Will Brexit sour the European sugar market?

The UK's departure from the EU at 2300 GMT on Friday will happen without those on either side of the channel being any the wiser about its long-term implications for the European sugar market.

The UK has a sugar deficit, with annual consumption of around 2 million mt outrunning domestic production, currently forecast by Platts Analytics at 1.18 million mt in 2019-20 (October-September). The deficit is made up of sugar imported from other EU countries (463,820 mt in 2017-18), with the rest coming from outside the EU.

Trade negotiations, which the UK has insisted should not extend beyond December 31, will begin during the first quarter. However, not until the final details of a potential trade deal have been concluded will European sugar market participants gain any insight into whether these trade flows will continue.

Continued access to the UK market for EU sugar through an agreed trade deal would provide support to EU sugar prices by continuing to offer a welcome destination and appears to be one of the options on the negotiating table.

Any UK tariffs could hit imports from EU-27

However, government sources have made it clear the UK's aim is to support the domestic refining industry -- highlighted by the proposed no-deal Brexit temporary tariff-rate structure, which would have affected the import duty on white sugar. European sugar would have had to pay Eur150/mt ($165/mt). The tariff on raw sugar for refining was maintained at Eur339/mt, but with a new, 260,000-mt import quota for raw sugar with zero duty and no restrictions on origins.

This potential tariff structure would reduce the competitiveness of French sugar and could open the UK's doors to Brazilian raw sugar as a replacement. Of course, the chance of a no-deal has not been completely eliminated, and this tariff structure or a halfway-house deal that includes any such tariffs could still dramatically alter European trade flows.

The displacement of sugar flows into the UK would be bearish for the EU market, given the supply side pressure it would cause. Back-to-back seasons of lower sugar production have pushed spot prices in Western Europe up Eur144 from the all-time low of Eur312/mt in May 2018 even though trading on the European spot market has been illiquid in recent weeks as market participants wait for further details on beet planting for the 2020-21 campaign and the results of sales over the festive period.

This wide range of potential scenarios has made it difficult for businesses to plan. Although some producers looking to the new crop planting will take some hope from the knowledge that they would have still have Q4 to deliver their sugar from the 2020-21 campaign to the UK under existing arrangements regardless of the negotiations' outcome. In Q4 2019, the rest of the EU exported 132,744 mt of sugar to the UK.