Page 1 of 15

London, 2nd March 2020

European Union and United Kingdom sugar markets and update and outlook

Table of contents

Key estimates ............................................................................................................................. 2

European sugar prices remain slow to react ................................................................................ 2

EU sugar exports retreat from their once traditional markets ..................................................... 4

EU28 stocks fall to their lowest level in five years ....................................................................... 5

EU sugar beet area is expected to be smaller for the third year running ...................................... 5

UK sugar market could be cut adrift from the EU sugar market as friction looms in 2021 ............. 7

UK Global Tariff consultation launched ............................................................................................... 7

Negotiating mandates for a new UK/EU partnership proposed ............................................................ 8

Rules of Origin likely to be a major sticking point for sugar .................................................................. 8

The UK takes its seat at the World Trade Organization ........................................................................ 8

The UK launches a new, independent trade policy ............................................................................... 9

UK agricultural policy will diverge from the Common Agricultural Policy ............................................ 10

Supply and demand of sugar in the United Kingdom.......................................................................... 10

Conclusion ....................................................................................................................................... 11

Statistical Annex ...................................................................................................................... 12

State of play for EU27 and UK preferential sugar import quotas ........................................................ 12

Estimated UK sugar balance sheet .................................................................................................... 13

Sugar imports from “ACP Sugar” countries into the UK (tonnes tel quel) ............................................ 13

Imports of sugar into the UK from EU27 ............................................................................................ 14

ACP, LDC and South African sugar exports to the EU 28 ..................................................................... 14

Disclaimer ................................................................................................................................ 15

Please visit my website at https://www.julianprice.com ................................................................... 15

EU Sugar Market Report and Update 02 March 2020

Page 2 of 15

Key estimates

European sugar prices remain slow to react Alongside most other financial assets, global sugar futures prices on the London and New York markets collapsed last week amid wild speculation of the effects on sugar supply/demand of the coronavirus (COVID-19), notably concerning the possible drop in sugar consumption as cities, travel hubs and even entire countries go into lockdown. In today’s feverish atmosphere, it is more than ever difficult if not impossible to forecast where the markets might be heading. The latest estimates of global sugar supply/demand and the surprising turn-arounds in Thailand (especially) and India had supported a market rally leading up to the Dubai Sugar Conference on 9th February, underpinned by the International Sugar Organization forecast of a deficit of 6.1 million tonnes in the current 2019/20 marketing year with production at 170 million tonnes and consumption 177 million tonnes, the FO Licht forecast of a deficit of 11.2 million tonnes (production 174 million tonnes and consumption of 185 million tonnes), and the LMC forecasts of a deficit of 7.3 million tonnes (production of 179 million tonnes and consumption of 186 million tonnes) this year and a smaller deficit in 2020/21 of 0.6 million tonnes.

EU Sugar Market Report and Update 02 March 2020

Page 3 of 15

Meanwhile, closer to home, the recent announcements of the financial results of Royal Cosun, Cristal Union and Associated British Foods confirmed what we already knew, that there are no companies in the EU who are producing sugar profitably, although they do state they remain unanimously optimistic about the European sugar markets recovering this year. According to the latest European Commission reported prices, the average EXW white sugar price was EUR 409 per tonne in Region 3 in December 2019, EUR 326 per tonne in Region 2 and EUR 357 in Region 1. According to Eurostat (via VAT returns), the average intra-EU sugar price traded at EUR 392 per tonne in December. However, spot prices are significantly higher, on average in February 2020 some EUR 450 to EUR 460 per tonne, and domestic prices are reaching EUR 510 per tonne in northern Italy, EUR 530 in southern Italy and EUR 535 per tonne in Spain.

EU Sugar Market Report and Update 02 March 2020

Page 4 of 15

EU sugar exports retreat from their once traditional markets The EU’s position as a net exporter in 2017/18 now looks to have been a “one off” in the years since the 2006 sugar policy reforms, before which time the EU had been net exporter for thirty years in a row. After the abolition of sugar quotas in 2017, it had been anticipated that the EU would return to its traditional sugar export markets in the southern Mediterranean, the Middle East and the Commonwealth of Independent States (CIS). Substantial investments were sunk into sugar export terminals from Rouen to Gdańsk and in railway facilities for eastern Europe and the Stans, to load the greater volumes of cargo. Hindsight is a wonderful thing, but no one could have foreseen (at least not many did three years ago!) that in the 2019/20 marketing year, EU exports could be less than one million tonnes, and maybe not even 750,000 tonnes excluding IPR “re-exports”.

