Memorandum submitted by the Biscuit, Cake,
Chocolate & Confectionery Association (O 13)
EXECUTIVE SUMMARY
1. The current regime is unsustainable and
anomalous. It leads to an EU price almost three times higher than
the world price (the UK price is higher still), which is driving
British jobs overseas.
2. Option 1—no change—is a misnomer,
since change is inevitable. But to attempt to maintain the current
regime would seriously damage British (including agricultural
and processing) interests.
3. Although there are attractions to Option
3, and this should ultimately be the objective, it is not realistic
to imagine that this can be achieved at present. There are also
concerns over the unpredictability of the implications of rapid
change and the risk of some EU governments introducing protectionist
measures. It is also more attractive to larger companies than
to SMEs.
4. We therefore support Option 2, believing
this to be in the best interests of British consumers, farmers
and industry, and the economy generally.
5. However, there must be a clear timetable
with a start date as soon as possible, and the transition period
should extend for no more than five years.
6. Quotas should, as proposed, become tradeable,
and should be increased until they gradually become meaningless.
7. Any compensation necessary for UK beet
growers should be by means of decoupled direct aid.
INTRODUCTION
8. The Biscuit, Cake, Chocolate & Confectionery
Association (BCCCA) welcomes the Select Committee's inquiry into
the reform of the sugar regime. The current anomalous and unsustainable
arrangements, leading to a serious distortion of the market for
sugar, present considerable commercial challenges for our industry,
which is the largest consumer of sugar by far in the UK.
9. The BCCCA represents all the leading
and many smaller manufacturers of biscuits, cakes, chocolate and
confectionery in the UK. In all, the Association represents more
than 90 British businesses. The sector as a whole employs some
60,000 people (though this number is falling—see below)
and has annual consumer sales of around £8 billion. Companies
contribute around £1 billion in respect of these products
in VAT receipts to the Exchequer.
10. The European Commission has invited
interested parties to comment on three options viz:
Option 1—an extension of the present regime
beyond 2006.
Option 2—a reduction in the EU internal
price.
Option 3—a complete liberalisation of the
current regime.
11. In seeking a way forward, the BCCCA
is keen to work with other UK interests, especially the sugar
processors/refiners and beet farmers, to agree a solution which
will best benefit the UK as a whole—agriculture, consumers
and industry. To this end we are not arguing for the option which
might best suit the majority of our members, but for a way forward
which we believe is realistic and beneficial, in the circumstances,
to all parties.
OPTION 1: AN
EXTENSION OF
THE PRESENT
REGIME BEYOND
2006
12. The extension of the current regime
beyond 2006 would perpetuate an unacceptable intervention in the
market which appears increasingly anomalous as similar arrangements
for other commodities are gradually phased out. It also presents
a major obstacle to international trade and tariff reform. The
degree of market distortion created by the current regime ought
to be an affront to any trading bloc which believes in international
competitiveness. It cannot be right that prices are almost three
times higher in the EU than outside (and higher still in the UK).
13. In any case, we do not believe that,
even if the current regime were to be extended, it would be sustainable.
As a consequence of political commitments on imports, such as
"Everything But Arms" and the Balkans, EU beet growers
will gradually lose out against a steady inflow of imports, while
industrial users of sugar will continue to lose their international
competitiveness. 70% of sugar used in the UK is bought by manufacturing
industry, and UK sugar producers need manufacturing in the UK
in order to prosper. They cannot, by any stretch of the imagination,
be sustained by consumer demand alone.
14. In 2002, for the first time, the biscuit,
cake, chocolate and confectionery industry incurred a negative
trade balance of sugar product exports against imports (over £72
million on exports of £700 million). The trend is clear.
15. Over the past five years, the industry
has seen the closure of some 15 factories and around 10,000 job
losses. The next five years are likely to see at least the same
number of jobs go. Instead of exporting confectionery we are at
present being forced to export jobs.
16. Companies that manufacture biscuits,
chocolate, cake and confectionery need to remain within Europe
in order to participate successfully in these markets. While some
may initially identify a solution by relocating factories to centres
of cheap sugar production such as Brazil, to reduce manufacturing
costs, the transport costs of locating there would be prohibitive.
To this end, many companies are now looking to the periphery of
the European Union, in areas such as the Ukraine, for cheaper
manufacturing locations which can utilise world sugar prices.
17. Whilst BCCCA members need to safeguard
the future financial viability of their companies, they also have
a very real responsibility to safeguard the jobs of those employed
within the industry. In any case, for smaller companies, a significant
part of the sector, relocation is not an option. The UK industry
therefore badly needs more export refunds, as currently these
do not serve their purpose adequately. While these may not be
sustainable in the long term they would certainly help to stem
the current trend of relocating manufacturing offshore. At present,
over-quota "C" sugar dumped by the European Union finds
its way around the world, where it can be purchased for as little
as £175 per tonne, compared with the current UK price of
around £550 per tonne—making it cheaper to manufacture
outside Europe using sugar purchased outside Europe.
