House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Memorandum submitted by British Sugar plc (A55)

INTRODUCTION

Sugar is included in virtually all manufactured foodstuffs. Throughout the EU, therefore, with its large manufactured food industry, the availability of white sugar at the required standards and delivery conditions is an important element in the supply chain for the food industry. Unlike other EU Member States, however, the UK sugar market is supplied from white sugar derived from both sugar beet and from raw cane sugar. This submission deals only with British beet sugar.

THE SIGNIFICANCE OF THE BRITISH BEET SUGAR INDUSTRY

Some 8,000 farmers grow sugar beet in the East of England (from Yorkshire down to Essex) and across the Midlands. British Sugar is the sole sugar beet processor with, currently, seven factories in the growing areas. The industry has greatly improved its performance since EU entry, taking UK yields from among the worst in Europe to among the best. Table 1 shows this in terms of white sugar yields per hectare, which covers both improvements in agronomic efficiency in the fields and process efficiency in our factories. Overall the UK beet sugar industry is now the lowest cost in Europe.

For the UK economy as a whole

— The beet sugar industry supports some 23,000 mainly rural jobs in farming, processing and transport including dependent jobs in downstream and upstream sectors;

— The value of the sugar beet crop to farmers is worth some Ł300 million each year (7 per cent of arable income, 1997 to 1999 average), while domestic beet sugar production generates balance of payments savings of some Ł500 million annually;

For the rural economy

— There is a heavy regional concentration of the beet industry in areas where there are few alternative job opportunities or sources of economic activity;

— The carriage of sugar beet is crucial in supporting local hauliers and, hence, the scale of the transport industry in areas where sugar beet is grown;

Development of new rural industries

— Beet sugar factories, particularly where new generation CHP plants are installed, are ideally placed to develop agro-industrial complexes for rural employment and economic activity creation. These large sites have all the normal manufacturing facilities, plus unrivalled access to regional farming and haulage networks. As a result of these advantages British Sugar has expanded its activities to include high performance (CHP) electricity generation for surrounding localities; the development of a specialist horticulture business using factory waste heat and CO2; and the production of novel food ingredients;

For agriculture

— Sugar beet is a key crop financially as it is both profitable and provides a reliable income, so making it one of agriculture's few bankable crops. In areas where sugar beet is grown it underpins arable farming as a whole;

— The growing of sugar beet helps sustainable agriculture both because of its place as a "break" crop in the arable rotation and because virtually everything produced from it is used in productive and environmentally sustainable applications. After the sugar has been extracted the remainder of the sugar beet is processed and sold as a preferred animal feed; the lime used in sugar extraction is sold as a soil conditioner and the soil delivered with the beet is recovered for agricultural, horticultural and amenity markets;

For the food industry

— The beet sugar industry provides a domestic source of supply for an ingredient which is used in nearly all manufactured foodstuffs;

— As the Food and Drink Federation (FDF) points out in its separate submission, the domestic provision of agricultural raw materials is a key element in retaining the UK's food manufacturing industry at its current scale;

— The beet sugar industry helps food manufacturers meet consumer requirements for food traceability and quality by being able to identify and audit the production processes in the entire chain from the beet seed through to white sugar delivered to manufacturers' premises;

— Food manufacturers' competitiveness is helped by ensuring they do not have to store sugar themselves, as they have available "just in time" sugar deliveries allowing them maximum flexibility in changing production levels in response to market fluctuations (eg the seasonality of the soft drink and ice-cream markets);

For the environment

— The beet sugar industry has worked hard, and is continuing to do so, to improve its environmental performance;

— In crop production, nitrogen usage has been reduced by a third, pesticides by a half (including a 95 per cent reduction in organochlorides, organophosphates and carbamate insecticides), dirt tares have been halved, and professional crop assurance schemes introduced for food safety and traceability and GM certification;

— British Sugar's use of CHP technology makes a significant contribution to meeting the Government's targets in reducing greenhouse gas emissions and improving the efficiency of UK energy usage.

THE WORLD SUGAR INDUSTRY AND GOVERNMENT SUPPORT

The world sugar market is highly distorted, volatile and unrepresentative of the conditions under which most of the world's production occurs. Coupled with the capital-intensive nature of sugar production, which requires stability and continuity of returns, this has led to the long history of Government intervention in the sugar sector. In brief:

— Most countries are sugar producers, either from sugar cane in the tropics or from sugar beet in temperate climates;

— Some two thirds of world population comes from cane. As such it is not readily responsive to fluctuations in world prices as, once planted, farmers produce several crops before re-planting;

— The demand for sugar in the developed world is highly inelastic, so over a wide range of price movements there is little response. In the developing world the ability to buy sugar is limited by income levels;

— The majority of the world's sugar production is consumed in the country of origin where it is the subject of widespread Government intervention and support. Therefore, most world sugar production and consumption occurs at prices unrelated to those recorded on world markets;

— Consequently the world sugar market only handles a small proportion of production. But this residual world market has to provide the adjustment mechanism for both normal agricultural supply variations and the impact of Government policies;

— As a result, recorded world sugar prices are extremely volatile (the most volatile of all agricultural commodities) and, also, for long periods of time below average world production costs;

— Finally, sugar production is highly capital intensive as it has both an agricultural component—the production of beet and cane—and a processing component (sugar beet processing to white sugar; cane milling and raw cane sugar refining). Sugar-processing factories themselves are the most expensive of primary food processing facilities. A new, green field site beet sugar factory in the UK would cost in the order of Ł150 million.

