Memorandum submitted by Professor Sir
John Marsh (O4)
1. The sugar regime is designed to prevent
competition relocating production within the European Union, in
contradiction to one of the fundamental objectives of establishing
a Common Market. By restricting supplies through quotas, import
restrictions and exports it has ensured internal sugar prices
that keep in production many producers, processors and possibly
some refiners who would otherwise have disappeared. The costs
of this policy have been borne by EU consumers and by third country
exporters. The budgetary costs have been modest. Reform of the
policy has been made difficult because of a Sugar Protocol agreed
with some ACP countries, which allows them to export a fixed amount
of sugar, 1.8 million tonnes to the Community paid for at the
protected EU price.
2. THE POLICY
Sugar is produced as cane in the tropics, and as
beet in temperate regions. In both cases the raw material has
to be processed to extract sugar and then refined to produce a
product for consumption. The processing and especially the refining
activities involve large plants and considerable capital investments.
In comparison with both producers and consumers, these relatively
few businesses occupy a potentially monopolistic position.
Sugar faces competition from alternative sweeteners.
Some of these have advantages for food processors. Others may
provide sweetness without calories. In an age beset with problems
of obesity, these offer an advantage as part of a calorie controlled
diet. For poorer countries, however, demand for sugar rises rapidly
with higher disposable income. It provides a valued source of
energy as well as adding flavour and helping to preserve food.
Most sugar is produced in the countries in which
it is consumed. Growers are protected from external competition
by a variety of trade barriers. This means that the world market
in sugar has the characteristics of a residual market. Although
demand for sugar on a world scale is growing, in the short-term
it is price inelastic. As a result small changes in the overall
quantity placed on the market can have disproportionate effects.
This has resulted in a very volatile world market upon which surpluses
are dumped and from which domestic shortages are relieved.
The diagram shows world price movements in US cents
per pound and individual countries in their local currencies.
It indicates how much larger have been fluctuations in the world
market than in the EU. Individual country prices reflect changes
in exchange rates, thus the major fall in sugar prices in the
UK from 1996 to 2000 is primarily the result of the appreciation
of the pound sterling against the euro. Similarly the higher prices
shown for Brazil and Barbados indicate their currencies weakness.
Supply is affected by season and weather so that
although the area planted may be relatively static, the quantity
reaching the market can vary substantially. Production in the
EU despite its quota regime has varied since 1991 from 15.4 million
tonnes (1995) to 17.7 million tonnes (1998).
THE WORLD TOP 10 SUGAR PRODUCERS
|Production 2001 Million Tonnes
||Share of World|
|United States of America||7.4
Source: Sugar International AnalysisEU Commission
The EU is a major player in the world sugar market. During the
1990s production in both India and Brazil overtook that of the
Community but EU policy remains a major issue in world trade debates.
Tropical sugar exports find their markets limited by the policies
of both the United States and the European Union. This affects
not only the major suppliers but also a number of smaller countries,
particularly in the Caribbean for whom sugar exports play a key
role in their overall economies. For these countries there is
seldom an easy alternative to sugar and so their economic fortunes
are significantly affected by developed country sugar policies.
For some of these countries, former dependencies of EU member
countries, the Sugar Protocol provides a secure outlet for a limited
quantity of sugar at the prices available to producers within
Sugar beet growing is an activity of larger farms within the EU.
For most countries less than 10% of the farms are involved in
sugar production, the exceptions being Belgium with 23% and the
Netherlands, 17%. Table 2 shows that in most countries these farms
are double the average size. On these farms the proportion of
the cultivated area used for sugar exceeds 15% only in Finland.
The amount of sugar produced within the EU substantially exceeds
the amount consumed. The UK is the only substantial net importer.
3. THE UK SITUATION
Much of the sugar that is imported into the UK is produced from
cane in the ACP countries and all of this is refined at the Thames
(Silvertown) refinery owned by Tate and Lyle. It processes over
one million tonnes per annum and is the largest cane sugar refiner
in the world. Home produced beet sugar is processed and marketed
by British Sugar plc who hold the entire UK sugar quota and command
about 60% of the market.
The existing CAP sugar regime works to the disadvantage of the
UK economy. It means that imported sugar, whether from EU or third
country, costs consumers more. It also leads to a distortion in
the use of resources within the UK as production is increased
to a level greater than would be viable in a competitive market.
