1. Contractual relations in the EU sugar sector
Technical Assistance for Development of a Strategy for Alignment with
Common Market Organisation (CMO) Requirements
TR2014/AG/10-A1-01/001
This Project is co-financed by the European Union and the Republic of Turkey
Contractual relations in the EU sugar sector
Miroslav Božić
Ankara, 10th May, 2018

2. Contractual relations in the EU sugar sector : main topics for discussion
Overview of global contracting in sugar sector
Sugar Sector Agreements in the EU prior 2017
Challenges of sugar beet contracting after 2017

3. How is the value of the products from cane and beet shared between growers and factories throughout the world?
A Study of World Association of Beet and Cane Growers (T. Masson), 2015

4. Scope & main results of the study
Only independent growers from 27 countries (WABCG members) and 5 continents took part in the study commissioned in summer 2015
What is the value of the sugar shared to growers?
Beet: 40 to 60%
Cane: 50 to 70%
But - there are as many different situations as there are countries
It comes to light that:
The price is almost always fixed by predefined rules
The segmentation of the products is variable and greatly influences the result
The control/management of the process and the grower’s involvement is also extremely variable

5. How is the price determined? → A price fixed by government (1)
Few cases are noted: generally to protect local markets/producers

6. How is the price determined? → A price fixed by government (2)
Few cases are noted: generally to protect local markets/producers

7. How is the price determined? → A price obtained through negotiation (1)
Two possibilities:
Negotiated price, with no predefined rules
Negotiation of a price formula
Few cases noted:
Requires a sufficient professional structure
(to avoid becoming unilateral price fixing by industry)
Risky because negotiations are periodical
Countries: Honduras, Ivory Coast
Collective or individual negotiation, annual to pluriannual
Countries: United Kingdom, Denmark, Germany, Romania
Collective negotiation but with statutory guarantees (minimum price, pulp belongs to the grower)

8. How is the price determined? → A price obtained through negotiation (2)
This is the most common case
Rules fixed by the State or by collective negotiation
The more precise the rules, the more limited the subsequent discussions
As many particular cases as there are countries!
A percentage of the value of the industry’s products is allocated to growers!

9. And what about the co-products?
Molasses:
Can belong to the miller (EU, Japan), be paid for partially (Nicaragua) or through sharing in the
Same way as for sugar (Swaziland, South Africa, Thailand, Fiji) or even belong exclusively to the
Grower (Mauritius)
Pulp:
Can belong to the miller (Japan), be paid for through sharing in the same way as for sugar (USA)
or even belong exclusively to the grower (EU, Morocco – providing the grower pays for drying)
or partially (Turkey)
Ethanol: product or co-product?
When considered as a product: paid as a product (Brazil, Colombia – underway!)
When a by-product of molasses: treated via molasses (Thailand)
Or treated separately (EU: non-quota, so no price fixing framework)

10. What control/management
What control/management? (1) External or (2) Management by the growers themselves
Through private third parties:
USA: sharing of the value on the basis of the company’s certified accounts
El Salvador: independent auditors, mandated by the inter-branch
By the inter-branch itself:
South Africa, Colombia
With the help of the government (or assimilated):
As publisher of the reference price (Mexico, Brazil)
Through public presence within the production structures (Belize, Fiji)
By providing tools such as price reporting (EU)
The growers are in the marketing structure:
Mauritius (MSS), Swaziland (SSA) – by statutory regulation Australia (QSL) – by inter-branch agreement
The growers participate in public bids:
Thailand: the growers partially manage the public bids which enable them to obtain the reference price of the exported sugar
The growers are actors in the selling process:
Australia: each individual grower can use futures contracts to fix the price of sugar to be applied to the cane delivered : up to 2/3 of the grower’s sugar equivalent production
• Most countries privilege the application of a predefined negotiated distribution
rule which is either fixed by the State, or by the inter-branch structure, and which
applies to market data
• Market segmentation is practised but variable
• Cogeneration is hardly ever taken into consideration
• The feeling of ‘fair’ price depends on the management mechanisms in place,
ideally with the growers’ participation

11. Sugar Sector Agreements in the EU prior 2017: during quota system (1)
Sugar sector has been regulated by a specific framework since production quotas were established in 1968
One of the key elements of sugar CMO: Sector agreements
Article 125 of Reg. 1308/13 covers both periods:
Before and after quotas
Definition:
„ The terms for buying sugar beet and sugar cane, including pre- sowing delivery contracts, shall be governed by written agreements within the trade concluded between, on the one hand, Union growers of sugar beet and sugar cane or, on their behalf, the organisations of which they are members, and, on the other hand, Union sugar undertakings or, on their behalf, the organisations of which they are members.”

