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That sugar lifeline

Feb 01, 2013 Editorial

 

 

Guyana’s beleaguered sugar industry was thrown a lifeline by the European Union (EU) when that trading bloc announced that it would be extending its sugar quota to the African, Caribbean and Pacific Group of States (ACP) up to 2020. Guyana is a member of the ACP and this means that Guyana can count on a duty-free base price of around 380 euros for up to 197,000 tonnes of its raw sugar.
When the EU sugar sector reforms were initiated in 2005 with a 36% cut in prices by 2012, it was widely assumed that the EU prices would still remain above world market prices. And that would ensure that the EU remained the market of choice for ACP producers. From 2006 to 2008 this was the case. However, in the 3 years, 2009–2011, average world market prices rose by 46%, 68% and 113% respectively, compared to the previous year.
This saw EU Cost, Insurance and Freight (CIF) prices below world market Free On Board (FOB) prices in 8 of the 16 months to January 2012, and more than 3 US cents/lb above the world market price in only 2 of these 16 months. This meant in essence that those countries like Guyana that remained locked into the EU quota arrangement lost a golden opportunity to make a windfall. Even at our continued high production costs, precipitated by the implosion of sugar production and the Skeldon Modernisation Project, Guyana could have still made substantial profits rather than losing money during that period.
The rise in the world sugar prices served to undermine the planned functioning of the EU sugar market, by generating a substantial gap between projected ACP sugar exports to the EU market (3.3 million tonnes for the 2011/12 season) and actual sugar exports (only 1.7 million tonnes for 2011/12). In the course of 2010 and throughout 2011, sugar shortages began to emerge on the EU market. This was in part a result of traditional ACP/LDC sugar suppliers directing sugar exports to more attractively priced non-EU markets. According to the Committee of European Users of Sugar (CIUS), this created a situation where in the 12 months to September 2011 EU sugar supplies were ‘1.1 million tonnes short of demand’.
By the end of 2011, raw sugar prices in New York had fallen some 27% from the 30-year high of 36.08 cents/lb reached in March 2011. During 2012, world market prices averaged 24.85 cents. Many analysts believe that the shortage of imported sugar that characterised the EU market in 2010–11 could then re-emerge. Indeed, in the medium term, the US Department of Agriculture (USDA) argued in mid-2012 that it will be difficult for the EU market to attract imports under current conditions. This will be compounded by growing demand for sugar in sub-Saharan Africa. This scenario of increased competition for supplies of sugar is consistent with the shift in global demand for sugar, and led the OECD to warn that failure to revise the EU sugar quota system ‘risks a repeat of the shortages seen [in 2010/11]’.
With its extension of the sugar quota to the ACP countries, the EU is obviously giving a high priority to establishing a policy framework that can meet the challenge of global sugar price volatility. And just as obviously, the EU believes it will be able to import between 3.4 million and 4 million tonnes of sugar per annum up to 2020.
Once quotas are abolished, the EU’s two-tier pricing system for its domestic beet sugar will no longer be able to operate, exerting a downward pressure on EU prices for sugar destined for human consumption. This will lead to EU and world market sugar prices becoming much more intimately linked, since quota abolition would also remove any WTO impediments to exports of EU refined sugar during times of high world market prices.
For Guyana, the present world price of 18 cents/lb illustrates the volatility of the sugar market and the EU quota is a good bet for us. But the day of reckoning has only been delayed.

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