EU sugar production is set to rebound in the marketing year 2021-22 (October-September), as cooler weather resulted in a lower incidence of virus yellows.
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The market will be closely eyeing the impact of the new COVID-19 wave on sugar consumption. Demand for industrial ethanol -- which uses sugar as a feedstock -- is set to increase.
Rebound in output
EU sugar production in the MY 2021-22 is set to rise for the first time in four years.
The 2020-21 crop was especially bad with the ban on neonicotinoids and warmer winter causing a high incidence of virus yellows. The cooler weather in MY 2021-22 has resulted in a lower incidence of virus yellows, with some countries not requiring the use of neonicotinoids even though the ban was temporarily lifted.
Despite sugar content being at multiyear lows due to poor sunshine over the summer, this is not expected to be as low as originally feared. The beet harvest is now nearly complete, with the French agriculture ministry showing its first sugar production estimate for MY 2021-22 at 4.36 million mt, a sharp rise from 3.445 million mt in the previous marketing year.
S&P Global Platts Analytics estimated MY 2021-22 EU+UK sugar production at 17.495 million mt, up from 15.565 million mt last year.
Domestic prices highest since 2017
Although the MY 2021-22 harvest only began in October, a significant portion of the sugar is understood to already be committed. Carryover stocks from the MY 2020-21 crop were the lowest compared to the past five years, which has been the main driver for domestic prices trending upwards.
Initial fears about low sugar content, in addition to the observed increase in energy prices and higher production costs, have also fueled these price increases, leading many producers to hold on to stocks.
Imports of world market sugar to deficit regions, such as Italy and Greece, have dwindled in recent months due to unattractive freight rates and high world market prices. Platts Western Europe delivered assessment reached Eur590/mt on Nov. 7, the highest level since June 4, 2017.
On the export side, trade has been extremely illiquid, due to producers' reluctance to export as domestic prices continue to be more attractive, and as high freight rates make exporting less attractive.
Looking ahead, if the current high domestic prices are sustained and if freight rates remain uncompetitive, exports are likely to be impacted for the upcoming year. Although imports are also expected to be challenging and expensive, the EU is still expected to remain a net importer this season.
Impact of COVID-19 on demand
COVID-19 infections are rising across the continent amid the emergence of the omicron variant. Although lockdowns have been introduced in various countries, sources said that the impact of the new wave on consumption is unlikely to be as pronounced compared to last year. While some impact is still expected, the extend of this impact is yet unknown.
"[The new variant] will certainly impact demand, how do you budget or strategize on an absolute unknown on the government's actions?", a source said. "It will reduce demand somewhat, but by how much?"
Platts Analytics kept its 2021-22 sugar consumption forecast unchanged despite new restrictions being implemented across the continent to curb the new wave of infections.
The lockdowns already announced have not been as strict as those seen last year, and consumer habits have adapted to the "new normal", with new restrictions unlikely to change those patterns.
Industrial ethanol demand
The expanding rollout of E10 as part of energy transition with countries look to fulfill their green agenda is set to cement ethanol demand in the coming year. With sugar used as a feedstock for ethanol, this could increase industrial demand.
The UK changed its standard gasoline specification from E5 to E10, which can contain up to 10% ethanol. E10 was already in use across much of Europe, with France the greatest European consumer of the fuel.