18. The BCCCA does not expect or seek prices
to fall to anything close to that figure in the UK: this would
conflict with the well-being of both domestic and ACP producers.
Instead, we seek the chance to compete on a more level playing
field through the phased reduction of prices within the EU (and
UK)—see below.
19. This chimes with the Commission's emphasis
that "any reform of the sector will have to follow the fundamental
principles of the CAP reform, such as bridging the gap between
domestic and world market prices and shifting support from product
to producer". If the sugar sector was to adopt the principle
of decoupling direct aid, then such an initiative would show up
the disproportionate support for sugar beet farmers (4% of the
total) over other farmers. This would be neither justifiable in
the existing EU nor sustainable under the terms of financial discipline
in the CAP budget in an enlarged EU.
OPTION 3: LIBERALISATION
20. Liberalisation is the option that the
UK sugar-using industry might be expected to support. There are
powerful arguments in its favour. It would certainly deliver improved
competitiveness in the sector and would reduce world market distortions.
The bureaucracy of the existing regime would be simplified and
the EU's negotiating position within the WTO would be strengthened,
in the light of the present challenge to the EU sugar regime by
Australia, Brazil and Thailand and future deliberations within
the Doha Development Agenda. The world price would rise to satisfy
concerns about the economies of developing countries and manufacturers
would pay the same price for sugar regardless of where factories
were situated, subject only to transport costs.
21. This option would also allow new entrants
into the sugar processing sector, which we would welcome, and
would instil competitiveness throughout the sector and in relevant
and competing industries. In addition, the latest information
suggests that liberalisation of the alternative sweeteners market
could result in these products challenging sugar for ingredient
use in manufacturing.
22. On the debit side, however, there could
be some unpredictable consequences. There are concerns that a
rapid move to liberalisation could create supply chain problems,
in that a reduction in the countries of supply, coupled with a
possible reduction in EU refining capacity, might lead to constriction
in regular supply. (However, we would expect the efficient UK
processors/refiners to remain competitive and our members would
invariably prefer a short supply chain, all other things being
equal.)
23. We recognise, too, that a swift move
to liberalisation could be accommodated by large member companies
in our sector, but many SMEs might struggle to adjust. Furthermore,
we realise that there could be a temptation for some EU member
states to find ways of protecting their farmers, which could work
to the detriment of UK beet growers, given that the UK Government
would be most unlikely to pursue such a course.
24. In the light of the entrenched views
of certain member states and vested interests, therefore, as well
as the uncertain consequences of full liberalisation; and in the
context of our preference to achieve a way forward which will
command wide support in the UK, we do not support this option
at this stage.
THE WAY
AHEAD—OPTION
2: MANAGED CHANGE
25. Option 2, despite its rather limiting
description, proposes managed change and we firmly support the
early implementation of a programme that embraces reductions in
the EU internal price as large as possible and introduced as quickly
as possible, certainly over a short period (maximum 5 years).
This programme would balance internal market supply by reduction
of import tariffs and domestic support prices, coupled with the
phasing out of member state quotas. The Commission's suggested
model has merit, though we are particularly concerned over the
timetable: the proposed duration of between 5 and 10 years is
too long, while the need for an early start date is not addressed
at all.
26. Time is of the essence: we need an early
decision and early implementation of change so that manufacturers
can take investment decisions for the foreseeable future. As we
have shown above, the situation for UK manufacturers is deteriorating
rapidly. More production and more jobs will move eastwards out
of the EU unless the industry knows that change is happening soon
and on a set timetable.
27. The Commission's scenario for Option
2 suggests that a reduction in EU internal prices and import tariffs
would lead to a balance in the sugar supply market and that quotas
would eventually disappear, almost as a consequence. However,
we see quotas as, in fact, the key obstacle to competition in
the EU sugar market. National quotas prevent competition and the
benefits that derive from competition; sugar quotas result in
tacit collusion, high prices for consumers and inefficient markets.
Quotas are allocated to member states, which then allocate them
to sugar processors (not to beet growers).
28. The EU sugar processing market is dominated
by a handful of companies. There is no scope for new entrants,
but the existing processors cannot expand their capacity to sell
on to the EU market; their only means of increasing revenue is
to raise prices. There is no EU single market in sugar supply
and allegations of tacit collusion against the sugar processors
have been made (see the Swedish Competition Authority report 2002;
European Court of Auditors' report February 2002; various cases
brought by the European Commission).
29. Sugar-using manufacturers are unable
to buy from other suppliers, while imports are prohibitively expensive
due to high tariff rates and the permanent application of the
WTO "safeguard clause". A reduction in the size of domestic
quotas would merely lead to an increase in prices owing to the
lack of competition. A reduction in the EU intervention price,
without eliminating national production quotas, would not help.
The small number of processors operating within the EU and effectively
in national markets, means that even a substantial cut in the
intervention price would not be reflected in a change in market
prices owing to the tacit collusion between processors.