It is now evident from Eurostat statistics (see below) that the EU has all but abandoned sugar export marketing to Algeria (down 91% compared with the average of 2017/19 exports), Egypt (down 61%), Lebanon (down 71%), Libya (down 99%), Russia (down 98%), Saudi Arabia (down 36%), Syria (down 100%) and Turkey (down 93%). The substantial export markets which the EU has retained so far are Israel (up 17%), Kuwait (down 4%), Norway (up 7%) and Switzerland (up 7%).

EU Sugar Market Report and Update 02 March 2020

Page 5 of 15

EU28 stocks fall to their lowest level in five years After reaching a peak of 15.3 million tonnes at the end of December 2014, EU28 sugar stocks have declined for five years in a row, reaching 12.1 million tonnes in December 2019, according to the latest data released by the European Commission.

EU sugar beet area is expected to be smaller for the third year running As spring approaches on the northern European plains, farmers’ attention now turns to drilling sugar beet for the 2020/21 campaign. As foreseen in Sugaronline’s EU report of 3rd December 2019, the area to be planted to beet is expected to be lower for the third year running. The headwinds facing farmers of the unscientific bans on plant protection products, the closure of the Cagny, Eppeville, Bourdon and Toury factories in France, the Brottewitz and Warburg factories in Germany, and the Strzyżów factory in Poland, the catastrophically low domestic sales prices until just recently, not to mention the ever-present weather and disease risks, will not have helped to encourage farmers to contract more beet for the 2020/21 campaign.

EU Sugar Market Report and Update 02 March 2020

Page 6 of 15

Although domestic prices are now rising quite significantly and the supply/demand outlook remains positive for the 2020/21 marketing year at least, especially given higher futures prices and a weaker dollar/euro, the return to a more positive market outlook has probably come too late to feed through into farmers’ decision-making this year. Nevertheless, the recent and hopefully enduring domestic price rises ought eventually to feed through into higher beet prices via the “value share” formulas in some contracts which are linked to the European Commission’s reported price series. The central assumption seems to be that the EU28 sugar beet area could be between 1,475,000 and 1,500,000 hectares after 1,533,000 hectares in 2019/20. Given three year average yields, EU28 beet sugar production would then be pretty much the same as last year, that is around 17.3 million tonnes given fair weather and luck with pests and disease.

Photo credit: British Beet Research Organisation

EU Sugar Market Report and Update 02 March 2020

Page 7 of 15

UK sugar market could be cut adrift from the EU sugar market as friction looms in 2021 There will be “friction” at the border between the United Kingdom and the European Union as from 1st January 2021, at least for traffic crossing the English Channel, UK Cabinet Office minister Michael Gove confirmed to the UK freight transport industry, reports the Financial Times on 10th February 2020. The friction that Mr Gove speaks of means that EU and UK customs authorities will each collect customs tariffs, value added tax and excise duties and check the safety of goods crossing the frontier. There will be no Transitional Simplified Procedure as earlier envisaged, and instead there will be border inspections for food, feed and plants, and there may be extra VAT accounting (to be confirmed). Moreover, the UK Government has strongly insisted that there will no extension to the transitional period beyond 31st December 2020. Mr Gove told the freight industry to prepare for new bureaucracy and costs when the post-Brexit transition period ends, and the UK leaves the EU customs union and single market. “Frictionless trade has been kicked to the touchline,” said Elizabeth de Jong, UK policy director of the Freight Transport Association, after meeting Mr Gove. “This was a big dose of realism. It’s going to be really costly for business”, she said. As an anonymous source advised, “Get it right and you won't have problems. Get it wrong and the consequences will be dire”. Thus, will the UK sugar market of around 1.8 million tonnes per annum become separated from the EU27 market of 16.5 million tonnes. Moreover, the European Commission’s “Region 2” for sugar price reporting, comprising Benelux, Germany, France and the UK, will be shorn of its latter now ex-member state. In devising these regions in 2017, the European Commission had anticipated Brexit and they gave assurances at the time that reporting sugar prices in Region 2 minus the UK would not raise competition concerns amongst the remaining member states in the region.

