The end of sugar quotas in the EU: expected benefits for industry

16.11.2017

The end of the quota system gives producers possibilities to adjust to emerging commercial opportunities and explore new export markets. It will simplify current policy management and administrative burden for operators, growers and traders. Abolishing limits to production and/or exports allows the Baltic States to better adjust to market demand, both within and outside the EU.

The sugar quota system was introduced in the EU’s first CAP rules on sugar in 1968, along with a support price for producers set at a level significantly above the world market price. Although the principal decision to end the quota system for sugar was taken by the EU states already in 2006 (the end of the quota system followed reform of the sector during 2006-10), final decision was agreed between the European Parliament and the member states in the 2013 after a major reform and restructuring process initiated in 2006.

Due to some technical reasons quotas were abolished only in September 2017: the average EU sugar price has recovered since the end of 2016 to around €500/t and has been stable in 2017. The EU is the world’s leading producer of beet sugar (roughly 50% of the total); however, beet sugar represents only 20% of the world’s sugar production: the other 80% is produced from sugar cane. Most of the EU’s sugar beet is grown in the northern half of Europe, where the climate is more suited to growing beet. The EU also has an important refining industry that processes imported raw cane sugar.

EU’s financial support for sugar

Sugar has been the last agricultural sector in the EU where production has been subject to a quota system (milk quotas were abandoned two years before). Quotas were introduced in 1968, with the first rules on the sugar common market organisation (CMO) along with a support price for producers at a level significantly above the world market price. At the time, the Common Agricultural Policy (CAP) had as one of its main objective the European self-sufficiency in food production by encouraging agricultural producers with remunerative and stable prices for farmers. Quotas, together with a support price, gave a welcome incentive in the member states to achieve these goals in the sugar sector during last decades.

Between 2006 and 2010, the sugar sector had been thoroughly restructured with the Union’s support of €5.4 billion. As a result, the sector has been able to carefully prepare for the changes and productivity has improved substantially over the years. The end of the quota system gives producers the possibility to adjust their production to real commercial opportunities, notably in exploring new export markets. It also significantly simplifies the current policy management and administrative burden for operators, growers and traders.

Commissioner for Agriculture and Rural Development, Phil Hogan underlined on the occasion of abandoned quotas, that the end of the system represented an important turning point for European sugar sector and signified an important step in the CAP’s market orientation. Hence, producers could expand their trade in the world; besides, with the right policy supports from the Commission, they will get timely and relevant market information for further successful production and management. Thus, the end of sugar quotas will provide industry with additional benefits from newly opened opportunities.

EU's continuing support for the sugar industry

Various measures from the Union’s CAP can be used to continue supporting European sugar sector in unexpected disturbances on the market. This includes a substantial EU import tariff (outside preferential trade agreements) and the possibility to give support for private storage and crisis measures that would allow the Commission to take action in case of severe market crisis involving sharp increase and/or decrease of market prices. Income support for farmers through direct payments is also available, including the possibility for EU states to provide so-called voluntary coupled support for sectors in difficulty, including sugar beet production.

The possibility to collectively negotiate value sharing terms in the contracts between EU’s beet producers and sugar processors is maintained after the end of the quotas.

The European Commission has also improved transparency on the sugar market in anticipation of the end of the quota system. A new Sugar Market Observatory provides short-term analysis and statistics about the sugar market, as well as recommendations to help farmers and producers to manage their businesses more effectively.

Commission’s comment on termination of sugar quotas in the EU

Historically seen, CAP is a dynamic European sectoral policy which has constantly adapted to fit with the evolving challenges and realities of food production, farmers’ needs, environmental concerns and market demands. Following the shift from product support (through prices) to producer support (through income support via direct payments), initiated in 1992, an additional reform in 2003 consolidated this transition by decoupling the direct payments from the production of any particular product.

The transition in “sugar case” was envisaged in 2006 reforms, which included the progressive reduction of support prices for beet and sugar, the phasing out of public intervention until 2008/2009, ceasing paying export refunds from 2008 and including a mechanism to support the restructuring of the whole industry during 2006-10.