30. Comparisons with the quota in the milk
sector are not valid in that collusion in the dairy market is
difficult because there are several hundred participants and over-production
incurs fining, whereas in the sugar sector over-production merely
leads to dumping of excess quantities on the world market. With
the advent of Everything But Arms, import competition should make
collusion more difficult, which will mean that price intervention
takes on real meaning. However, if the intervention price remains
high, then substantial volumes of EU sugar will go into intervention,
which would be very expensive for the taxpayer. Lowering the intervention
price would help, but more realistically intervention prices and
in particular quotas should be dismantled.
31. The Commission's example of a transition
scenario suggests that quotas should be tradeable across member
state borders. We welcome this suggestion, but any proposal would
have to allow new entrants to move into the sugar processing industry
in the various member states by purchasing the tradeable quotas.
Furthermore, we strongly challenge the contention that the value
of such quotas should remain high during the transition period.
Transition should be executed as quickly as possible, which would
not happen if the quota had a high tradeable value over a period
of years. Furthermore, any transitional measure of reducing quotas,
prior to them being phased out, would merely act to inflate market
prices and the overall value of the production quota, which would
discourage beet farmers in the less attractive regions from moving
out of the beet-growing sector. Rather than cut production quotas,
they should be increased throughout the transition period until
they become meaningless.
32. Understandable concerns have been expressed
about what Option 2 would mean for UK farmers and processors/refiners.
However, within the UK we have some of the most efficient beet
growers and the most effective processors/refiners. The European
Commission's economic analysis shows that, apart from the French,
UK farmers and processors are the most competitive within the
EU.
33. Although we are convinced therefore
that UK beet growers would remain viable, any compensation necessary
for beet growers should be by means of decoupled direct aid, eg
single farm payment, as in other agricultural sectors.
34. Concerns have also been expressed that
this Option might lead to revenue falls for those ACP countries,
which benefit from the Sugar Protocol. It must be realised that
out of 77 ACP countries, only 17 have EU sugar quotas to export
to the EU and five of those countries (Mauritius, Fiji, Guyana,
Swaziland and Jamaica) account for 80% of the preferential access.
This is not an equitable situation. However, Option 2 could work
to the advantage of all ACP countries with sugar quotas. Furthermore,
these quota allocations are for raw sugar and, consequently, do
not entitle these developing countries to enter value-added sugar
refining. Any proposals for reform must address this issue.
35. We acknowledge the need to ensure a
fair financial return to EU beet farmers and to cane producers
in the developing countries. It would not be prudent to create
a situation where total supply of sugar in the future came solely
from one or two non-EU origins. This means that growers should
be compensated, in the case of EU growers by decoupled direct
aid (single farm payment), whilst the ACPs should be compensated
via the general EU budget and not as a direct levy on sugar users
and consumers. Compensation from the agricultural budget would
not be politically acceptable, although cuts in the levels of
export refunds could provide funding for compensation for EU growers,
but there is a general acceptance within the European Commission
that the development budget should be the appropriate vehicle
for the restructuring of cane-producing economies.
36. In looking to secure a future for existing
EU beet farmers and cane producers in developing countries, consideration
should be given to developing biofuels as an alternative option
to food use for sugar. Apart from delivering an environmental
benefit and reducing greenhouse gas emissions, fiscal measures
on bioethanol can extend growers' options. The Chancellor has
already announced a reduction in the duty rate of bioethanol,
compared with ultra-low sulphur petrol, effective from 1 January
2005. Further measures, including a possible biofuels obligation
for transport operators, were canvassed in the 2004 Budget. British
Sugar has calculated that this differential need only be slightly
enhanced to produce an industry generating an additional 20,000-30,000
jobs in the UK. Such fiscal measures, together with CAP reform
to allow additional payments on land for biofuel crops, offer
beet farmers a chance to diversify.
37. A managed programme of reform as outlined
above will help UK manufacturers to remain competitive in third
country markets. Export refunds form an average of 9% of the export
price of our products, which is too large to be absorbed by manufacturers
or to be accommodated within the export market without increasing
the product price. Any move to reduce internal market prices will
reduce the need for export refunds, which will be helpful to the
EU within the context of the WTO Doha Round negotiations and the
specific challenge to the EU sugar regime from Australia, Brazil
and Thailand.
38. The issue of price transmission throughout
the distribution chain raises two competing concerns: one is that
reductions in raw materials will not benefit consumers; the other
is that, should prices to consumers fall, this is not a desirable
policy outcome since it may tend to increase consumption of sugar
products.
39. The UK manufacturing industry operates
in a highly competitive market, which means that the introduction
of real competition higher up the distribution chain will result
in price reductions on sugar being passed on to the consumer.
However, this is most unlikely to lead to increased consumption
of these products; since these products are being sold in a competitive
market, what will happen is that British-made products will begin
to win back market share from overseas competitors, to the benefit
of the UK economy.
Conclusion
40. For these reasons, the British biscuit,
cake, chocolate and confectionery industry supports Option 2,
as described in detail above, and commends it to the Committee
as the best, realistic Option for the future of British farmers,
consumers and industry.
22 March 2004
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