Picture Credit: Andrew Parsons / No10 Downing Street

UK Global Tariff consultation launched On 6th February, the UK Department for International Trade announced the launch a public consultation, calling on businesses and individuals to help to shape the UK’s new global tariff regime. “This is an incredibly exciting moment”, Liz Truss, the newly-reappointed Secretary of State for International Trade wrote in The Daily Telegraph on 7 February. “Since we joined the Common Market in 1973, our tariff regime has been written for us. And it is fair to say that it has not always served the best interests of the UK. The EU’s Common External Tariff is maddeningly complex and hugely bureaucratic. Take confectionery. The EU inexplicably has 13,000 variations of tariffs on biscuits, baked goods and

EU Sugar Market Report and Update 02 March 2020

Page 8 of 15

confectionery. These are essentially taxes that drive up the cost of the British consumer's weekly shop and ultimately, their cost of living”, she added, hinting that the so-called Meursing code may be dismantled in 2021. The Meursing code charges additional import duties on the sugar, cereals and dairy content of processed foods depending on the percentages in each recipe.

Negotiating mandates for a new UK/EU partnership proposed On 3rd February, the European Commission proposed draft negotiating directives for a new partnership with the United Kingdom and on the same day, UK Prime Minister Boris Johnson spoke at the National Maritime Museum in Greenwich, London, to insist that the UK must become champion of global free trade. Mr Johnson added that from “Brussels to China to Washington tariffs are being waved around like cudgels”, as he said it was time for the UK to remove its “Clark Kent” glasses and transform into a “superhero champion of free trade with other countries”. The European Commission’s recommendations are scheduled for adoption at the General Affairs Council on 25 February. Once this decision is adopted by the Council, the European Union could then be ready to begin formal negotiations with the United Kingdom. The first formal meeting between the EU and the UK negotiators is expected to take place at the beginning of March.

Rules of Origin likely to be a major sticking point for sugar For sugar and sugar-containing products, perhaps the most important negotiations – perhaps more important even than the tariff negotiations – will be about Rules of Origin, in particular about bilateral, diagonal and/or full cumulation with the EU. For example, it is possible that without an adequate agreement on preferential rules of origin, raw sugar originating in ACP countries, refined in the UK and incorporated into products manufactured in the UK could be charged MFN duties on entry into the EU (including Ireland?), whereas UK beet sugar may not suffer the same tariff consequences. An “adequate” EU/UK agreement would enable full cumulation of origin of sugars imported under the many and various Free Trade Agreements with SACU+M, Cariforum, ESA, Pacific Forum, Central American, Andean Pact and Least Developed Countries. But how easy will it be to negotiate that? Perhaps even more difficult than that may the direct transport rule further to which evidence or proof of direct transport (non-manipulation) will have to be provided for each consignment of goods exported from the UK to the EU and vice-versa to the customs authorities of the importing country. It is also possible that there may be product specific rules and messy derogations for agricultural products. All this has apparently to be negotiated and agreed in the nine months remaining in 2020, with “sufficient progress” apparently required by July 2020 after which there seems to be no legal basis for extending the transition beyond 2020 and we will be faced with a “cliff edge” and the hardest of hard Brexits on 1st January 2021.

The UK takes its seat at the World Trade Organization On 1st February 2020, the UK formally took its seat independently of the EU at the WTO. As seats at the WTO are arranged in alphabetical order, the UK now sits next to the United States of America instead of being subsumed in the EU delegation. A communication from the United Kingdom to WTO set out more detail on the implications in the WTO of the United Kingdom's departure from the European Union. Further information was also provided in a Note Verbale from the EU.