The member states agreed in principle to end quotas in 2015: a system of voluntary compensation (worth €5.4 billion) for ceasing the activity resulted in the reduction of the quota production by roughly 6 million tones and led to the creation of a more competitive EU sugar sector ready to compete on a deregulated EU market closer to international prices, and to benefit from market opportunities, both in the domestic and the world markets.

Following this important transition, a decision was taken to postpone this landmark by two years until the end of the 2016/17 sugar marketing year, i.e. from 30 September 2017.

Thus, consensus among the European Parliament, the EU states and agricultural community has led to simplified CAP with price and quota management followed by monitoring administrative resources for national authorities.

Quota system in the EU

The total EU production quota of 13.5 million tons of sugar has been divided among 20 member states; strict rules governed production in excess of the quota (known as “out-of-quota” sugar). It can be exported according the EU’s annual World Trade Organisation (WTO) limit of 1.374 million tons, sold for biofuel or other industrial non-food uses, or be stored and counted against the following year’s sugar quota. There has been also a small quota of 0.72 million tons for an alternative sweetener called isoglucose (also known as Glucose Fructose Syrup); surplus production of isoglucose is subject to similar restrictions.

If there are signs of excess sugar production on the EU market in the following marketing year (which runs from 1 October to 30 September), a decision could be taken to withdraw some quantities. If, on the other hand, there was the risk of shortage, measures could be taken to increase supplies. Thus, the end of the sugar quotas means that there are no further limits to production or to exports, allowing production to better adjust to market demand, both within and outside the EU.

Sugar sector: production, consumption, trade and employment

The EU is the global leading producer of beet sugar (roughly 50% of the total). However, beet sugar represents only 20% of the world’s sugar production; other 80% is produced from sugar cane. EU sugar production in the 2016/2017 marketing year corresponds to 16.84 million tons (including 250 000 tons of sugar from cane grown in the French Overseas Departments). As soon as there no quotas for the upcoming harvest, it is expected an increase in production by roughly 20% (20.1 million tons). This increase results from increase in area and higher yields because of good climatic conditions.

In terms of employment, there are roughly 145 000 sugar beet growers in the EU in 20 states, plus 28 000 direct jobs in the sugar beet processing, and many more upstream (farm machinery, agricultural inputs) and downstream (food processing, wholesale, retail, transport, logistics). In addition to this, there are 8 000 sugar cane growers in the French Overseas Departments, and full time cane refineries in 9 EU states.

In terms of trade, the EU is one of the largest importers of cane sugar, in particular as a result of the EU’s economic partnership agreements with the African, Caribbean and Pacific countries, which grant many developing countries duty-free access to the EU market. But the EU is also a sugar exporter. Under the current quota system, WTO rules restrict EU’s “out of quota” exports to 1.374 million tons a year. But EU exports almost only out-of-quota sugar and mainly to neighbouring countries in North Africa and Middle East.

The bulk of sugar produced under quota and the sugar imported from third countries are used by the EU food and drink industry for both the domestic market and the export of processed products; only a minor part of the sugar production is marketed and directly consumed. Out-of-quota sugar production is used for exports (until the limit of 1.35 million tons), a variable volume goes for bio-ethanol production (1.35 million tons in 2016-17) and to specified chemical uses (800 000 tons for 2016-17). The remaining volume of out-of-quota sugar (749 000 tons in 2016-17) will be carried forward to the next marketing year and then released on the market as quota sugar.

CAP’ perspectives for the EU sugar sector after quotas

The EU states have the option of providing voluntary coupled support linked to production to address sectors in difficulties, including sugar beet production. This option is taken up by 11EU states: Croatia, Czech Republic, Finland, Greece, Hungary, Italy, Lithuania, Poland, Romania, Slovakia and Spain) with overall coupled support for sugar beet amounting to about €179 million in 2017. The Commission re-introduced a far-reaching system of collective bargaining in the legal provisions applicable post quota that helps the position of beet growers when negotiating with the other elements of the food chain. This system improves the negotiating powers of beet growers towards their sugar producers when concluding agreements regarding the delivery of beet.

