Global Sugar Markets

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Sugar, which can be produced from both sugarcane and sugar beets, is cultivated in more than 100 countries. Most sugar comes from the former: of the 175 million tonnes produced around the world in 2014, 77.1 percent came from sugar cane, with the remaining 22.9 percent from sugar beets. Brazil is by far the most significant producer of sugar, accounting for a quarter of global production. Other top producers include India, China, Thailand, Mexico, Pakistan and Australia.

Africa plays a relatively small role in determining global sugar supplies, producing 9.8 million tonnes on close to 1.5 million hectares in 2014. One-fifth of this land is in South Africa, the continent’s top sugar producer and 12th largest producer globally. Other countries across Southern Africa are also strong producers, aided by their ideal sugar growing conditions. As a result, sugar yields are quite high in countries such as Malawi (107.4 tonnes per hectare), Swaziland (96.5 tonnes per hectare), and Zambia (103.5 tonnes per hectare), figures which outdo those of major producers like Brazil (70.65 tonnes), India (70.26 tonnes), China (71.34 tonnes), Thailand (76.6 tonnes), and Mexico (74.39 tonnes). Six of the world’s most competitive sugar producers are located in Africa, which includes Uganda, Tanzania, Malawi, Zambia, Swaziland and Egypt. Uganda has the lowest production cost on the continent at $140 -$180 per hectare.

In 2013, sugar accounted for $1.6 billion in Sub-Saharan African exports. The majority of this—about $1.05 billion—went to the EU. South Africa was the continent’s top exporter, exporting one million tonnes of sugar in 2013. Other major exporters include Algeria (500,000 tonnes), Mauritius (410,000 tonnes) and Swaziland (385,000 tonnes). In the same year, Africa imported 5 million tonnes of sugar, with the majority coming from Brazil, China, and India. Algeria was the largest importer (1.6 million tonnes), followed by Nigeria (1.3 million tonnes) and Egypt (1.2 million tonnes). Algeria is unique because it imports raw sugar, refines it, and exports the final product instead of producing its own raw sugar. Algeria and Mauritius are the only African countries that export refined sugar to the EU.

Global markets

Strong production from India, Mexico, and the Black Sea regions has translated to a pattern over the past four years in which supply has exceeded demand. The extended periods of increased production are largely reactions to dry weather conditions in Brazil, which have periodically affected the country’s crop since 2010.

Although the global sugar market has been somewhat depressed as a result of this supply and demand gap, with relatively low prices over the past several years, producers in Africa have been somewhat sheltered from market volatility thanks to the preferential market access the continent’s producers gain through economic partnership agreements (EPAs) with the EU. These agreements mean that African countries are gradually opening up their markets to European imports, which may over time prove to be difficult competition for African producers. Many European sugar beet producers receive some sort of subsidy or support, and Europe already has the established capacity to refine its sugar.

The EU is in the midst of reforming its sugar policies, which should be fully implemented by 2017. These policies are expected to translate into a 3.9 percent drop in regional demand by 2023. The production of isoglucose, a sweetener extracted from cereals, is projected to grow and replace sugar in some food consumption tiers and claim an increasingly large share of the European sweetener market.

Demand is expected to increase in Asia, which is already responsible for a significant proportion of global sugar consumption. India and East Asia make up 41 percent of global consumption, a proportion which is expected to rise to 47 percent by 2020. Brazil is currently the main supplier of sugar to Asia, followed by Cuba.

Global Sugar Consumption Continues to Increase

According to the Organisation for Economic Co-operation and Development (OECD), Brazil is one of the world’s most efficient producers of sugar, with production costs of about $170-210 per tonne. Not only is the country a top producer of sugar, but also a major consumer, especially given the country’s booming, decades-old ethanol sector which is supported by legislation requiring ethanol to be mixed into the country’s fuel supply. However, the sugar industry has recently been wavering due to uncertain and unfavorable weather such as ongoing drought, stoking fears of the world’s first sugar deficit in five years. The United States Department of Agriculture (USDA) has forecast Brazilian sugar exports from May-April 2015 to be at 24 million tonnes, a six-year low. This is likely to place upward pressure on world sugar prices. A potential concern for consumers, higher prices could bring relief to producers who have been struggling with low prices over the past several years.