THE EU SUGAR REGIME

As with virtually all other countries in the world, the EU supports its sugar industry. The continuity of policy represented by the Sugar Regime has been of major significance in encouraging the EU industry to restructure and to modernise. Support is given through the normal CAP mechanisms, although the Sugar Regime differs from other CAP regimes in important respects:

— Support has never been open-ended, unlike other CAP products, as it has always been limited to production within the national quotas;

— Rather than payment by taxpayers, the cost of support is met by consumers as in many other of the world's sugar producing countries;

— The industry (growers and processors) refunds to the EU Budget the full cost of exporting surplus quota sugar through the levies it pays. In the case of the UK, the levies the British beet sugar industry pays go to fund the export of Continental quota surpluses, as the UK does not have a quota sugar surplus (see chart);

— Unlike most other CAP products, for sugar the EU provides substantial preferential access for Third World production coming from the ACP States and, now, the EBA countries. (Most of these imports come to the UK where the market is shared between beet and cane).

RECENT DEVELOPMENTS IN THE EU SUGAR REGIME

In 2001, EU Foreign Ministers agreed the "Everything but Arms" (EBA) initiative. Under EBA a specific and annually increasing quantity of raw sugar from the 48 least developed countries may be imported in to the EU free of duty from the 2001-02 marketing year. Tariffs for all EBA sugar imports (white as well as raw) will be dismantled from 2006-07 with full liberalisation in 2009. The impact of this development has yet to be fully assessed by the European Commission, but it is widely believed that significant changes to the EU Sugar Regime will result.

Also in 2001, EU Ministers of Agriculture agreed to roll over the Sugar Regime, with some minor changes to 2005-06. The Commission is to submit a report to the Council of Ministers on the operation of the Sugar Regime in early 2003 "together with any appropriate proposals". In view of this and the fact that sugar was not part of the "Agenda 2000" agreements, sugar is excluded from the 2002 CAP Mid-Term Review. The Commission has appointed the Universities of Stuttgart and Bonn to carry out a study on future options for the Regime and is in the process of reissuing a tender for a study on concentration and competition in the sugar, cereals, dairy and beef sectors. These studies are meant to inform the debate on the future of the Sugar Regime.

WHAT DO WE WANT FROM ANY POSSIBLE SUGAR REGIME CHANGES?

In relation to European Commission's 2003 report, we have the following comments:

The existing quota cutting mechanism

1. The Commission reviews the levels of beet sugar production quotas each October with a view to cutting quotas, for the year in question, if the EU's quota surplus exceeds its WTO subsidised export constraint. The British beet sugar industry is the only major EU industry that has to concede market share when quotas are cut. Many other Member States have such large beet sugar quota surpluses (see Chart) that they ensure, even after quota cuts, they still have more than enough for their domestic markets and so do not have to give-up market share. This situation is all the more galling as the UK sugar market, even taking into account cane sugar imports, is only in balance;

2. Despite the difficulty of its negotiation, we would seek a modification to this review mechanism that recognises our efficiency, the fact that we do not contribute to the EU's quota sugar surplus and the fact that much of the EU's commitment to import sugar from the ACP is realised in the UK market;

Quota transferability

3. Turning to the production quotas themselves, we feel that in terms of changes that might be made to the Sugar Regime, the quota mechanism should be modified so quotas are transferable between Member States, both to introduce flexibility into their operation and to encourage movement of the sugar industry to the EU's best suited and most efficient areas;

Restructuring Fund

4. Again in relation to production quotas, we would suggest that were there to be significant changes to the Sugar Regime in the future, our previous proposal of a Restructuring Fund should be revived as a mechanism for taking-out surplus capacity to help the necessary adjustment process, as has been done successfully with many other industries;

Keep sugar beet financially attractive for growers

5. Among the options the Commission has given to the Universities of Stuttgart and Bonn for their study is the possibility of including sugar beet in the Arable Area Payments Scheme, as is the case for other arable crops. In this context, we would be most concerned that the financial attractiveness of European sugar beet growing is maintained;

Maintain the domestic beet sugar industry

6. The key consideration for us, of course, is that any changes should not undermine the domestic beet sugar industry, so that it can continue to provide at least half of Britain's sugar consumption from domestically grown sugar beet. Further that the scale of its operations, both financially and physically, are maintained so that it has the ability to invest in the development of new rural industries such as bio-ethanol production for renewable transport fuels;

Changes to be known well in advance

7. Given the capital intensity of sugar production and the size of investments required (British Sugar has invested over a billion pounds, at 2000 prices, since it was privatised in 1981), it is crucial that any changes to the Sugar Regime are known well in advance so the industry has adequate time to adjust.

