5 million tons of new sugar a year onto the global market, equal to just over 6% of this year’s expected global trade volumes.

The coming changes add uncertainty at a volatile time for the sugar market. Sugar consumption is set to exceed supply in 2016 after five years of surpluses and stagnant prices, and the market has gained in recent months after droughts hit harvests in many parts of the world. Yet analysts think prices could be pressured in the longer term by extra production.

Liberalization of the sugar industry has lagged behind reform of other agricultural commodities. In developing countries, that reflects pressure on governments to protect a labor-intensive industry.

The U.S. government, which has levied taxes on imported sugar since 1789, currently guarantees a minimum price for domestic producers, places production quotas on growers and taxes imports.

While there are few signs of imminent change in the U.S., the world’s sixth biggest producer, the sugar industry in Europe and Africa is set for an overhaul.

Europe will shift to more liberal markets in October 2017, when production quotas and minimum payments will be removed in the EU. The move is the culmination of a process that already has seen the EU cut its sugar subsidies following a 2005 WTO ruling that the EU was dumping sugar on world markets in a case brought by Brazil, Thailand and Australia.

Producers in Europe’s industry, currently the world’s third largest, say they plan to produce and export more sugar as a result.

“The EU will certainly become a net exporter,” said Olivier Lippens, managing director of Finasucre SA, a Belgium-based sugar producer. Mr. Lippens estimates that net exports eventually could reach around three million tons a year.

Meanwhile, restrictions on cane-sugar imports into the EU will remain. The combination could squeeze importers like Tate & Lyle TATYY -2.07 % Sugars, whose London refinery has been turning cane sugar into sweetener for 138 years.

“The clock’s ticking for us,” said Gerald Mason, a vice president of Tate & Lyle as he watched a crane unload a 35,000-ton shipment of sugar. “We are not going to be competitive after 2017 unless the regulation is changed.”

Many sugar producers in the Caribbean and Africa rely on sales to European refiners.

“The people who have been supplying Europe for a century and more are the casualties, unfortunately,” said Karl James, manager of Jamaica Cane Products Sales Ltd., a Jamaican sugar exporter.

The change also could hit the relatively high-cost producers of the Caribbean, which may now struggle to compete in Europe when prices fall with the removal of quotas.

In Europe, beet producers already have cut prices to grab market-share ahead of the 2017 reform. The impact is being felt across the sugar-cane industry. Tate & Lyle’s Thames-side refinery is now running at reduced capacity. In October, Jamaica Cane Products Sales agreed to a one-year extension on a contract to supply Tate & Lyle sugar cane at around $370 a ton. That is down from $770 a ton in the previous three-year deal.

African producers also likely will suffer as their traditional European markets become more self-sufficient.

South Africa-based Illovo, that continent’s largest sugar company, is gearing up to sell more of its sugar into Africa, where trade barriers also are tottering.

Bilateral trade agreements between some African countries and pressure from regional trade bloc Comesa to reduce restrictions make the market look more attractive, said John Bason, finance director of Illovo’s parent, Associated British Foods ASBFY 1.44 % PLC.

In a twist on the 2005 WTO ruling that went on to fell European barriers, Brazil is now taking aim at its one-time ally, Thailand. Brazil has accused Thailand of increasing its share of the global sugar market by subsidizing exports. In a complex maneuver, the Thai government fixes domestic sugar prices, taxes the sales and uses that revenue to subsidize sugar-cane growers. Brazil says that this is a breach of WTO rules that costs its exporters around $1 billion a year.

“They want a result similar to what they got when they sued the European Union,” said João Botelho, an analyst at brokerage firm INTL FCStone Inc.

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