Sugar Shortages Extend Across Europe as Global Glut Expands

(Bloomberg) – At a time when the world is facing its biggest sugar glut in at least four years, trade barriers mean the European Union is contending with a second consecutive annual shortage.

EU supply will fall 1.1 million tons short of demand in the 12 months ending in September, according to the Committee of European Sugar Users, whose members include Nestle SA (NESN), Unilever and Kraft Foods Inc. Global output will exceed usage by 5.32 million metric tons, Macquarie Group Ltd. predicts. As world sugar prices fell 22 percent in the past eight months, costs in the 27-nation bloc reached a two-year high.

The EU, once the second-biggest sugar exporter, spent about 5.2 billion euros ($7.1 billion) since 2006 to shrink the industry after the World Trade Organization ruled it was dumping subsidized supply on world markets. At the same time, the bloc failed to scrap import duties, leaving users with the choice of either paying about 60 percent more than in the international market or shunning purchase and shuttering production.

“We can’t buy sugar in the EU because there isn’t any,” said James Lambert, chief executive officer of Northallerton, England-based R&R Ice Cream Plc, Europe’s largest private-label producer. “Anything like fizzy drinks, ice cream and bakery products is going to rise dramatically.”

Two-Year High

White, or refined, sugar averaged 548 euros a ton in the EU in July, the most since September 2009, according to the latest data from the European Commission, the bloc’s regulatory arm. Some second-quarter contracts cost as much as 850 euros, Rabobank International estimates. Futures traded on the NYSE Liffe exchange in London and deliverable globally averaged $664 (479 euros) in the period, data from the bourse show.

The gap may widen further, with Goldman Sachs Group Inc. predicting a 14 percent drop in raw-sugar futures in the next six months and Barclays Capital anticipating three consecutive quarterly declines as the supply surplus expands.

While EU output will climb 16 percent to 17.8 million tons in the 12 months through September, production will still be 11 percent lower than where it was seven years ago, according to European Commission data. The EU’s policy to limit sales of domestic production in the internal market means increased output won’t translate into increased supplies to consumers.

U.S. Shortage

The U.S. is also facing shortages, exacerbated by trade barriers protecting farmers. U.S. stockpiles will contract this year to the lowest since records began in 1960 after rain and freezes damaged the beet crop, the USDA reported Oct. 12.

Domestic prices in the U.S. were last at 39 cents a pound, compared with 27.94 cents for international contracts, data from the ICE Futures U.S. exchange in New York show. Sugar is the only major agricultural commodity produced in the U.S. that is subject to import quotas, and the USDA increased the limit on cargoes by 45 percent this year as futures surged.

The EU shortage predicted by the European sugar committee, whose members include Coca-Cola Co. and PepsiCo Inc., may not be as big as anticipated should the region tip back into recession.

Euro-region growth will slow to 1 percent next year, from 1.7 percent this year, the median of 21 economists’ estimates compiled by Bloomberg show. That compares with a 4.2 percent contraction in 2009. EU sugar consumption fell 1.5 percent in the 12 months ended September 2009, Macquarie estimates.

EU Options

The European Commission may try to alleviate shortages by allowing domestic producers to divert more supply into human consumption and away from industrial uses such as ethanol. It authorized them to sell an extra 500,000 tons this year.

The commission may also increase the amount that can be imported without duties, currently set at 339 euros a ton on raw sugar and 419 euros on refined. It added 500,000 tons of zero- duty imports this year and a further 356,566 tons were approved at a reduced tax.

The commission plans to abolish output limits in 2015, part of proposals for modifying the bloc’s Common Agriculture Policy, a subsidy system that cost 58.2 billion euros in 2010.

Officials from Vevey, Switzerland-based Nestle and London- and Rotterdam-based Unilever, the maker of Ben & Jerry’s ice cream, declined to comment. Nestle, the world’s biggest food company, spends about 1.5 billion Swiss francs ($1.66 billion) a year on sugar globally.

The EU is also contending with declining imports from its preferred suppliers, which can ship to the bloc at preferential tariffs, said Edward George, a commodities analyst at Lome, Togo-based lender Ecobank Transnational Inc.

Drought Conditions

“A lot of southern and east African countries, which usually ship to the EU under preferential agreements, are not exporting as much sugar because domestic demand has been much higher than anticipated,” he said. “These countries are also facing shortages because of drought conditions and maintenance outages in several mills.”

Sugar imports at preferential tariffs are forecast to be 1.7 million tons in 2011-12, compared with the 3.3 million tons budgeted by the EU, the Brussels-based European Sugar Refiners Association said in September. The association represents 19 refiners that use imported raw cane.

EU stockpiles stood at 1.92 million tons last month and will probably decline to 1.24 million within a year, according to the European Commission. At least 1.8 million tons of inventories are needed as a buffer against smaller-than-expected imports, the Committee of European Sugar Users estimates.

“The impact on medium and small-sized enterprises can be even more drastic and can lead to the temporary closure of export businesses,” said Muriel Korter, the secretary general of the committee in Brussels. “If there are no changes in the market and the commission does not consider taking measures to guarantee sustainable supply, every year is going to be the same battle.”

To contact the reporters on this story: Isis Almeida in London at Ialmeida3@bloomberg.net; Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at Ccarpenter2@bloomberg.net.