EU Sugar Market Report and Update 02 March 2020

Page 9 of 15

The EU and UK have already jointly proposed to split the WTO “CXL” sugar quotas between them on the basis of an average of three years deliveries between 2014 and 2016 (1). Accordingly, the UK submitted Schedule XIX – United Kingdom to the WTO on 24 July 2019 (2). The UK’s MFN import tariff schedule is the same as that for the EU, that is 339 €/t duty for raw sugar for refining and 419 €/t for all other sugars. However, according to the UK Trade Tariff, raw sugar for refining (1701 13 10 or 1701 14 10) is subject to a variable tariff (whilst white sugar is indeed 419 €/t) (3). Note that the withdrawn “temporary tariff schedule” provided for a white sugar tariff of 150 €/t (4). In Schedule XIX, the UK specified sugar quotas in UK Sequence No. 072 as follows:

The total of “CXL” quotas to Australia, Brazil, India and Erga Omnes thus amounts to 70,209 tonnes. Note that the commitment of 372,993 tonnes to the ACP countries has yet to be written into UK law.

The UK launches a new, independent trade policy So-called “continuity” trade agreements have been signed between the UK and 51 countries worldwide, including virtually all significant preferential sugar exporters to the EU, and negotiations between the UK and another 16 countries are ongoing. As regards sugar, the UK has negotiated with SACU and Mozambique a sugar quota for South Africa of 71,365 tonnes, with the Andean Pact countries a quota for sugar and products containing a high proportion of sugar of 18,391 tonnes and with Central America a sugar quota of 68,388 tonnes per annum. The current “state of play” concerning agreements which include tariff rate quotas for sugar is summarized in annex to this paper. In addition, brand new free trade agreements with the USA, Canada, Australia and New Zealand are very high on the UK government’s agenda. Meanwhile as regards the ACP and LDC sugar exporters, the UK has signalled that, “to meet our long-standing commitment to reduce poverty through trade, the government currently offers preferential access to the UK market for developing countries. To ensure that access for developing countries is maintained, we would retain tariffs on a set of goods, including bananas, raw cane sugar, and certain kinds of fish” (5).

1 EU regulation 216/2019 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02019R0216-20190208 2 https://www.gov.uk/government/publications/uk-goods-and-services-schedules-at-the-wto 3 https://www.trade-tariff.service.gov.uk/commodities/1701141000 4 https://www.gov.uk/government/publications/temporary-rates-of-customs-duty-on-imports-after-eu-exit/mfn-and-

tariff-quota-rates-of-customs-duty-on-imports-if-the-uk-leaves-the-eu-with-no-deal#sugar 5 https://www.gov.uk/government/news/temporary-tariff-regime-for-no-deal-brexit-published (withdrawn)

EU Sugar Market Report and Update 02 March 2020

Page 10 of 15

UK agricultural policy will diverge from the Common Agricultural Policy In its “strategic proposal” for the future Common Agricultural Policy (6), the EC proposes to maintain Voluntary Coupled Support (“VCS”) for sugar until at least 2027. In the last year for which statistics are available, in 2017, the EU paid €175,559,640 to sugar beet farmers in eleven member states, supporting the production of sugar beet on 485,991 hectares of land which would otherwise “face difficulties” (7) with an average subsidy of € 361 per hectare of beet, producing around four million tonnes per annum of sugar or fully one quarter of the EU28’s total sugar production (8). This level of annual expenditure on coupled support seems likely to continue indefinitely on top of the much larger sums paid to EU27 sugar beet farmers in decoupled support under the CAP. However, the UK proposes a devolved agricultural policy (9) which in England would phase out direct payments to farmers starting in 2021 over a seven-year period and would intervene in agricultural markets only in exceptional circumstances.

Supply and demand of sugar in the United Kingdom In total and subject to ongoing negotiations, the UK has already agreed CXL and FTA sugar quotas of 228,353 tonnes per annum (and increasing by various percentages), of which 158,259 tonnes are duty-free and most of the remaining 70,094 tonnes being with a reduced duty of 98 €/t. On the basis of an average of imports in the marketing years 2016/17, 2017/18 and 2018/19, the UK imported 342,290 tonnes of sugar from 17 ACP/LDC countries (to compare with the UK WTO commitment of 372,993 tonnes) and 513,335 tonnes from EU27 countries (10). Given the agreements reached in the WTO and under the continuity agreements, the total of UK imports of sugar on the above basis would be 1,083,978 tonnes per annum. In the last four marketing years 2016/17, 2017/18, 2018/19 and 2019/20, UK beet sugar production has amounted to 885,000 tonnes, 1,364,000 tonnes, 1,148,000 tonnes and approximately 1,180,000 tonnes respectively, thus an average of 1,144,000 tonnes. Note that in 2016/17, the area planted to beet was drastically reduced in advance of the last year of production quotas, whilst in the most recent two years the beet crop was damaged by summer droughts.

