EU sugar prices 'need to drop' - to spur export surge
10:57 UK, 6th Oct 2017, by Mike Verdin

European Union sugar exports will, thanks to a bigger-than-expected reaction to the end of output quotas, rise even further than had been thought this season– but this will mean a drop in prices.

US Department of Agriculture bureaux in Europe raised to 2.50m tonnes their forecast for EU sugar exports in 2017-18 (which started on Sunday) – the highest in eight years.

The estimate was 300,000 tonnes above the USDA's official forecast for shipments, although below figures from some other commentators. The International Sugar Organization, for instance, sees EU exports this season at 2.88m tonnes.

The expectation for a sharp increase in volumes from last season, when exports came in flat at 1.55m tonnes on the USDA bureaux's estimates, reflects the boost to production from the ending of output quotas.

The bureaux pegged EU sugar output this season at 20.1m tonnes – up 3.6m tonnes year on year, and 1.5m tonnes above the USDA's official estimate.

'Prices will need to decrease'

However, the enhanced export performance, which would likely make the EU the world's fourth-ranked sugar shipper, after Brazil, Thailand and Australia, implies weaker prices.

"EU sugar prices will need to decrease to make EU sugar competitive in the world market," if large exports are to be achieved, the bureaux said in a report.

"While high-quality EU refined sugar may command a price premium over world market prices, this premium will have to be limited if the EU wants to achieve its export ambitions."

EU premium

In fact, European sugar prices have proved resilient to the prospects of market liberalisation and surging production, with values as of July, the latest data available - at E501 a tonne, a premium of more than 50% to London white sugar futures, according to European Commission data.

Credit Suisse last month reported that producers have been striking forward supply contracts at levels below the official spot price, at "around E450-plus per tonne", below levels of around E500 a tonne year before.

This represents "nowhere near the collapse that might be implied by the export parity price", adding that the drop in values was "pretty modest in the circumstances".

The bank attributed the resilience in prices to weak EU inventories, with buyers last season running down stocks in expectation of weaker values ahead.

'Downward pressure on prices'

However, the USDA bureaux underlined their belief in weaker values to come, given market liberalisation.

Without a guaranteed sugar beet price, which had "put a floor under the cost of production for sugar, EU sugar prices can be expected to closely follow low world sugar prices.

"EU sugar processors are also engaged in a competition to maximise market share in the post-quota era, which may add further downward pressure on prices."

London white sugar futures for December on Friday stood at $378.40 a tonne, equivalent to E323 per tonne.