Question

EU sugar market

Describe the demand and supply forces and related issues including the graph and summarize the main messages in this example.

Answer 1

The European Union is the world’s leading producer of beet sugar, with around 50% of the total amount. However, beet sugar represents only 20% of the world’s sugar production, with the other 80% produced from sugar cane.

Most of the EU's sugar beet is grown in the northern half of Europe, where the climate is more suitable. The most competitive producing areas are in northern France, Germany, the Netherlands, Belgium and Poland. The EU also has an important refining industry that processes imported raw cane sugar.

EU sugar policy-

Sugar is part of the common market organisation (CMO) between EU countries, which has several functions including providing a safety net to agricultural markets, cooperation through producer organisation and inter-branch organisations, and laying down minimum quality requirements.

Beet farmers can get income support in the form of direct payments that are largely decoupled. EU countries have also the possibility to grant voluntary coupled support to specific sectors in difficulty – including sugar beet and sugar cane production. Eleven EU countries have decided to grant voluntary coupled support for sugar beet producers.

EU sugar market policy focuses on two main areas: market measures and trade measures.

Market measures within the EU

The EU can support the sugar sector with specific market measures, in particular private storage aid, measures against market disturbance and measures to solve specific problems.

Private storage aid is granted when taking into account average recorded Union market prices, the reference thresholds and production costs. The European Commission may grant this aid in the case of a particularly difficult market situation or economic development having a significant negative impact on the margins of the sector in order to keep a certain volume of sugar out of the market during a certain period. The CMO rules foresee additional support measures in case of severe market disturbances due to sharp increase or decrease in prices, amongst others.

Trade with countries outside the EU

Trade policy is an exclusive power of the European Union – so only the EU, and not individual EU countries, can legislate on trade matters and conclude international trade agreements. International trade is also governed by rules of the World Trade Organisation.

As a major importer of cane sugar, the EU grants duty-free access to the EU market to developing countries under the "Everything but arms" agreement and economic partnership agreements with the African, Caribbean and Pacific countries.

On 19 November 2018, the Commissioner for agriculture and rural development announced the establishment of a High level expert group on sugar (HLG) at the AgriFish Council meeting.

The mandate of the HLG was twofold:

1. to discuss the current market situation as well as EU countries' and stakeholders' concerns about the EU sugar market;
2. to explore and evaluate possible solutions and policy measures as regards their effectiveness and suitability to tackle the problems identified.

The Director-General for Agriculture and Rural Development chaired the HLG, composed by representatives of all EU countries. The HLG held three meetings between January and June 2019

Canegrowers: As an association

In a perfect competition, all the producers are always low on margins and facing a stiff competition. So, it doesn’t makes business sense for an individual organization to expend money on increasing sales; as there is no guarantee of achieving any material revenue growth given the large number of suppliers and buyers. Moreover the information being free and symmetrical would never let the supplier charge any amount higher than the market price. Hence, in such a scenario it’s in the best interests of all the suppliers to pool their knowledge & resources and work out on the process of maximizing their returns by reducing their costs. This leads to establishing of industry associations, which is designed to work in the best interests of the industry. Canrgrowers is one such association of sugarcane suppliers which works for the sugar industry and aims at sustaining the profitability of the producers and sustaining the sugar industry as a whole.

Canegrowers: As a task force

The Canegrowers as an association is responsible for the development of techniques which help the sugar producers in getting the maximum return out of their crops. These techniques are a part of the ‘quality assurance’ activities they undertake on the behalf of producers as a whole. As described in the video, the techniques used are polar technology and new-infrared Spectrophotragpy. These techniques are used extensively to measure the sugar content in the sugarcane juice (using various pre-calibrated parameters) and enhance the output of the producers. Also any impurities in the juice are washed away ensuring that the sugar itself is not wasted in the process.

This way not only would they better the quality of sugar they produce, they would also increase the amount of sugar produced. By developing new and improved ways of removing impurities, Canegrowers is helping the industry in lowering their variable costs and increasing their margins.

Sugar Industry Elasticity

The elasticity of a product depends on several factors. Let’s first enlist the major factors that contribute to the elasticity of the product –

Availability of Substitutes

Amount of Income allocated to spend on the commodity

Necessity of the product

Time Span

Now, we will analyze these factors with respect to sugar industry and try to gauge the elasticity of sugar industry.

Availability of Substitutes: This alone is one of the major factors of elasticity and it pretty much defines the fate of a commodity. Taking sugar as a product we find that sugar has high elasticity as there are substitutes available for sugar such as jaggery. So if the price of sugar goes up (ceteris paribus) then people would tend to shift towards jaggery to satisfy their need for sweet inducing commodity. Also, there are some artificial sweeteners available in market which can to an extent act as a sugar substitute. Whereas, if the price of sugarcane itself goes up then there would probably be little change in the consumption of sugar or jaggery. This is because there are no real substitutes for sugarcane and people might not be ready to give up their sweet needs. So, we see that a product within an industry might be elastic but the industry as a whole itself is not elastic.

Amount of Income allocated – Sugar being a daily consumption product would have a monthly budget allocated to it. With

Necessity of product – Although this would depend on the demographics of the region but talking in general the necessity of sweet can’t be done away with and hence there would always be demand for this product.

Time Span – Longer is the price change for a product, higher the elasticity would be for it. For example for once you may buy sugar at high price but if you see a permanent change in the price for sugar then you might eventually shift to jaggery.

Hence, the concept of elasticity of demand is a very useful concept in understanding the demand for sugar in the short run as well as long run.

Sugar Industry – Factors affecting Supply & Demand

Sugarcane growing is a long process (taking 1.5 to 2 years from planting to harvesting); so depending on the weather and also dependent on many natural hazards such as floods, tornados etc. and the impacts of pests and diseases. This type of abrupt changes can seriously alter the supply of sugar and hence the price of sugar in market (especially international market) fluctuates very frequently.

Talking about international market, there are two major factors that influence the price –

International trade is a very small proportion of total production and consumption of world

Protection policies adopted by some European nations, US, Japan etc.

To reduce the uncertainty of prices, sugar futures and options are readily traded in derivatives market and major chunk of the commodity is sold through these contracts only. This reduces variability in the ‘spot’ prices of the sugar in market. Also, individual producers are shielded from this price fluctuation by entering into long-term contracts to sell a significant proportion of their output. (“The Australian Sugar Industry”, Industry Commission, 1992)

The factor to be considered from supplier side while deciding for the equilibrium price and quantity is mainly the cost of production of sugar. Apart from that, the technology developed to increase the output and other logistics costs, form the major chunk. After that it depends on the interactions between suppliers and buyers to decide upon the equilibrium price and quantity. Since, the producers are price-takers hence only some firms can’t influence the price of the sugar in market. Also since the demand at firm level is perfectly elastic hence any increase in price by one supplier would lead to zero quantity sold for that buyer. Talking at an industry level, the demand for sugar is almost inelastic and the once the equilibrium price is reached after that no individual firm can demand more than that price (as shown in graph above).

As Graph shows, the increase in ethanol produced from sugar beet occurred mainly during the restriction of the EU sugar industry following the EU sugar reform in 2006. It is expected that the share continues to increase, albeit at a very slow pace.