The curious case of subsidized sugar

Nearly every sugar producing country has some kind of government intervention in the sugar value chain. For example, in Brazil, subsidies include: direct payments through income and price support schemes , alleviation of pension taxes for sugar producers , usage mandates especially in the ethanol fuel markets, lower tax rates, special interest rates on government loans, and tax liabilities. These subsidies amount to about $2.5 billion annually, equivalent to 7 percent of the global sales of sugar and ethanol from Brazil. To put this further into perspective, all of sub-Saharan Africa exported $1.6 billion in sugar exports in 2013.

Production from the world’s second largest producer, India, is projected to hit a record 26.4 million tonnes in 2014/15. Faced with a potential sugar glut, the Indian government announced an additional subsidy of 4,000 Indian rupees ($63) per tonne of sugar exported by local millers. The government states that India needs to ship 1.5 to two million tonnes with incentives in order to avoid a local sugar price collapse and to help millers pay farmers on time. So far, India has managed to defend its position to the World Trade Organization (WTO), stating that its subsidies amount to less than 10 percent of the value of sugar production—the WTO-mandated limit for such support.

The US, Thailand, China, and several countries in Africa also offer some sort of monetary or financial support or incentives to producers. South Africa applies tariff protection for its sugar producers, providing compensation when global sugar prices fall below a reference price point. In Egypt, subsidies are widespread across agricultural commodities, with the country spending about $670 million on sugar subsidies alone. Kenyan lawmakers and sugar industry leaders have succeeded in obtaining 11 years of reprieve from the Common Market for Eastern and Southern Africa (COMESA) on imports of duty-free sugar from the region. Earlier this year, it received a further two year extension. The Kenyan government has also pumped capital into sugar millers to service bad debt and finance expansion, the latest of which was a $45 million capital injection into Mumias Sugar—Kenya’s largest sugar miller, controlling a third of the country’s sugar output.

The sugar story in southern Africa

Together, Malawi, South Africa, and Swaziland will produce about 37 percent of African sugar this year. In 2013, the three exported a combined 813,000 tonnes, most of which was raw sugar. South Africa specifically is responsible for about 25 percent of African sugar production, producing approximately 2.5 million tonnes of sugar each year. Roughly 60 percent of the country’s sugar is exported, to either other countries in the South African Development Community (SADC), or the US, EU, and Asia.

That said, South African sugar yields have been declining on a year-to-year basis. In fact, the country’s yields are roughly half those of other producers in the region, such as Malawi and Swaziland. This drop in yield has been in part due to adverse weather conditions like drought. Kwa-Zulu Natal, the province which produces 80 percent of South Africa’s sugarcane, has been hit the worst by the drought, with the government declaring disaster areas in nine of the 11 districts in the province. According to a grower’s association, the drought may cost the sugar industry up to $81 million.

Additionally, South African sugarcane growers have been struggling with shifting land reform and infrastructure constraints. Urbanization is also affecting the availability of land for sugarcane production to grow, as some farmers are converting their sugar estates to gated housing developments.

In February of this year, President Zuma announced major and controversial changes to land ownership laws. Foreigners will no longer be able to own land and must lease property from its South African owners. The policy also restricts the amount of land that an individual can hold to 12,000 hectares. Anything beyond this, according to the new law, should be taken over by the state and transferred to black South Africans. While this policy aims to address historical, racial land injustices, it may have negative implications for the country’s sugar production. Most of South Africa’s sugar farms are well below the 12,000 hectare limit, but the move has the potential to negatively impact investor and landowner confidence.

Almost half of sugar growers have left the industry since the 2002/03 crop year, with sugarcane area harvested reduced by 15 percent. Moreover, the number of large scale sugar cane producers declined by 20 percent in the past ten years to about 1,400, and small scale producers declined by 48 percent to about 25,000. The dramatic decrease in small-scale producers over the years has been attributed to long-term drought conditions in South Africa. For the large-scale producers and sugar companies, the import of cheap, subsidized sugar has driven down investment returns, particularly in light of higher production costs and fluctuating sugar prices. Throughout the 2000s, South African sugar companies invested heavily in countries such as Mozambique, Zambia and Malawi, both due to the drop in profitability of sugar production in South Africa and also to take advantage of preferential trade access for sugar exports to the EU.

