Select Committee on European Scrutiny Thirty-First Report


COMMON ORGANISATION OF THE SUGAR MARKET


(21743)
12087/00
COM(00)604

Draft Council Regulation on the common organisation of the market in the sugar sector.



Legal base: Articles 36 and 37 EC; consultation; qualified majority voting
Document originated: 4 October 2000
Forwarded to the Council: 16 October 2000
Deposited in Parliament: 3 November 2000
Department: Agriculture, Fisheries and Food
Basis of consideration: EM of 17 November 2000
Previous Committee Report: None
To be discussed in Council: Following receipt of European Parliament opinion
Committee's assessment: Politically important
Committee's decision: Not cleared, pending evidence session with Minister

Background

10.1  The Community sugar market is extremely complex, and covers a range of interests. So far as supplies are concerned, beet production is by far the major source within the Community, involving nearly 270,000 growers and 159 processing plants, with the latter employing some 47,000 people. Moreover, apart from providing an important element in the arable crop rotation sequence, beet production is of considerable economic significance in a number of regions throughout the Community, including East Anglia (where it takes place on around 38% of farms). Annual production varies largely according to yields, but has averaged about 16.7 million tonnes (of white sugar equivalent) over the last six years. As in other developed areas, consumption is now relatively stable, and, over the same period, has averaged around 12.68 million tonnes, of which roughly three-quarters is in the form of processed products, such as confectionery and cakes etc. There is, therefore, a built-in surplus, which can only be accommodated either by building up stocks or by exports, though, in the latter case, the quantities which may be exported with the aid of a subsidy are having to be progressively reduced as a result of the WTO Uruguay Round Agreement. The position is further complicated by the undertaking which the Community has given to permit preferential access to imports of cane sugar from the African, Caribbean and Pacific (ACP) countries. At present, these countries are allowed to send around 1.3 million tonnes each year, which is free of import duty and receives a guaranteed price at or near the Community intervention price. By far the largest share (1.13 million tonnes) of this quantity is imported into the UK, and this forms a major source of supply for the associated refining industry.

10.2  There has been a common organisation of the market in sugar since 1968. Not surprisingly, its provisions are also extremely complex, even by the standards of the Common Agricultural Policy (CAP), in that they endeavour to cover the interests of beet and cane producers, refiners, and consumers (including those industries using sugar in their products), not to mention Third Countries for which sugar represents a significant crop and source of export earnings. Thus, leaving aside the preferential import arrangements for the ACP countries, the present arrangements involve:

    —  a system of internal price guarantees, comprising a minimum price for sugar beet (which manufacturers must pay to Community farmers), and an intervention price (at which the intervention agencies buy in all sugar offered to them by Community producers): these are fixed annually by the Council, but have in practice been frozen since 1984-85;

    —  the application of duties on imports from Third Countries, and the payment of export subsidies, designed to take account of the substantial difference between world and Community market prices;

    —  the application of three production quotas, fixed for each Member State and establishment — A (which corresponds in principle to the demand in the internal market), B (which represents the amount of excess sugar which may be exported with the aid of refunds), and C (which covers any quantity produced in excess of the A and B quotas, and which has to exported without refund): the UK has A and B quotas of 1.04 million and 104,000 tonnes respectively, equivalent to 8.6% and 3.98% of the corresponding Community totals of 11.97 million and 2.61 million tonnes;

    —  levies paid by producers on A and B quotas, to cover the cost of export refunds (other than those on quantities equivalent to the ACP imports, which are financed by the Community budget);

    —  monthly storage payments on stocks of sugar, aimed at encouraging orderly marketing, and funded by a levy on sales to the consumer;

    —  production refunds on sugar used to manufacture chemicals; and

    —  a requirement, dating back to the shortages in the mid-1970s, for a minimum stock level (currently 3% of the annual quantity produced or refined by an undertaking).

10.3  The regime also sets production quotas for two competing bulk sweeteners — isoglucose (made from wheat or maize) and inulin (made from chicory). In common with twelve other Member States, the UK has no inulin quotas; for isoglucose, it has an A quota of around 21,000 tonnes, and a B quota of around 5,750 tonnes.

10.4  The future of the regime was last considered in 1996, when the present arrangements (which last until 30 June 2001) were agreed. Sugar was thus not considered within the context of the Agenda 2000 reforms of the CAP, and nor was it among those commodities subject to the major reforms which took place in the arable sector in 1992. It is clear, therefore, that reform of this regime is long over-due.

The current proposal   

10.5  In presenting this proposal, the Commission maintains that the market organisation has fulfilled many of its stated objectives, notably in ensuring a steady supply of sugar to the market and a stable income for producers within both the Community and the ACP countries in a sector where world prices are extremely volatile. However, it also accepts that the sector suffers from a lack of competition; that the regime has been costly for consumers; and that the need for surplus production to be exported with the use of refunds has had a negative effect on developing countries.

10.6  Overall, therefore, the Commission acknowledges the need for an overhaul of this regime. However, it argues that this cannot be considered in the abstract, given in particular three major factors which it sees as influencing the evolution of the CAP, namely the financial framework agreed last year in Berlin; the forthcoming round of WTO negotiations on agriculture; and the future enlargement of the Community. It suggests that significant uncertainties remain in these areas, and that there is also a need to review the operation of the quota system and such issues as lack of competition within the sector. It therefore concludes that a thorough review of the regime should be undertaken once these various studies have been completed, which it expects to be by July 2002 at the latest.

