Ukraine. Sugar Annual. May 2014 May 8, 2014
Sugar beet and sugar production in Ukraine in marketing year 2014/15 is expected to increase by 13 and 20 percent, respectively, to satisfy domestic sugar consumption. In the past several seasons the country observed sugar production beyond domestic demand that resulted in large carry-over stocks while exports were weaker than desired. These factors led to low domestic sugar prices that all together have negatively affected the profitability of the industry that dropped from 37 percent in 2011 to three percent in 2013.
For the first time in several seasons in Marketing Year 2014/15 (MY 2014/15) area planted with sugar beets in Ukraine is projected to increase – by about 16 percent, up to 340,000 Hectares (ha), compared to 293,000 ha in the previous season. This expansion in area is intended to provide the sugar production industry with enough beets to satisfy the domestic sugar demand for the coming season.
Sugar beet yields in MY 2014/15 are expected to remain high – at about 36 Metric Tons (MT) per hectare – though slightly below that of the previous season. The main factors behind some contraction in yields are the increase in input prices and overall worsening of the economic situation in the country.
During the first three months of 2014, Ukraine’s currency has lost over 40 percent of its value when compared to the major world currencies like the US Dollar and Euro. However, Ukrainian agricultural producers are not expected to cut crop production area this season. Instead, farmers report taking advantage of production technology adjustments and some reduction in fertilizer and chemical use to lower production costs. Credit availability and its cost to agricultural producers have already started going down at the time of this report writing which doesn’t help the situation.
Profitability of sugar beet production reported by the State Statistics Committee of Ukraine has been decreasing in the recent years due to the oversupply of sugar on the domestic market and relatively low sugar wholesale prices. In general, agricultural crop production profitability dropped significantly in 2013 for all crops. This effect for the most part was caused by the world market prices on agricultural commodities staying low over the season compared to the previous years while input costs have been steadily growing for Ukrainian farmers.
The domestic sugar industry has been changing year after year with observed yield improvements and consolidation of sugar beet production in large vertically-integrated agricultural businesses, called agro-holdings, in Ukraine. The current season’s profitability drop caused yet another wave of market reshuffling. Smaller and mid-size farms that don’t own in-house sugar production facilities keep discontinuing sugar beet production in favor of other economically beneficial crops like soybeans and corn. Large companies that own sugar production plants and related (e.g. confectionary) businesses were able to redistribute the burden of unfavorable market condition for sugar industry across their various divisions. However, even these giants in MY 2013/14 were struggling to breakeven on sugar and sugar beet production. It is reported by the industry that over 80 percent of all sugar beets are now produced by large companies. This trend is expected to continue.
Sugar beets in Ukraine are not used for alcohol production. Sugar beets produced in the country were fully utilized for sugar production. No exports of sugar beets were reported in Ukraine in recent years.
Production of beet sugar in Ukraine in MY 2014/15 is expected to increase by over 20 percent and reach 1.6 Million Metric Tons (MMT) compared to 1.3 MMT in MY 2013/14. This recovery in production is driven by domestic consumption needs. Local producers of sugar beets are responding with larger production in the new season.
Due to large stocks and weaker exports of sugar in Ukraine for the last two seasons, domestic sugar prices remained low leaving sugar production plants struggling to break even. The statistics reported by the industry association – UkrSugar – are notable: 77 plants produced sugar in 2011, while in 2012 their number went down to 63, and in 2013 only 38 were able to sustain operations. Industry reported losses varied from $188 to $250 per metric ton of sugar produced (the $1:8UAH exchange rate that was relatively prevalent through the last several years in Ukraine was used to calculate).
Sugar production costs in the coming season may once again increase if prices for natural gas that producers are highly dependent on are higher. New investment in the industry is more difficult under any unstable political situation, and no long-term government support strategy developed and set for implementation.
Refined sugar consumption in Ukraine has been slowly decreasing due to declining population, slow economy, and generally unstable demand from food product producers that use sugar as an input. Exports of Ukrainian chocolate and other confectionary products to Russia and other neighboring countries faced interruptions a number of times in the past year. Thus, domestic sugar consumption in MY 2014/15 is anticipated to continue shrinking, by six percent year-on-year.
The industry usually observes several years of growing production that reach levels above domestic demand. Weak exports and large stocks trigger a fall in sugar industry profitability. This results in declining production until imports of sugar threaten to kill the industry. Then another phase of production improvements starts and the cycle repeats again.
In 2013, domestic refined sugar wholesale as well as retail prices have not changed much. The exchange rate used for the period stayed unchanged at $1:8UAH – the official rate reported by the National Bank of Ukraine.
Domestic sugar prices for the rest of MY 2013/14 and in the upcoming season are expected to follow generally upward trend (when looked at in the domestic currency terms but if recalculated into USD may seem to be declining for near-term period) due to tight stocks and anticipated increase in cost of production in MY 2014/15.
In the last few seasons Ukraine had a disposable surplus of beet sugar due to large production and was hoping to secure export markets. Ukraine exported about 165,000 tons of sugar in MY 2011/12 and about 131,000 tons in MY 2012/13.
Export destinations for Ukrainian sugar over these years covered various regions in the world: CIS countries (major share), the European Union, Middle East, Far East, and even the US. The list of top buyers changed from year to year showing and supporting the industry reports that sales and export markets are not stable for Ukraine.
However, in the current and the upcoming season the situation may change significantly. On one hand, Ukraine is not expected have the surplus sugar for exports due to industry conditions discussed in more detail at the beginning of this report. On the other hand, exports of any agricultural products to the CIS countries, the major buyers of Ukrainian sugar in the past, could be difficult.
In MY 2014/15, domestic sugar production is anticipated to be close to the level of projected domestic consumption, but possible import demand of as much as 100,000 tons may be need to maintain consumption in sugar deficit areas.
Sugar production in Ukraine, just like in many other countries, relies on government support. Both wholesale and retail prices for sugar in the country are monitored by the Government with minimal price boundary mandated in legislation that is reviewed each year.
For MY 2013/14, minimum wholesale price of sugar was set at $584.75 per MT ($1:8UAH exchange rate used) while minimum sugar beet price was set at $42.25. For the upcoming season starting in September 2014 these prices are already set 1.0 and 1.6 percent higher respectively. However, due to the recent significant currency devaluation, the rates may be reviewed and adjusted with the start of the season approaching