DG Agri published its annual Prospects for Agricultural Markets and Income in the EU for the period 2007 through 2014 at the end of July. In this post I discuss the Commission’s latest view on the outlook for the EU sugar market. The EU’s sugar market reform agreed in November 2005 has been less than a thundering success in making progress towards its objective of reducing domestic production by 6 mio tonnes of white sugar annually. White sugar stocks remain high, and success in maintaining market balance through 2014 will depend on the quantity of imports realised under the EBA (Everything But Arms) scheme and the future take up of restructuring aid. However, biofuels demand has emerged as an unexpected source of demand for sugar, and could absorb 10% of sugar production from 2012 onwards.
Sugar was included in the DG Agri projections for the first time in the 2006-2013 projections published earlier this year in January 2007, and there is little difference in the new projections now published six months later, apart from the sharp fall-off in exports now foreseen after 2011 (though this may be a misprint in the table as the text refers to exports of unprocessed sugar remaining at the WTO limit of 1.3 mio tonnes).
2006 was the first year of the sugar reform which is being phased in over four years. This transition phase to 2009/10 includes a stepwise reduction in reference prices, the offer of restructuring aid and the phasing in of increasing import rights for least developed countries under the EBA initiative. From 2010/11 onwards, the EU will be completely open to EBA imports and the market will be managed by linear quota reductions to maintain market balance.
During the first year of the reform, member states renounced 1.5 mio tonnes of quota (which, however, was offset by an allocation of 1 mio tonnes in additional quota for sugar and isoglucose), but only 700,000 tonnes in 2007/08. As a result, the Commission introduced a mandatory 2 mio tonne cut in 2007/08 to avert a potential surplus which would have derailed the reform. Some of this has been offset by increased out-of-quota production which, under EU rules, can only be used for industrial or biofuel purposes. In addition, the Commission has proposed changes to the restructuring scheme to make it more attractive which it hopes will be adopted by the Council and Parliament before October this year in time for decisions for the 2008/09 campaign.
Sugar market projections for the European Union (EU-25 and EU-27), mio tonnes
| Year |
Usable production |
Net consumption |
Imports |
Exports |
|
|
|
Total |
Bio-fuels |
|
|
|
| 2004 |
19.6 |
16.1 |
0.0 |
3.2 |
4.9 |
| 2005 |
20.3 |
17.0 |
0.0 |
3.0 |
6.7 |
| 2006* |
17.4 |
17.4 |
1.0 |
4.1 |
2.2 |
| 2007 |
16.1 |
18.6 |
1.1 |
3.8 |
2.2 |
| 2008 |
16.4 |
19.2 |
1.3 |
4.1 |
1.3 |
| 2009 |
16.6 |
19.4 |
1.4 |
4.2 |
1.3 |
| 2010 |
16.8 |
19.8 |
1.6 |
4.4 |
1.3 |
| 2011 |
16.7 |
20.1 |
1.8 |
4.4 |
1.3 |
| 2012 |
15.2 |
20.5 |
2.0 |
4.4 |
0.9 |
| 2013 |
15.7 |
20.8 |
2.2 |
4.4 |
0.7 |
| 2014 |
15.6 |
20.9 |
2.2 |
4.4 |
0.3 |
Source: Table A.8, Prospects for Agricultural Markets and Income 2007-2014, European Commission Directorate General for Agriculture, July 2007.
Note: 2006 figures assume a twelve-month campaign until it was exceptionally prolonged to 15 months in that year. Years refer to marketing years which start in Oct after 2006, i.e. 2007 is the marketing year 2007/08. Stock changes represent a balancing item. Years up to 2007 refer to EU-25; years 2007 and after refer to EU-27.
Domestic use of sugar is projected to increase from 17.8 mio tonnes in 2005 (including Bulgaria and Romania) to 20.9 mio tonnes by 2014. The main reason for this increase is the emerging biofuel industry which is assumed to absorb 2.2 mio tonnes of white sugar annually by 2014.