The impact is to reduce UK GDP, although in the overall scale
of the economy, this effect is so small as to be unlikely to attract
The regime does benefit sugar growers, the beet sugar industry
and, because the Sugar Protocol enables cane sugar still to be
imported, Tate and Lyle and their parent company, Associated British
Foods. EU analysis suggests that during the campaign, (the period
during which beet sugar is processed) some 2,211 staff were employed
in the UK. Defra indicate that their are some 7,200 sugar growers
in the UK. A major reform of the CAP would put at risk many of
these jobs and much of the capital invested in processing domestic
4. THE COMMISSION'S
The Communication from the Commission to the Council and the European
Parliament makes a powerful case for reform. It stresses three
There is a need to bring the sugar regime into line with the policies
for other commodities under the reformed CAP. Essentially support
is no longer to be provided for production but for the producer
and made subject to the requirements of cross compliance.
The EU has made commitments to allow imports from the Least Developed
Countries, under the Everything But Arms initiative and to the
Balkan countries. This raises the risk that there will be a serious
increase in the oversupply of the EU sugar market by 2007. Such
an oversupply would disrupt the market in many parts of the Union.
The Doha Development Round is likely to challenge the existing
sugar regime. Progress in the WTO will inevitably require changes
in the EU export regime, essentially a reduction or removal of
export subsidies and greater market access for third country exporters.
To these reasons might be added a number of others that remain
valid although they are not stated by the Commission.
The income transfers achieved have no justification on social
grounds. They raise the price of food, which figures heavily in
the expenditure of poor people and confer income benefits to farmers
who are in comparison relatively rich in terms of both income
The level of production that results has no justification in terms
of food security or comparative advantage. The EU constantly produces
more sugar than it uses and can only dispose of this with what
amount to subsidies on exports. The fact that exports are supported
by a complex system of A, B and C sugar, cannot disguise the reality
that although the budget may not finance exports, they are being
funded by a policy that forces up consumer prices within the EU
to levels not needed to supply demand.
The policy has damaging consequences for the third world. The
subsidised export of approaching 6 million tonnes of sugar is
not offset by imports of 1.8 million tonnes under the Sugar Protocol.
Inevitably it depresses the world price and the fortunes of third
country exporters. The fact that Brazil now sells more sugar on
the world market than the EU cannot disguise the reality that
the EU sugar regime plays a major role in depressing world prices.
The Sugar Protocol that is currently attached to the Cotonou Agreement
maintains preferential access for ACP sugar. In the short run
this benefits these countries but its longer run and global results
are less reassuring. The gains can only be realised by the countries
concerned if they continue to produce sugar. In terms of comparative
advantage some of these exporters would not be competitive at
world prices. Essentially the Protocol traps resources that should
move to more productive and competitive uses. If the Community
wishes to support these ACP countries a transfer of funds equivalent
to the difference between a competitive world equilibrium price
and the current EU price would offer a more flexible and effective
way of helping them to develop.
Countries that that do have a comparative advantage but are not
included in the Protocol suffer as a result of the unloading of
the sugar the EU imports as a result of lower world prices.
5. THE OPTIONS
The Commission does not make a specific proposal for reform; instead
it invites consultation on three options.
The status quo, in effect, continuing the existing regime
and making adjustments to accommodate more imports. This would
imply lower prices and production quotas.
Lowering EU prices and phasing out production quotas. The
price mechanism acts as the instrument of adjustment of production
levels, discouraging not only domestic production but also imports.
This policy could allow for compensation to producers via the
Single Farm Payment system agreed in the June 2003 reforms.
Liberalisation, the removal of price support mechanisms
the end of quota restrictions on farmers and the elimination of
barriers to imports. Again this could be combined with compensation
to existing EU producers via the Single Farm Payment.
The first of these options is inconsistent with the Commission's
own analysis of the need for reform. It does not bring coherence
with the rest of the reformed CAP, it does not remove the problem
of matching EU sugar policy to commitments made to other countries
and it is unlikely to meet the demands for access by third countries
that are expected to figure in any Doha Round settlement.
