Memorandum submitted by Joan Noble (O55)
EXECUTIVE SUMMARY
The reform of the EU sugar regime is long overdue.
The current system is highly complicated, restricts competition,
encourages over production, is over protectionist and inflates
consumer sugar prices. The rules are now under pressure from the
EU's international commitments and a move to a more liberal regime
is required. Any change must be agreed as soon as possible to
allow the EU's sugar industries time to plan for the future and,
where necessary, diversify out of sugar production. Reforms have
to be agreed which will reduce support price levels.
While a system of full liberalisation and abolition
of regulation may be welcome in the future, there will have to
be a phased change introduced to allow the most efficient producers
in the EU to adapt to the new circumstances. Sugar beet remains
an important crop for the British farmer and it is possible for
a system to be agreed which would allow production of sugar beet
in the UK for sale within the EU and at the same time continue
to provide some preferential arrangements to the UK's traditional
suppliers of raw cane sugar.
INTRODUCTION
1. The current sugar regime with its complicated
system of support prices and production and import quotas ends
on 30 June 2006. The European Commission is considering possibilities
for reform and is hoping member states will reach a broad consensus
prior to presenting its proposals in summer 2004. Decisions on
the future sugar regime are unlikely to be taken by the Council
of Ministers until 2005 at the earliest, possibly in the second
six months when the UK is holding the Presidency of the Council
of Ministers.
THE NEED
FOR REFORM:
EXTERNAL AND
INTERNAL PRESSURES
2. The EU's current policy allows for significant
surplus supply over domestic consumption. Further, the EU's international
commitments to the WTO already result in production and import
quota reductions on an annual basis and pressure has increased
with the recent weakening of the US dollar. Further, Australia,
Brazil and Thailand are challenging the EU regime. Future commitments
following a conclusion to the Doha development agenda will increase
the difficulties. It is widely perceived that not only will the
fixed import tariffs have to be reduced and the "safeguard
mechanism", allowing variable import tariffs, will be disallowed,
but also there will be a phasing out of export refunds which would
result in a considerable reduction in commercially viable exports
from the EU.
3. The system where prices are supported
at such a high level gives rise to problems for the EU when entering
into preferential trade agreements. The "everything but arms"
agreement with the 49 lesser developed countries (LDCs) is being
phased in for sugar. Between 2006 and 2009, tariffs will be phased
out in their entirety for both white and raw sugar originating
in these countries. The free trade agreement with the Balkans
has increased pressure to change a system of high prices for limited
production. Indeed the EU had to stop imports from the Balkans
following clear fraudulent trading.
4. On the internal front, both consumers
and industrial users of sugar for a long time have called for
the regime to be fundamentally reformed to reduce prices and increase
competition. Food companies will be faced with increasing difficulties
when exporting as export refunds are phased out. Already the Commission
has had to allow quantities of ipr[55]sugar
to be available as the cost of export refunds on non Annex I processed
products has exceeded the permitted limits under the Uruguay Round
agreement on agriculture. Following a conclusion to the Doha development
agenda, refunds may be disallowed altogether and the EU manufacturers
of processed products will be unable to compete with third country
manufacturers and exports would therefore be uncompetitive unless
they could source raw materials (particularly milk and sugar)
at prices closer to those pertaining on the world market.
5. The Commission points out in its reform
proposals that:
"The sugar sector is singular in having
so far stayed out of the 1992 reform process, which has essentially
consisted of increasing competitiveness by compensating institutional
price cuts with direct income payments." (a)
There is an argument to make the common agricultural
policy more coherent and bring sugar into line with other arable
crops. Further, liberalising the market will reduce regulation
and "red tape" if the complicated system now in force
could be dismantled and allow for the development of competitive
alternative sweeteners.
PRESSURES AGAINST
REFORM
6. It is clear that any reform involving
significant price cuts will cause considerable problems for the
EU sugar industry and many participants will be forced out of
the business. The number of sugar producers in the EU who will
cease production depends on the size of any price cuts agreed
by the member states as well as the timing of the introduction
of price cuts.
7. There will be a significant impact too
on the traditional third country suppliers (developing ACP countries
and India) who have enjoyed preferential import arrangements and
have had the advantage of the high internal market prices. Sugar
production in many of these countries would not have survived
without these preferential arrangements. The system provides ACP
producers a guaranteed market with high stable prices even when
world market prices are very low. Further the LDCs who, under
the current agreement will be granted free access for all sugar
exports originating in the 49 countries from 2009, are calling
for a continuation of the phased quota system to allow for a slower
rate of reform. Those countries want to benefit from the EU's
high market prices for as long a period as possible "in order
to build capacity on their way to their future role as important
sugar suppliers to the European Union." (b)
8. Assuming reforms will include EU budgetary
compensation to EU sugar farmers (and indeed under the development
budget to ACP producers) there will be budgetary costs involved.
The current system is low cost in terms of the EU budget as the
major proportion of the cost of export refunds is covered by levies
paid by the sugar producers themselves. Any direct payments to
farmers would have to come out of the budget.
SUMMARISED IMPACT
OF THE
VARIOUS OPTIONS
Option 1—Extension of Current Policy
9. It is clear that even if the current
policy is extended beyond 2006 there will be changes to the EU
industry. With prices in the EU three times those on the world
market, the EU will be attractive to sugar imports especially
once the current restrictions on sugar coming from the lesser
developed countries under the EBA agreement are lifted. Trade
distortion was seen when the Balkan agreement was implemented
and while there is a commercial advantage to exporting to the
EU such problems will continue to arise. There will be pressure
on the system currently in place if quotas have to be cut more
severely in future to meet WTO commitments. The countries bearing
the largest cuts are those with the largest B quotas (eg Germany
and France). As the UK's B quota is set at 10% of the A quota,
the impact of the current system of cutting quotas is less than
that on many other member states. Further, cuts to the import
quotas are confined to a small proportion of imports as the sugar
imported from ACP countries and India under the Sugar Protocol
is not subject to reduction. The new countries joining the EU
from 1 May 2004 all have very low B quotas (most less than 10%).