6 Proposal for a regulation COM(2018) 392: https://ec.europa.eu/commission/publications/natural-resources-and-

environment 7 Report of the High-Level Group on Sugar, 5 July 2019: https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX:02013R1307-20190301 8 https://ec.europa.eu/info/food-farming-fisheries/plants-and-plant-products/plant-products/sugar_en#highlevelgroup 9 https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-8702 10 See statistics in annex hereto.

EU Sugar Market Report and Update 02 March 2020

Page 11 of 15

Sugar consumption in the UK (including sugar for bioethanol) is currently estimated to be around 1,800,000 tonnes per annum. Note that it is difficult to estimate consumption accurately, however, it seems clear from Public Health England’s National Diet and Nutrition Survey, that sugar consumption has been declining slowly over the past nine or ten years as shown in the graph above which measures free sugars as a percentage of total energy consumption in adults (the trend for children shows a more sharply downwards slope) (11). In summary, UK trade policy as already enacted seems to be heading towards a surplus of around 428,000 tonnes per annum, as estimated as follows (tonnes tel quel):

Consumption (estimated) 1,800,000

Imports (see above) 1,083,978

Production (4-year average) 1,144,165

Annual surplus 428,143

Surplus as % of consumption 24%

In the withdrawn Temporary Tariff Schedules, it was envisaged that an Autonomous Tariff Quota (“ATQ”) of 260,000 tonnes would be enacted. However, even if imports from the subsidized sugar producers of the EU27 would be choked off by means of an MFN tariff applicable along the English Channel, such an ATQ would clearly be unnecessary to balance supply and demand of sugar in the UK market.

Conclusion It seems possible that the UK will be a quite separate market for sugar after the end of the transition period on 31st December 2020, and that, rather than trading at a small-ish premium to average EU sugar prices, a quite different dynamic may emerge. On the basis of what we may foresee in advance of the beginning of the UK/EU free trade negotiations, which are expected to begin in March 2020, the UK seems to be heading towards a surplus of sugar supply compared with diminishing demand, with inevitable consequences for domestic UK sugar wholesale prices. However, the negotiations have not yet even begun, and much could change in the next nine months!

11 Source: https://www.gov.uk/government/statistics/ndns-time-trend-and-income-analyses-for-years-1-to-9

EU Sugar Market Report and Update 02 March 2020

Page 12 of 15

Statistical Annex Sources: julianprice.com Ltd. and Eurostat data

State of play for EU27 and UK preferential sugar import quotas

EU Sugar Market Report and Update 02 March 2020

Page 13 of 15

Estimated UK sugar balance sheet

Estimates: julianprice.com 13/02/20

Sugar imports from “ACP Sugar” countries into the UK (tonnes tel quel)

EU Sugar Market Report and Update 02 March 2020

Page 14 of 15

Imports of sugar into the UK from EU27

ACP, LDC and South African sugar exports to the EU 28

EU Sugar Market Report and Update 02 March 2020

Page 15 of 15

Disclaimer

o The opinions, views and forecasts expressed herein reflect the personal views of the author and do not necessarily reflect

the views of julianprice.com Ltd.

o Any comments or opinions in this report are not intended to be an offer to buy or sell commodities or futures and options

thereon as they merely state our views and carry no guarantee as to their accuracy.

o We make no representation or warranty that the information contained herein is accurate, complete, fair or correct.

o All information, prices or projections are subject to change without notice.

o This information is not intended to be construed as investment advice.

o We do not accept any liability or loss or damage arising from any inaccuracy or omission in or the use of or reliance on the

information in this document.

Please visit my website at https://www.julianprice.com