External influences likely to keep sugar prices high, says USDA

By Oliver Nieburg

- Last updated on GMT

External influences likely to keep sugar prices high, says USDA

Related tags: European union

World sugar prices are likely to stay high in 2012 due to external factors such as government policies, oil prices and instability in the Eurozone, according to the US Department of Agriculture (USDA).

A USDA report ‘Post-Reform European Union Sugar – Prospects for the Future’​ published late last month assessed past EU sugar reforms and analysed the challenges ahead for the EU as a consequence of further reforms in its new Common Agricultural Policy (CAP).

The report​ said: “It is likely that world sugar prices will remain higher than in the past when the original reform measures were being considered.”

Government policies

“The Indian production cycle and government policies are the main source contributing to an expected continuation of world sugar price variability. Government policies that intervene in sugar markets are assumed to continue,”​ it said.

Projections from the Organization for Economic Co-operation and Development (OECD) from 2011/12 through to 2020/21 put the average price for sugar at $518.5 (€405.9) per tonne, 48% higher than the $349.5 (€273.6) per tonne average from the earlier period.

“The figure shows future price volatility, with a low of $464.1 (€363.3) per tonne in 2012/13 and a high of $608.7 (€476.5) per tonne in 2015/16,”​ said the report.

“Low prices are expected in 2012/13 and 2013/14 that make a case for retaining the quota system during the period in which quota is being debated,” ​it continued.

Eurozone and EU expansion

The report added that another influence affecting prices was instability in the Eurozone.

“The European Union would be in strong competition for the Sub-Saharan African exports unless the euro appreciates above projected levels,” ​it said.

“Looking ahead, the value of the Euro and increased demand from emerging market economies will likely have strong effects on EU sugar markets that policymakers cannot afford to ignore.”

The report added that the likely enlargement of the EU to include Croatia and Serbia could also impact the sugar market.

“They ​[Croatia and Serbia] have been granted loans to improve their sugar infrastructure and could become more efficient producers that could add to greater self-sufficiency in EU sugar production in an EU of 30 member states.”

Influence of oil

According to the report a lack of risk management policies in the EU, unlike in other regions, mean the next CAP reform will likely address the price volatility issue, though many factors will still affect sugar prices.

“Oil price changes affect world sugar prices by influencing trade-offs in producing either sugar or ethanol in Brazil,” ​said the report.

Brazil is the world’s largest sugarcane producer and can choose use its produce either for sugar production or ethanol production.

“When the world price of oil is high, Brazil has more incentive to produce ethanol and less sugar. Reduced sugar exports contribute to higher world sugar prices.”

“Conversely, when world oil prices drop, less ethanol is produced and more sugar is available to the world, thereby lowering the world price.”

The European Commission released its proposals for CAP reforms on 12 October 2011.

It is now up to the European Parliament and the Council to approve the regulations, which is expected by the end of 2013. If all goes to plan, the CAP reforms would take effect on the 1 January 2014.

Related topics: Market Trends

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