Options two and three represent a gradualist as opposed to a "cold
bath" approach. Rationally they both ultimately lead to production
levels determined by a market to which other countries would have
access. Intellectually the "cold bath" approach has
much to commend it. From the outset producers, processors and
refiners know they have to adjust. Rather than mount a protracted
political campaign to safeguard the existing use of their resources,
they would have to evaluate them against the reality of what,
in the future, they could earn in sugar production or other activities.
This is essentially what other sectors have had to do and there
is no economic benefit from delaying adjustment.
Politically the gradualist approach may be preferred. Market driven
adjustments leave casualties. The process of moving to an efficient
system is unlikely to be achieved in "one hop". As a
result there may well be greater initial volatility and alarms
could be raised about the security of supplies. The danger of
a gradual approach is that markets may never be given a chance.
Well-organised political lobbies will point to any disruption
as evidence that liberalisation is a mistaken direction and seek
to restore their comfortable world in the name of "what the
consumer wants". It will take continued firmness of purpose
by the Council of Ministers to deliver the ultimate goal of an
efficient and non-distorted sugar market.
For both options reform will not be attainable without some measures
to compensate farmers and to respond to the problems that will
result for ACP countries. The Commission paper suggests that the
Single Farm Payment should be the chosen instrument so far as
EU sugar producers are concerned. This is a good starting point
but it should be made clear at the outset that this is a compensation
payment awarded to help farmers adjust, not to keep them in the
lifestyle they have enjoyed for an indefinite or infinite period.
Two steps would ensure this. First that the period is time limited
so that recipients know they will have to adjust if they are to
sustain their incomes levels in the future. Second that the right
to payment should be attached to the producer, not to the land,
and should be a saleable right, enabling the producer to realign
his resources quickly and move on to new activities, having recovered
much of the capital he has invested in sugar production. The suggestion
that this would lead to land abandonment has no weight in the
case of sugar production. This takes place on some of the best
land within the EU and would rapidly be utilised for other agricultural
An essentially similar approach should be applied to assist ACP
countries cope with having to compete in an open world market.
A basis for compensation exists in terms of the difference in
value between the world price and the internal EU price these
countries have received over a past time period. This not only
provides a defined sum but also produces a distribution corresponding
to the loss of benefit from losing protection. Again the compensation
payment should be time limited, allowing the country concerned
to use it in their own restructuring programme. Funding for this
purpose would more appropriately come from the development budget
rather than the CAP. It might reasonably be expected that other
international agencies would join in support of adjustment programmes
that enabled the countries concerned to move to a more secure,
long-term future rather than be tied to continued dependence upon
an EU commodity regime that has lost it legitimacy.
Both the second and third options imply opening EU markets to
imports. It is important that the process of reform within the
Community should promote progress within the framework of the
World Trade Organisation. The opening up of markets, the removal
of distorting policies in developed countries must be accompanied
by an acceptance of international trade disciplines by all countries,
including those of the developing world. Reform of the sugar regime
makes sense in terms of the self-interest of the Community, even
if others do not change. However, as countries such as China,
India and Brazil grow in economic weight and potential, they too,
must share in the responsibility of maintaining a trade system
that creates wealth for the world as a whole. The EU needs to
negotiate from a position of strength not one of guilt and reform
of the sugar regime can contribute significantly to this.
The UK national interest favours a move to a liberalised market
in the shortest feasible time and with compensation to farmers
that is phased out once they have an opportunity to adjust. In
terms of the three options offered, the third is most attractive.
It would remove the added cost of the sugar regime to consumers,
it would remove the loss of real income associated with paying
more for imports than is necessary to ensure a secure supply and
it would liberate resources within the UK to be used for more
productive purposes. The key element is that payments of compensation
should be linked to restructuring and not tied into a continuing
commitment to farmers or captured to fund environmental or rural
development policies. Such policies should be supported on their
own merits, not on the grounds that, once upon a time, someone
grew sugar beet on a particular farm.
The UK has an interest and an important responsibility towards
many of the ACP countries. The suggestion outlined in paragraph
5f above would discharge this much more effectively than the continued
survival of the sugar protocol. It would also provide an opportunity
for development assistance to be directed towards developing new
industries and markets higher-value-added products within the
countries concerned and as exports.
17 March 2004
COM (2003) 554 Final Brussels, 23.9.2003. Back