10.7  In the meantime, it says that it has looked at the three following options based on the continuation of the quota system:

    —  a price reduction on the Agenda 2000 model, combined with compensation to producers for the resultant loss of income;

    —  a progressive reduction in prices over a number of years;

    —  the continuation of the present price level, with minor adjustments to the quota level.

10.8  It points out that each of the first two of these options would entail a reduction in producer incomes, and that, in view of the low supply and demand elasticity of sugar, this would need to be of the order of 25% to have any real effect. Even if only half of the resultant loss of income were to attract compensation under the Agenda 2000 model, the Commission puts the resultant cost at 1.125 billion euros (for which it says there is no room under the present financial framework): and, even if a price reduction of this order were to be spread over a period of years, it says that this would still have a substantial cumulative effect on producer incomes and create a need for compensation, albeit over a different time profile.

10.9  The Commission has thus concluded that a continuation of the present regime for a further two years until 30 June 2003 with some modifications would be the most appropriate course for the time being. More specifically, it suggests that:

    —  prices would remain unchanged for the next two years;

    —  quotas would be reduced by 115,000 tonnes (corresponding to 50% of the structural surplus, which it puts at 227,000 tonnes);

    —  flexibility would be maintained by reducing the quota annually in order to respect the WTO limit;

    —  the storage levy/refund system would be abolished, leading to a reduction of 300 million euros in annual expenditure under the European Agricultural Guidance and Guarantee Fund;

    —  minimum stocks would be abolished; and

    —  production refunds for the chemical industry would be fully covered by production levies.

10.10  Other aspects of the proposal include the need for the growing of sugar beet to be conducted in an environmentally friendly way, and the transfer from the Council to the Commission of the power to set certain detailed rules.

The Government's view

10.11  In her Explanatory Memorandum of 17 November 2000, the Minister of State (Commons) at the Ministry of Agriculture, Fisheries and Food (the Rt Hon Joyce Quin) says that the Government can support the broad thrust of the Commission's proposal, although it regrets that this does not go further. In particular, the Government welcomes the proposal to limit the next regime to two years, in order to bring the sugar reform cycle in line for the first time with the Agenda 2000 arable commodities whose regimes are due for a mid-term review in 2002. It would, however, like greater clarity on the conduct and coverage of the Commission's proposed studies, and firm deadlines for their completion.

10.12  The Minister considers that the main weakness in the proposal is the price freeze and consequent reliance on quota cuts as the sole mechanism to counter the budgetary and "mounting external" pressures faced by the regime. She points out that the Government has been calling for small, progressive price cuts instead, and sees quota cuts as the wrong response (in that it would not give the Community the flexibility it needs to respond to external pressures).

10.13  The Minister also expresses concern at the apparent lack of coherence between this proposal and a separate proposal for duty-free access for all products (except arms) from the least-developed countries (LLDCs), and she says that the Government considers that the impact of duty-free imports of LLDC sugar on the regime should be assessed. She also makes the point that, under the Commission's proposal, any Community response to LLDC imports would be limited to further quota cuts and/or intervention purchases of sugar, neither of which the UK considers desirable.

10.14  Finally, the Minister says that the transfer of powers from the Council to the Commission within the framework criteria is questionable in a number of areas, including those of deficit area pricing, powers to ban Inward Processing Relief, and powers to set production refunds for the chemical industry.

Conclusion

10.15  We can see the logic of linking a thorough reappraisal of the sugar regime with the review which is due to take place in 2002 of the arrangements agreed under Agenda 2000 for the other arable crops. We have also noted that the Commission has suggested that the continuation of the present arrangements for a further two years will both enable a number of studies within the sugar sector to be completed and reduce the uncertainties currently arising in areas such as the WTO and enlargement negotiations. However, whilst a two-year extension of the present system is clearly preferable to the five-year roll-over which a number of other Member States are said to favour, there must be a danger that the problems currently foreseen by the Commission (and set out in paragraph 10.8 above) will get worse, rather than better, over time.

10.16  Our concerns on this last point are reinforced on two counts. First, although the Commission suggests that the structural surplus in this sector is 227,000 tonnes, this figure is based on the difference between the current level of production quotas (14.25 million tonnes), and the sum of internal consumption (12.75 million tonnes) and the amounts which may currently be exported with the aid of refunds (1.273 million tonnes). This calculation ignores the fact that actual production has on average been about 2.5 million tonnes above quota, involving a large carry-over of stocks from one year to another. It also takes no account of the Community's import commitment of around 1.3 million tonnes to the ACP countries. This suggests that the actual surplus could be nearer 4 million tonnes.

10.17  Secondly, the Commission appears to have paid scant regard to the implications for this sector of its proposal to grant duty-free access to products from the least-developed countries (LLDCs), on which we are reporting separately.[25] Whether or not such a proposal is desirable is a matter of judgement, but it seems to us unacceptable that a decision on it should be taken without a proper analysis of its possible effect on the Community's sugar producers, ACP suppliers and budget. For that reason, we are not clearing this document until we have taken oral evidence from Ministers on the relationship between it and the matter of access for the LLDCs.



25  (21715) 12335/00; see paragraph 9 above. Back


 
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