Collective negotiations or written agreements within the food chain are compulsory and provide predictable terms for delivering and buying beet. The sugar sector is the only area where such far reaching agreements without competition scrutiny exist. However these agreements cannot involve the collective negotiation of the selling price as was the case under the quota regime. This scheme is applicable after the quota end includes the possibility of voluntary value sharing arrangements.

The Commission is constantly providing market information and transparency to enable the sector to respond to market developments. A new EU’s Sugar Market Observatory is aimed at providing the sugar sector with more transparency by means of disseminating market data and short-term analysis in a timely manner.

Private storage aid can also be granted if necessary taking into account market prices, reference thresholds, costs and margins. Like other agricultural sectors, the sugar sector is covered by several disturbance clauses available in the CMO Regulation that would allow the Commission to take action in case of severe market crisis involving a sharp increase or decrease of market prices.

Effect on the EU trade with developing countries

The EU will export around 8% of the total production in 2016-17. With the end of the quota system, these exports will no longer be limited by WTO rules, allowing producers to fully explore new markets and possibilities.

As for imports, the EU will continue to offer trade preferences and remain the world's foremost provider of assistance to developing countries. However, sugar can be and will continue to be imported into the EU duty-free and quota-free under the Everything-But-Arms agreement for the least-developed countries and from countries that have concluded or implemented Economic Partnership Agreements with the EU. Most of that sugar will need to be refined in the EU. These preferential imports have declined in the recent years because of lower EU prices and other markets having become more attractive during the last two years. These imports will most likely further decline after the end of quotas as domestic prices will closer align to world prices.

In agreements with a range of Latin American countries, South Africa, Balkans countries and Moldova the EU has also granted sugar concessions in the form of tariff import quotas with reduced duties. Some additional import tariff quotas in the sugar sector are part of the WTO agreement. In addition to these import agreements, the EU has been extremely attentive to the situation of cane farmers in developing countries, allocating over €1.2 billion for restructuring or diversification in the 18 countries that traditionally supplied raw sugar to the EU. These funds allowed countries to invest and move up the value chain (e.g. for Mauritius) or to diversify away from sugar (e.g. for Trinidad and Tobago).

New opportunities for the sector and expected post-2017 market situation

Without regulatory limits on sugar production, sugar producers will optimise the use of their production capacity and reduce the unit costs of producing sugar. This will allow competitive suppliers to sell sugar on the world market which will not be limited anymore when the quotas expire.

Certain starch-based sweeteners, notably isoglucose, were limited until now to 0.7 million tons. This sector will be able to expand and generate new employment, notably in rural areas as isoglucose is typically used for the production of soft drinks.

EU sugar consumption is expected to remain stable or slightly decline; however, as much of the increase in output will either compensate for decreasing imports or help to boost export sales.

The post-2017 situation is analysed in the Commission’s medium term outlook report: it estimates that between 2016 and 2026 sugar production will increase by 6%. Isoglucose production could triple from 700 000 tons to 2.3 million tons. Imports will continue to drop from 3.0-3.5 million to 1.8 million tons and exports are expected to increase from 1.3 million tons to 2.5 million tons. For the upcoming harvest, no longer bound by the limitations of the quota, an increase in production of roughly 20% (20.1 million tons) is expected. This increase results from both an increase in area and higher yields because of good climatic conditions. This production, however, follows two marketing years with relatively low production levels.

The increase of production is likely to be compensated by a further decrease of imports, an increase in exports which are expected to double to 2.8 million tons and a possible rebuild of stocks which have been at the lowest level ever in summer 2017.

Since spring 2017, international prices have fallen as a result of an estimated sugar surplus at world level after two consecutive years of deficit. In September 2017, world market prices were around €311 per ton. The EU domestic prices have remained stable in previous months (€501 per ton in July 2017), however prices will likely drop as from the beginning of the new marketing year and become closer to world trends.