THE WTO DOHAR TRADE ROUND

In relation to the agriculture negotiations in the WTO's Dohar Trade Round, we have the following comments:

Support measures not covered in the WTO

1. We support the European Commission's efforts to ensure that more forms of agricultural support are covered in these negotiations, so that a level playing field is more obviously possible. The example, that is most frequently mentioned, is American use of export credits, which were omitted in the Uruguay Round. Of particular concern to us as sugar producers are some other support measures that have not, as yet, been included in the agriculture negotiations. In this context we mention:

(i) Brazil's encouragement of its sugar industry through a huge cross-subsidy from its ethanol industry, so large that Argentina refuses to allow sugar to be included in MERCOSUR;

(ii) The frequency of bank refinancing deals, underwritten by Governments, that allow industries to escape having to pay their debts. In recent years such deals have been seen for the Thai and Mexican sugar industries to save them from bankruptcy, while the Brazilian industry has not had to repay its debt to the Government;

(iii) The impact of devaluations: in the case of Brazil, for example, the Real has nearly halved in value against the US dollar in the last three years. If it is not possible to take into account currency devaluations in the WTO, then we insist that the Special Agricultural Safeguard clause (introduced in the Uruguay Round) be maintained.

Level playing field

2. The European Commission emphasised the importance of non-trade concerns at both the Seattle and Dohar WTO Ministerial meetings. In this context we seek recognition of the cost burden imposed by producing to European standards (eg for environmental protection) when overseas producers do not have to meet the same standards. Policymakers must recognise that the environmental and consumer agendas increasingly being followed tend to make domestic EU industries less competitive in international terms, rather than more competitive, because of the higher costs incurred. (There is a paradox here: if such cost recognition is not given and, as a result, industries move offshore, then the result will be that consumers get less food produced to European standards rather than more).

THE DEVELOPMENT OF ALTERNATIVE MARKET OPPORTUNITIES

We support the development of a UK bio-ethanol industry as an alternative market opportunity for sugar beet growers, following the European Commission's recent proposal that there should be a minimum inclusion rate for bio-ethanol in transport fuels of 2 per cent in 2005, rising to 5 per cent by 2009. Bio-ethanol is not only a renewable fuel in its own right, but it leads to a lowering of greenhouse gas emissions as fossil fuel burn is reduced and creates much cleaner tailpipe emissions without having to use expensive catalytic converters.

In this regard we note that other EU Member States are expanding their already existing domestic bio-ethanol industries, or forging ahead with the creation of new industries.

CONCLUSION

Although we recognise the pressures for change to the EU Sugar Regime in terms of the apparent logic of treating all agricultural products in the same manner, we caution that this is particularly difficult in the sugar sector for at least two major reasons. Firstly, the capital-intensive nature of sugar production compared with other primary agri-food products. Second, the widespread and heavy Government intervention in sugar production and consumption throughout the world, which makes the development of a level playing field particularly difficult.

British Sugar plc

11 January 2002
Table 1

THREE YEAR AVERAGE SUGAR YIELDS BY EU MEMBER STATE* (TONNES WHITE SUGAR/HECTARE)

Member State	1974-75 to 1976-77	Member State	1984-85 to 1986-87	Member State	1994-95 to 1996-97	Member State	1998-99 to 2000-01
Austria	7.15	Austria	9.48	France	9.75	France	10.79
Greece	6.79	France	8.17	Holland	9.00	Austria	10.12
Holland	6.28	Holland	7.76	Belgium	8.78	UK	9.59
Belgium	5.85	Germany	7.48	Austria	8.61	Belgium	9.53
Germany	5.64	Belgium	7.44	UK	8.11	Holland	9.05
Sweden	5.37	Denmark	7.29	Germany	7.57	Germany	8.87
Ireland	5.30	Greece	7.25	EU"15"	7.33	Spain	8.19

Member State	1974-75 to 1976-77	Member State	1984-85 to 1986-87	Member State	1994-95 to 1996-97	Member State	1998-99 to 2000-01
EU"15"	5.20	EU"15"	7.23	Denmark	6.84	EU"15"	8.11
France	5.13	Sweden	6.64	Spain	6.72	Denmark**	8.04
Italy	5.10	UK	6.49	Greece	6.51	Sweden	7.21
Denmark	4.87	Italy	5.87	Sweden	6.46	Greece	6.81
Spain	3.72	Ireland	5.39	Ireland	6.26	Ireland	6.66
UK	3.30	Spain	5.15	Italy	5.38	Italy	6.00
Finland	3.17	Finland	3.58	Finland	4.33	Finland	4.42

Source: Calculated from CEFS, Sugar Statistics, annual volumes for 1993 and 2001.

Notes: *Luxembourg is not a sugar producer, while Portugal only started beet sugar production in the late 1990s.

**1998-99 only for Denmark.



© Parliamentary copyright 2002	Prepared 7 June 2002