Leadership in Crisis: Collapse in EU Sugar Quota

I want to take a step back now, to 2015, when the sugar quota changed. Can you just provide a bit of context to the industry environment and the follow up events to that change?

Sugar production in Europe was an industry that was created 1830s - 1840s and it was an extended value chain kind of business. Farmers pooled some money together, built a sugar factory that would then work with the sugar beet that came from the very same farmers, the owners, delivered to the factory. So instead of just delivering sugar beet that the farmers grew for somebody else, they said, we can produce sugar on our own. We don’t have to rely on somebody else who is making all the money out of it. So that’s where it comes from.

Then, of course, as we all know, we had the famous blockade, by Napoleon, when it came to sugar. When that whole thing was solved, at one point, Europe started to import sugar from other places. That sugar was significantly cheaper, because in Europe, we produce sugar beet, which means beet sugar and, of course, in other places, like in Brazil, South America generally, you could use cane sugar from cane. Today, about 85% of all the sugar comes from sugar cane. Sugar cane is much cheaper in planting and harvesting, and particularly in producing sugar.

Europe came up and said, food security means supplying sugar to the European market, so we want to protect sugar, so we will create a minimum price level of sugar and below that, sugar cannot be sold in Europe. Secondly, we want to create a minimum price level of sugar beet, so what the factories have to pay to the farmer, in sugar beet. They wanted to prevent the factories giving any margin to their own profits, but that the farmers profit from it. That system was abandoned in 2015. Suddenly, we do not have a minimum price anymore, so we have no quota system anymore. Suddenly, we have no import tariffs anymore. We all knew that it was going to happen. There was strong lobbying going on, by the industry in Europe, to prevent this from happening. We were part of that lobbying but we never believed that that would lead us anywhere. For us, it was clear that this system would break.

It took us two years, in transition time. In 2017, the entire European sugar market was completely liberalized. It was clear that it was happening and then you can see what happened after that. That’s a good lesson, probably, for a number of people. Maybe also for students, it’s good to hear that. It’s very simple. It’s the old market demand and supply wisdom that then set it. I’m from a trading environment. I said, if the quotas go, you can import completely freely, any sugar you want. You can export any sugar you want, because we also had export limitations before. Most importantly, all the European sugar manufacturers can produce as much sugar as they want.

We made an analysis of the existing factories in Europe and we came up with the number of factories and what the total production capacity was. We said, if everyone really wants to run the capacity that he has, at 100%, we will have a tremendous over supply of sugar in Europe. To give you a number, we would have 21 million tons of sugar production, with a demand of 17 million tons. That was the moment when we decided at Nordzucker, that that is ridiculous. We are not going to expand our acreage. We are not going to expand our production. In fact, we tried to reduce our production, because we believed that others would produce so much, that we can probably buy cheaper from them, under pressure, than we can produce it ourselves.

Our competitors decided the other way round, so they decided to expand acreage, to produce much more. The argument was that our cost per ton of sugar will go down. Of course, it all ended in a complete price collapse. It ended, unfortunately, as we had said could happen and that was a sugar collapse, from €450 a ton to below €300 a ton and produced tremendous losses in all those companies involved. The old supply and demand story is still valid. If you don’t look at that, you will make the wrong decisions. But we were quick at deciding, so it was all fine.

There was a big transition though. The transition and suddenly realizing that something was going to change massively and what was really hard was that we were the only ones, of all the major competitors in Europe, we were the only ones saying that we were not going to expand our production. Our owners were really nervous about that because our owners are farmers and were asking how our competitors are being asked to produce so much more sugar beet and sugar beet is profitable for our farmers; why don’t you do it? I said, I won’t do it, because I think it’s a hoax. I think you will be promised good prices now and, in a year from now, everyone will see that prices go down and then they will be coming back to you, telling you sorry, we can’t take delivery of your beet or we will not be able to pay the price that was originally promised. That is exactly what happened. But it was hard.