House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Twelfth Report

7 Issues arising

Lower value market for ACP and LDC exports

39. One of the consequences of the policy approach we are advocating is that the European Union market will become much less attractive for imports from ACP countries. This is particularly relevant to those exporters whose high costs of sugar cane production will render the activity uneconomic after the proposed reduction in the guaranteed price for preferential imports is applied. In recognising the potential losses to ACP countries resulting from reform, we believe that transitional aid programmes should be set up to assist their economies in diversifying away from dependency upon a European Union commodity regime that has lost its legitimacy.

40. Defra told us that "the European Union cane refining sector, especially in the UK, could be significantly affected by changes to the import arrangements".[36] We agree with the Government that ways have to be found to ensure the cane refining sector is not put at an unfair disadvantage during an interim period when preferential suppliers are adapting to the reform.

41. Exports from the LDCs, under the EBA initiative, will also face a lower value market than might have been anticipated. This prospect has prompted representatives of the LDCs to propose an orderly system of export deliveries, with quantities fixed in advance. Their suggestion would involve postponing unlimited duty-free access for a further ten years, in association with a second stream of zero tariff quota, taking total LDC supply up to 1.6 million tonnes.[37] This increase in preferential imports would be at the expense of European Union producers, who would face cuts in their beet quotas.

42. Whilst the Commission's analysis largely discounts the option of fixed quotas, some Member States seem to be pushing it as a viable option. It would, however, do nothing to address the lack of competition in the sugar sector and would not fit well with the European Union's international commitments. This option should be avoided if the European Union is serious about making its agricultural policies more coherent and less protectionist.

Reduced sugar beet production

43. Sugar beet growers and the organisations that represent them have expressed concerns over what phased price reductions and quota abolition would mean for the UK industry. However, the UK has the most effective processors and some of the most efficient beet growers, making it one of the most competitive producers in the European Union. While it is generally accepted that the French industry will be the most resilient to price reductions, the Commission's economic analysis suggests that the UK and Germany could also survive a move towards liberalisation.[38] With many of the less efficient producers in the European Union being forced to cease production, there should also be increased market opportunities for those who survive.

44. It has been suggested that the contraction of the European sugar beet industry might be more severe than the Commission originally envisaged, due to the increased competitiveness of alternative sweeteners.[39] Such fears should not detract from the many benefits of quota abolition. Indeed, it is important that deregulation should be extended to the lifting of quantitative restrictions on alternative natural sweeteners, so that the whole sector is brought into line with the principles of the single market.

45. Gross margin analysis suggests that there will be viable alternatives to sugar beet in the crop rotation.[40] However, our preferred reform option will have a negative impact on growers' incomes, as prices and production levels are reduced. We recognised that some form of producer compensation will be required to help farmers adjust to the new market conditions. To minimise market distortion, these payments should be fully decoupled from production activity, following the principles of the CAP reform agreed in 2003.

46. The Commission's Communication suggests that the Single Farm Payments might be an appropriate instrument for compensating farmers for their income losses.[41] However, Defra's decision to implement the English Single Farm Payment on a flat rate basis, phased in over a transitional period, complicates the issue.[42] Sugar beet land in England is already set to benefit from the area component of the Single Payment from 2005. We are, therefore, not convinced that incorporating any future sugar payment into the Single Farm Payment can be fully justified.

47. In his evidence the Minister acknowledged that the amount of extra money that could be found to compensate European Union sugar beet farmers was limited by the budgetary ceiling to the first pillar of the CAP. He did note, however, that savings from a reduction in export refunds could go some way to offset the additional cost of producer payments.[43]

Environmental impacts

48. During the course of our inquiry, we made strenuous efforts to identify the different environmental impacts of the proposed reform scenarios. We were concerned not only about the environment in the UK and Europe, but also in the LDCs and ACP states. We were also keen to know if an expansion of production in a low cost area, such as Brazil, would have significant detrimental consequences for its environment.

49. The evidence we received on this matter was sometimes conflicting and largely inconclusive. When focussing on the situation in the UK, we were told by the RSPB that, while there were environmental advantages and disadvantages associated with sugar beet cultivation, on balance it favoured continued production.[44] However, it was noted that the environmental gains made could be achieved through other means, such as agri-environmental schemes.[45] Other evidence focussed on the potential for sugar beet to provide a feedstock for the production of bio-ethanol,[46] the use of which would have significant environmental advantages over fossil fuels.[47]

Security of supplies

50. Current levels of production in the European Union clearly go well beyond any need for food security. Indeed the Commission has said that security of supply is not likely to be seriously threatened in a commodity sector where consumption is stable and numerous exporting countries are seeking a market for their surplus production.[48] However, one of the benefits of our preferred approach of managed change, as opposed to a swift move to a fully liberalised position, is that it should ensure stability of supplies, while protecting the internal market from the worst of the fluctuations seen in world prices.

Scrutiny of the UK processing industry

51. The high level of concentration in ownership and limited competition has made the sugar sector a focal point for the attention of anti-competition authorities.[49] The situation in the UK, where just two companies control the whole sugar sector, is not uncommon in the rest of the European Union. In 2001, the Court of Auditors reported:

Just five companies hold over 50% of the total European Union quota. Furthermore, in 10 of the 14 sugar-producing Member States, the entire national quota is in the hands of only one or two companies.[50]

52. A recent report by Oxfam called for competition authorities to "carry out a systematic, European Union-wide investigation of the activities of sugar-processing companies with a view to lowering market-entry barriers, improving competition, and preventing price collusion".[51] Competition will be increased more by abolishing quotas than through any other policy change. However, if the new sugar regime does not contain provision for eliminating production quotas, we recommend that the competition authorities conduct an investigation into the UK processing industry.

36 Ev 85 Back

37 Ev 36 Back

38 European Commission, Reforming the European Union's sugar policy: Summary of impact assessment work, (Brussels, 2003), pp 27-28 Back

39 "Isoglucose threat to EU sugar regime if quotas abolished", Agra Europe, 5 March 2004, EP/8 Back

40 Ev 16, 183 Back

41 COM(2003)554, p 21 Back

42 See Environment, Food and Rural Affairs Committee, Seventh Report of Session 2003-04, Implementation of CAP Reform in the UK, HC 226-I, para 5. Back

43 Q 200 Back

44 Qq 162-163 Back

45 Q 164 Back

46 Ev 63, 131, 139, 148, 154, 176 Back

47 Ev 8; see our report into Biofuels, HC (2002-03) 929-I, and the Government Reply to the Committee's Report, HC (2003-04) 270. Back