EU Sugar Market Preps for End to Production Quota

Market Participants Look to Futures Market to Manage Price Risk

Article Highlights:

  • Current EU sugar policy is defined by three areas: a minimum price floor, import quotas and tariffs, and production quotas
  • Quota management and minimum beet price for EU sugar production is set to end in Sept. 2017, at which time pricing of EU’s sugar will float alongside the global sugar market
  • Participants will be exposed to increased price risk that can be managed through the futures market
  • With most producers around the world already price referencing ICE’s benchmark contracts, our sugar complex provides ideal risk management solutions for EU sugar market participants amidst the upcoming shift in the sugar market

Today the European Union (EU) is responsible for close to 50% of the world’s total sugar beet production, making it the top producer of beet sugar. Sugar beet accounts for only 20% of overall sugar production; sugar cane accounts for the other 80%1.

The EU’s current sugar policy, which was set in 20062, establishes the EU’s place in the complex global sugar market. It’s defined by three key areas1:

  • A minimum price floor – By current EU law, there is a set minimum price sugar factories must pay sugar producers for in-quota sugar. This means that sugar producers currently have a set threshold for price risk exposure.
  • Production quotas – Currently, the EU has a production quota of 13.5 million tons of sugar. This production quota encompasses all sugar produced by 19 member states, with top producers being France, Germany, Poland and the United Kingdom.
  • Import quotas and tariffs – The EU has become a net importer of sugar post-2006 sugar reform, with the majority of its inputs coming from African, Caribbean and Pacific states (ACP) and Least Developed Countries (LDC). ACP and LDC producers currently have quota-free, duty-free access to the EU market.

On Sept. 30, 2017, quota management for EU sugar production will end. This legislative change will introduce a new dynamic between the European and global sugar markets.

“Under the existing sugar policy and quota regime, producers and end-users are insulated from the price fluctuations in the global market,” says Dave Farrell, Chief Operating Officer, ICE Futures U.S. “When the policy changes, the door will open for producers to increase production and exports, which will have downstream implications for all market participants. The potential return of EU exports to the global market will bring the price of EU sugar more closely aligned with the world market, as it was prior to the introduction of the policy. Participants in the EU sugar market will benefit from access to the futures market to manage their exposure to price risk under the new system. Most global market participants are already pricing based off ICE’s benchmark contracts, so we’re working closely with the EU market to provide information around our sugar futures contracts.”

Managing Sugar Price Risk after the 2017 EU Policy Changes

With the EU poised to lift restrictions on the sugar market, participants are turning to the futures market for risk management solutions.

ICE’s sugar complex is designed to meet the trading and risk management needs of diverse market participants amidst changing market dynamics, including the upcoming shifts in the EU’s quota management policy. Each of our core sugar contracts has strong participation from commercial participants who employ the contracts to manage their price risk. The charts below demonstrate the strong commercial participation among users of the ICE White Sugar Futures and Sugar No. 11 contracts, in both long and short positions.

 Producer/Merchant/Processor/User      Managed Money      Swap Dealers      Nonreport      Other Report

 

 Producer/Merchant/Processor/User      Managed Money      Swap Dealers      Nonreport      Other Report

 

The deep liquidity in ICE’s sugar market makes our contracts ideal hedging mechanisms.

Three Featured Sugar Futures Contracts:

1. ICE’s White Sugar futures contract is used as the global benchmark for the pricing of refined sugar. It’s actively traded by the international sugar trader, sugar millers, refiners, and end-users (manufacturers) as well as by managed funds and institutional investors.

2. Working closely with the sugar industry, we developed a new physically delivered Containerised White Sugar futures contract to reflect advancements in the shipping methods for white sugar. The contract was introduced for trading on June 20, 2016, with the first listed contract month of October 2016. This contract is particularly relevant in Europe where ports are optimized to ship in containers. For this reason, the containerised sugar futures contract is a natural hedging mechanism for EU sugar production and exports.

3. The Sugar No. 11 contract is the world’s benchmark contract for raw sugar trading. This contract prices the physical delivery of raw cane sugar, free-on-board the receiver’s vessel to a port within the country of origin of the sugar.

ContractADV YTDAverage Daily OI
Sugar No. 11145,847851,601
White Sugar Futures10,81694,684

As of Sept. 23, 2016

The containerized white sugar contract had its first delivery in the October 2016 delivery period. Over 10,000 MT were delivered across two delivery ports, marking a strong beginning for the contract.

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Sources:

1 European Commission, “Agriculture and Rural Development.”
http://ec.europa.eu/agriculture/sugar/index_en.htm

2 SugarCane.org, “EU Sugar Policy.”
http://sugarcane.org/global-policies/policies-in-the-european-union/eu-sugar-policy