Whilst it is most likely that EU sugar prices will provide a premium compared to world market prices, they are expected to be closer to world market level in the future.

In spite of an increase of sugar production expected for the current harvest in the EU, the market context as well as the economic structure and drivers of the sugar sector allow for a fast and efficient reaction to market developments. Production decisions in the sugar sector are taken by a limited number of sugar producers; thus, contract beet hectares from farmers and production levels can be adjusted annually.

The EU sugar sector (supported by €5.4 billion) managed to get ready for the end of the quota system; it is hoped to be prepared to properly react to market signals. The increase of production in the first year post-quota is expected to be absorbed by a higher level of exports (no more subject to WTO’s limit), a likely reduction on imports and a recovery of sugar stocks (currently particularly low). It is however unavoidable that the increase in supply will bring the adjustment of EU prices to a level closer to the world market in order to allow exports.

The Commission hopes that, after one or two marketing years, beet and sugar producers will have fully adjusted to the new market environment. It cannot be excluded however, that production will further concentrate in the most productive regions and, while some producers will successfully secure new market outlets (inside and outside the EU), others will further reduce their production.

The Commission will be ready to any possible market evolutions and will use safety net measures to support producers.

Quotas’ effect on isoglucose and higher health risks

Sugar consumption is expected to remain stable or slightly decline in Europe; there is debate on how exactly the sugar and the isoglucose market will react to the end of quotas and discussions on the health consequences of high intakes of fructose in diet.

Other names are used for isoglucose such as glucose-fructose syrup, fructose-glucose syrup and high fructose corn syrup. As ingredients, isoglucose may be used to replace, e.g. sucrose, this is the name for the simple table sugar coming either from sugar beets or sugar cane. But whether free fructose and fructose in sucrose have different metabolic effects is a matter of debate. The Commission will continue efforts to promote healthy diets and physical activity and promote product reformulation by industry on nutrition and physical activity in the future.

According to the European Food Safety Agency, there is some evidence that high intakes of sugars in the form of sugars’ sweetened beverages might contribute to weight gain and the relationship of patterns of consumption of sugars-containing foods to dental caries, weight gain and micronutrient intake should be considered when establishing nutrient goals for populations and recommendations for individuals and when developing food-based dietary guidelines.

Too many people in the EU, including children, do not comply with the World Health Organization’s recommendation of reducing free sugars intake to less than 10% of total energy; a number of EU states have established national recommendations for added sugars at this level.

Promote healthy eating habits

The Commission is supporting the EU states’ work on reformulating the food products’ recipe to lower their increase in certain nutrients. It is done by providing real value to citizens and contributing to removing excess sugars, salt and fat from products that are bought every day in European supermarkets. The Commission intends to open tenders on nutritional quality of the food in EU supermarkets and to support the monitoring national reformulation initiatives.

The Commission takes a multifaceted approach to reducing sugar intake and healthy diets in general. Since 2007, the Commission has a “Strategy on Nutrition, Overweight, and Obesity-related Health Issues”, which aims at contributing to reduce the risks associated with poor nutrition and limited physical activity in the EU. The strategy encompasses a range of initiatives covering many policy areas: e.g. the school fruit and vegetables and milk scheme, which provides school children with fruit and vegetables on a voluntary basis, encourages school children to replace sugary snacks with healthier options.

In 2014, the High Level Group on Nutrition and Physical Activity adopted an Action Plan on Childhood Obesity that aims to halt the rise of childhood obesity by 2020. Improving diet quality, including eating less sugar is a major part of this plan, which includes promoting healthier diets in school and pre-school, and making the healthy option the easy option, amongst its objectives. In 2011, the High Level Group agreed on an EU Framework for National Initiatives on Selected Nutrients (a framework had been agreed to reduce salt in food by 16%). Work then started on reducing saturated fat by 10% by 2020. In 2015, work started on Added Sugars Annex, promoting a voluntary reduction of 10% in added sugars in processed food by 2020.


The Baltic Course

Readers choice: TOP-5 articles of the month by UkrAgroConsult