London — EU sugar production in the 2019-20 campaign (October-September) is set to fall for the second consecutive season due to tough growing conditions and a reduced area planted to sugar beet.
Looking ahead to the 2020-21 campaign, questions around planted area and its impact on final production remain; and the outcome of Brexit could play a role in changing trade flows.
Since the first post-quota sugar campaign of 2017-18, when growing conditions in Europe were ideal, growers have faced two successive seasons in which the elements were against them.
In 2018-19, late planting due to high spring rainfall and then a very dry and hot summer caused sugar beet yields to spiral downward, whereas in 2019-20 dry early season conditions, combined with a very wet October and November, meant beet yields have struggled to recover.
With the total EU planted area for 2019-20 reduced by 5.4% to 1.699 million hectares, total production has been reduced again, forecast to be down 443,000 mt on the year at 17.488 million mt, according to S&P Global Platts Analytics.
Looking to 2020, this lower production will continue to have a knock-on effect on EU sugar exports. Preliminary export figures from the European Commission showed October 2019 sugar exports from the EU at just 103,000 mt, sharply below the 266,712 mt exported in October 2018.
For 2019-20, Platts Analytics is forecasting sugar exports of 1.320 million mt, below imports at 1.745 million mt, meaning the EU-28 would remain a net importer, with a trade deficit estimated at 425,000 mt.
One of the major political and economic events of 2020 will be the outcome of the Brexit negotiations.
On December 20, Prime Minister Boris Johnson's Brexit bill was passed by the lower house of the UK parliament by 358 votes to 234, a week after the Conservative Party won a large majority in the UK election. This means it is the UK will leave the EU on January 31, 2020, entering a transition period that is scheduled to run to the end of the year during which a trade deal between the two parties is to be negotiated.
The UK has a sugar deficit, with annual consumption of 2 million mt outrunning domestic production of 1.150 million mt (2018-19). The deficit is made up from sugar imported from other EU countries (409,497 mt in 2018-19), with the rest coming from outside the EU.
The UK government announced the potential tariff under a no-deal Brexit would have placed an import duty on white sugar, meaning EU sugar would have to pay Eur150/mt ($168/mt). The tariff of raw sugar for refining was maintained at Eur339/mt, but with a new 260,000 mt import quota for raw sugar with zero duty and no restrictions on origins.
Although it is not yet clear what the tariff on sugar might be under the yet-to-be negotiated trade deal, a similar tariff structure to that envisaged under a no-deal would reduce the competitiveness of EU sugar and potentially open the doors of the UK market to world market raw sugar as a substitute. With such a significant trade flow of white sugar from Europe to the UK, EU producers will be hoping they can maintain their access to the UK market.
There is a variety of opinions circulating the EU market on the potential area planted to sugar beet in spring 2020. Higher EU prices should mean an increase in planted area, if these prices are passed on to farmers in the form of beet contracts.
NFU Sugar has already announced a one-year contract price of GBP19.60/mt ($24.46/mt) for 2020-21, 53 pence more than in 2019-20.
However, many analysts are forecasting that even with higher beet prices, growing sugar beet remains unattractive and therefore the planted area will shrink again in the main producing countries of France and Germany. The main fundamentals behind this are changing intentions of EU operators solely to target the domestic market over the export market, as well as the increasing costs associated with cultivating sugar beet and unpredictable growing conditions.
For example, the ban on neonicotinoid pesticides is likely to have greater impact on yields in 2020-21, as the residual effect of the pesticides from previous seasons will lessen. There is concern that virus yellows, one of the main threats to sugar beet, will spread to Continental Europe, especially if the weather is mild enough for adult aphids carrying the disease to survive the winter season. The Polish and Belgian authorities have confirmed the neonicotinoids ban will again be lifted in their countries for 2020.
October 2020 will mark the end of two-year beet contracts completed at low prices throughout the EU in October 2018, and this could mean the end of the low-price environment that Europe has struggled with since 2017-18.
Fundamentals have been bullish in the spot market. Delivered sugar is currently trading in Western Europe around Eur450/mt, nearly 50% higher than the all-time lows of May 2018.
Low stocks and another year of lower production should limit supply-side pressure on prices, even against the background of falling sugar consumption in Europe.