The main uncertainty concerns the expected level of EBA imports after 2010. The Commission assumes that these will amount to 2.2 mio tonnes, and thus total imports will amount to 4.4 mio tonnes when account is taken in addition of ACP imports, imports from Western Balkans as well as the import quota opened after the accession of Bulgaria and Romania.
The market for sugarbeet for ethanol was not foreseen when the sugar reform was being drawn up. It will help to absorb some of the ‘C’ quota sugar which otherwise was exported from the EU without the aid of export subsidies. Ethanol production is expected to attract, on the DG Agri projections, an amount equivalent to the EBA imports of white sugar equivalent. The profitability of this outlet depends, in part, on the tariff protection provided against imported ethanol in the EU (19.2 euro per hectolitre on undenatured alcohol and 10.2 euro per hectolitre on denatured alcohol, though considerable duty-free preferences for developing countries (but not Brazil) exist).
Nonetheless, sugar stocks are expected to remain high until 2010, and the Commission projects that there will be considerable pressure for supply adjustment in 2011 and 2012. And, while DG Agri focuses on the potential supply from least developed countries (LDC) under the EBA initiative, the projections do not appear to take into account the April 2007 offer of duty-free access for sugar from non-LDC African, Carribbean and Pacific countries after October 2009 (subject to a volume constraint until 2015 which would nonetheless allow a ‘substantial increase’ in export levels)Â under the terms of the proposed Economic Partnership Agreements with these countries due to come into force after January 2008.
This is an interesting insight into the link between the CAP reform agenda and the biofuels debate. The biofuels enthusiasm of various parts of the farm lobby, and farm establishment, increasingly seem to be vindicated. Your post is however suggesting to one of the flows in the “strategy†of shifting farm support into the shadow of the energy policy. Inefficient production of a global commodity will face tough competition on the global market and will end up being dependent on punitive tariffs or production subsidies. So sugar beet ethanol is unlikely, on the long run, to pose different problems from those of sugar beet sugar.
Sugar beet ethanol offers, in most cases, very poor value for money on the environmental side, but that’s an issue for the biofuels debate proper…
I agree that a significant use of either EU-produced wheat or sugarbeet (currently, the two main feedstocks for ethanol in the EU) to produce ethanol will be dependent on production subsidies or tariff protection even at current oil prices. Two factors in the 2005 sugar reform have given a boost to sugar beet. First, since 2006, sugar beet can be grown on set-aside land, and second, it is now eligible for the energy crop aid of €45 per hectare on non set-aside land. In addition, sugar used for bioethanol is not counted against the quota. These changes in the sugar regime will make beets a more attractive feedstock in the future (Of course, bioethanol remains the poor relation compared to biodiesel when it comes to biofuels in the EU).
A recent USDA report (“The economics of bioethanol production in the EU 2006”) compared the greenhouse gas reduction efficiency of both wheat and sugarbeet-based ethanol based on IEA data. It concluded what wheat-based ethanol would reduce GHG emissions by 19-49% for every km travelled, compared to a petrol-driven vehicle, and that the equivalent reduction would be 35-56% for sugarbeet-derived ethanol. Of course, the energy and environmental efficiency of Brazilian sugar cane is still higher, and there are also other environmental costs (increased water and pesticide use) to be taken into account.
The same report also compared the production costs of the two feedstocks. These depend critically on the assigned value to co-products (distillers grains in the case of wheat, and sugar beet pulp in the case of sugar beet). While acknowledging the uncertainties, the report concluded that sugarbeet was likely to be a better option as a feedstock than wheat. These comparisons look at the competitiveness of feedstocks at a point in time, and do not take into account the likely rise in feedstock prices if demand for domestically-produced ethanol were to rise. It also remains the case that overall profitabiliity of bioethanol production from domestically-produced feedstocks even at current oil prices remains very dependent on public support through mineral tax relief, mandatory incorporation, production subsidies and tariff protection.