12. Sugar Sector Agreements in the EU prior 2017: during quota system (2)
Minimum price for sugar beet: ,26 EUR/t
Reference price for sugar: reduced from 631,9 EUR/t to 404 EUR/t
Price reporting in the sugar market: compulsory for producers!
Definition of ‘delivery contract’:
„ A "delivery contract" means a contract concluded between a seller and an undertaking for the delivery of beet for the manufacture of sugar.”
In delivery contracts distinction had to be made for:
Quota sugar → minimum beet price mandatory
Out-of-quota sugar
Sugar producers needed to provide:
Quantities of beet and the sugar content
The corresponding estimated yields

13. What are the major changes in the sugar sector after 1 October 2017?
No more production quotas
No more minimum price for sugar beet
Sugar producers without production levy
Constraints on EU sugar export eliminated
However:
Sugar sectors agreements remained
Price reporting remained (but modified)
Purchase terms for beet and delivery contracts remained (slightly modified)

14. Overview of mandatory elements of agreements in the sugar sector
Delivery contracts in the sugar sector shall:
Be made in writing for a stipulated quantity of sugar beet
Indicate the price of sugar beet of standard quality and price adjustments for deviations from standard quality
Stipulate duration of beet deliveries, collection places and provisions linked to delivery and transport
stipulate the method for determining the sugar content
define procedures implemented for the pulp
define deadlines for payment

15. Annex X → Purchase terms for beet (1)
POINT I
Delivery contracts with specified quantity of beet
The duration of the delivery contracts (annual or multiannual)
May specify terms for an additional quantity of beet supplied
POINT II
The purchase prices for the quantities of beet
The price shall apply to sugar beet of a standard quality
The price shall be adjusted by price increases or reductions
Evolution of market prices and allocation between the parties
Conversion scale showing the different sugar contents and factors
POINT III
Provisions on the staggering and normal duration of beet deliveries
POINT IV
Beet collection places; conditions linked to delivery and transport
Loading and transport costs from the collection places
The costs incumbent upon each party are clearly specified

16. Annex X → Purchase terms for beet (2)
POINT V
Delivery contracts shall provide for reception points for beet
The reception points agreed shall remain in operation, derogations possible
POINT VI
Polarimetric or other method to deterimine sugar content at reception
Agreements may determine different stage for samples and corrections
POINT VII
Gross weight, tare and sugar content to be determined:
(a) jointly, by the sugar undertaking and the beet growers' organisation;
(b) by the sugar undertaking, under the supervision of the beet growers;
(c) by the sugar undertaking, under the supervision of an expert recognized.
POINT VIII
Beet pulp treatement:
(a) to return the fresh pulp free of charge to the beet seller, ex-factory;
(b) to return part of that pulp, pressed or dried, free of charge, ex-factory;
(c) to return the pulp, pressed or dried, ex-factory; to be paid by beet seller;
(d) to pay the beet seller compensation.
Different treatment of beet – different obligations from (a) to (d)
Agreements might set other stages of pulp to be delivered
POINT IX
Time limits for advance payments and other payments of the beet
POINT X
Other provisions in delivery contracts shall not conflict to the Annex

17. Challenges of sugar beet contracting in the EU after 2017
Implementation of sugar sector agreements: there are no sanctions envisaged !
Value sharing close (Annex X, Point XI (5)):
„A sugar undertaking and the beet sellers concerned may agree on value sharing clauses, including market bonuses and losses, determining how any evolution of relevant market prices of sugar or other commodity markets is to be allocated between them.”
Factory
Grower
price
inputs
subsidy
transport
sugar, %
What if sugar prices will lead to ‘share of losses’ by growers?

18. Falling world and EU sugar prices are not ‘good’ for farmers’ contracts
Current EU price levels are below of cost of production → everybody in a chain is loosing money !
EU prices are already among the lowest in the world…
Source: EC, 2018

19. EU Sugar sector is facing the biggest crysis with the lowest prices ever !
Source: CEFS, 2018

20. Value transfer in food supply chain
My dear ladies and gents did you know …
Source:

21. Coupled payments for sugar beet & direct payments in 2015 in the EU
Most productive producers → without coupled payments!
But they dump sugar on periferian markets!!!
Source: Wageningen University, 2018

22. A sustainable sector at risk!
Sector has attained even higher levels of efficiency
More sugar production → lower unit production costs
Obstacles (plant protection product bans; FTAs)
Non-remunerative sugar and beet prices at present!
Farmers are majority stakeholders of factories in EU
Financial losses are hugh
No further investments (endangering further efficiencies…)?
Factory closures are coming soon?…

23. This publication has been produced with the financial assistance of the European Union
The contents of this publication is the sole responsibility of NIRAS IC Sp. z o.o. and can in no way be taken to reflect the views of the European Union