This has been the source of much unrest in the country. In a complaint filed in a Malawi court by the Sugar Plantation and Allied Workers Union, Illovo Sugar was accused of refusing to hand back over 600 hectares leased from local communities in the late 1970s. These communities claim that the company colluded with the government to annex their land without consulting its inhabitants. The situation was further complicated by an August 2013 land bill which sought to change land tenure such that foreign-owned freehold land was converted to leasehold, and yet controversially sparing the sugarcane industry. Over the past few years the EU has funded infrastructure projects such as roads and irrigation to support small-scale growers, who in turn sell their sugar to Illovo. Although well-intentioned, this support may be helping to fuel the land disputes, with wealthy locals allegedly colluding with authorities to take land. This, alongside late 2014 floods, spells an uncertain future for the country’s sugar crop.

The situation in Swaziland is similar. In 2014 the country produced 704,000 tonnes of sugar, and was the fourth largest sugar exporter in Africa. Swaziland’s sugar production is dominated by three multinational sugar companies: Illovo, Tongaat Hulett, and the Royal Swaziland Sugar Corporation (RSSC). The industry is expected to grow at five percent annually through 2018/19 on the back of the increase in small-scale sugarcane growers. With a production cost of about $250 - $300 per hectare, Swaziland is still poised to be competitive in the EU market post-2017.

Preferential EU trade policies

In 2006 the WTO deemed the EU’s sugar export subsidies non-compliant with the organization’s international trade rules, a decision which led to the reform of these rules that same year. As a result, the EU became a net sugar importer. It set up a Tariff-Rate Quota (TRQ) scheme which permitted a specific quantity of imported sugar from the Africa, the Caribbean, and the Pacific Group (ACP) to enter the EU market more cheaply. This was in addition to preferential trade access for sugar exporters from the ACP under the 1975 Sugar Protocol. This was particularly beneficial for the African sugar export market with up to 62 percent of Africa’s sugar exports going to the EU in 2013. Countries such as Malawi and Swaziland benefitted from this reform, which also included aid to help restructure the local sugar industries to be more competitive.

In 2013 the EU passed some transitional safeguards, and from October 2017 the EU will abolish sugar production quotas for its member states and minimum sugar beet prices. This is projected to make EU sugar beet production increase and prices drop by 22 percent. Looking forward, the European production increase is expected to make prices become more volatile over time. It is unclear if the EU will maintain import protection against non-preferential sugar imports, but if the restrictions are removed, it would cause further downward pressure on prices.

Much of the sugar that Africa exports to the EU is for food use. The prices received for this exported sugar have been much higher than the global average due to severe import restrictions on non-preferential exporters and sugar price guarantees. Post-2017, however, this price distortion will be corrected to be closer to world market prices—a change which is expected to spell trouble for African producers.

Illovo Sugar, the largest sugar producer in Southern Africa, has already shifted its market focus away from the EU to domestic markets. Although this shift is in part due to growing domestic demand, it is also motivated by the looming changes to EU policy. Malawi and Swaziland are low-cost producers and are therefore well-positioned to compete favorably against the rest of the world for the liberalized EU sugar market.

Looking ahead

Africa currently imports about five million tonnes of sugar each year, while exporting just under 3.5 million tonnes. Demand is expected to increase as middle class economies across the continent continue to grow. African producers will likely begin increasingly targeting consumers from within the continent, a move which makes sense given the shifting, potentially unfavorable trade policies from traditional markets like the EU.

Sugar demand is likely to increase as diets around the world continue to include more sugar and sugar-based ethanol becomes an increasingly sought-after commodity. But many countries around the world are already producing sugar cheaply, whether by subsidies or good growing conditions. It is particularly important that all sugar producers across Africa should not scramble in their attempts to increase production. Rather, the countries in which sugar production is particularly cost-competitive, such as Swaziland, Tanzania, Malawi, Zambia, and Uganda, should strive to better reap the benefits of their competitive advantage. These producers should also ensure that they have the capacity to refine their sugar, so that they can trade in a higher-value version of their good.

Sugar is an undoubtedly complex market, and one that can be troublesome for African producers. With the right shift in outlook, the future may be sweet.

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