The new countries, therefore, under the current system, will not
be faced with the possibility of such large quota cuts as most
of the existing member states. This is likely to cause some friction
in the future especially as the quotas of some of the most efficient
producers in the EU are faced with the largest cuts.
Option 2—Reduced internal prices and phasing
out of production quota
10. A phased change is envisaged to reduce
the levels of support price, maintaining tariff protection (presumably
reduced once the Doha development agenda is concluded), and an
adjustment in supply of both domestic production and imports to
create a market balance. It is assumed that intervention (rarely
used in any case) would become a safety net at a lower level and
prices would become more market orientated. Farmers would be compensated
with direct payments. Once a market balance had been achieved,
quotas would be abolished.
11. The reduced prices would make the EU
market less attractive to importers especially those coming from
countries with high production costs (including some ACP countries).
Further this phased price reduction and quota abolition would
favour the most competitive EU producers with many producers leaving
sugar production altogether and a number of countries ceasing
production. The oversupply would be removed from the market and
exports would be reduced to very low levels which would be beneficial
to the EU's trading partners. A marginal increase in imports could
be envisaged. The depth of the impact would depend on how quickly
and by how much prices were reduced.
Option 3—Complete liberalisation
12. The abolition of the support prices
for sugar and sugar beet would leave only the most efficient producers
in the sugar industry. The impact of abolition of all price support
would be a variable market price moving in line with world market
prices. It is often suggested that total liberalisation by the
EU would mean an increase in world market prices but that could
not be guaranteed as other countries would look to increase output
following a reduction in EU sugar production. Further, if the
EU opted for liberalisation in isolation with little change in
other countries applying protectionist policies (eg USA), the
impact on world prices would be much less. If the EU opt for full
liberalisation, this should be done at a time when they could
persuade other WTO members to do the same. The most efficient
producers in the EU may survive if world prices increased significantly
but the majority of EU sugar companies would cease production
unable to compete with the world's most efficient cane producers.
Further without support, many of the EU's traditional suppliers
of raw cane sugar (ACP) would cease production in the face of
extra competition from the low cost cane producers such as Brazil.
If full liberalisation was introduced, the current, albeit high
price, stability would be replaced with variable prices as EU
and UK sugar prices would reflect world market levels which traditionally
have shown a significant degree of volatility. While price peaks
have been less regular and less high in recent years, the world
market would be less stable in future without a secure source
of beet sugar from the EU. The UK is of course used to fluctuating
prices as the current system supports prices in euro and UK consumers
and producers have to consider currency fluctuation as the UK
is outside the eurozone.
Fixed quotas
13. Another option comprising fixed quotas
was mooted by the Commission, but has been discounted although
some member states would like to see this considered as a serious
option. Such an option does make the market more predictable but
does not address the lack of competition. Further it would increase
regulation and control and increase rather than decrease the protectionism
afforded to EU producers allowing for prices in the EU to remain
at very high levels. This policy would not fit either with the
rest of the EU's agricultural policy or indeed with the EU's international
commitments. A number of member states would like to see this
as a policy option but it should be avoided if the EU is serious
in looking at a more liberal approach to agricultural policy.
Impact of price reductions
14. The impact of sharp price reductions
is stark. It is estimated that even relatively small price cuts
will result in a number of EU countries ceasing production altogether
and no country in the EU could compete in a free market with world
prices at current levels. It is difficult to predict accurately
what level of world prices would pertain after reform as there
are so many variables. A reduction in the EU surplus exports would
encourage low cost cane producers to increase output. Cane sugar
production is of course vulnerable to natural yield variations
and climatic problems. Further as sugar is traded in US $, there
is an impact on the price of changes in the value of the $ compared
to the
and other currencies. It is clear that there
will be significant changes in the EU's sugar industry whatever
the outcome of the current debate, assuming prices have to be
reduced, as the least efficient producers are unable to compete
in a market with lower prices.
SUGAR PRODUCTION
IN THE
UK
15. The UK is in a unique position amongst
EU member states in that domestic production is shared between
two major companies, British Sugar processing beet sugar and Tate
and Lyle refining raw cane sugar imported under the preferential
import arrangements. It is therefore important for the UK's particular
interests to be taken into account when reforms are agreed.
16. According to various studies it is thought
that the UK beet industry, as the beet processor in the UK is
one of the most efficient of Europe, will be able to survive price
reductions better than many of its competitors in Europe. While
it is considered that France will be the last country to survive
with much reduced prices the Commission has suggested that the
UK and Germany could also survive a move towards liberalisation.
With many of the less efficient producers in the EU ceasing production,
there would be an increased market within the EU for those surviving.
17. The UK is not currently involved in
inulin production, but does have a quota for isoglucose. It is
also suggested that liberalisation of the market will encourage
an increase in production and use of isoglucose depending on the
market price. In a more liberal market not restricted to production
quotas, there would be scope for the UK, and other EU member states,
to develop the production and market for alternative sweeteners
providing a greater degree of competition.
CONCLUDING REMARKS
18. With both the internal and international
pressures for reform there has to be regulatory change. Change
should ensure that the EU complies with its international commitments
under the WTO (both existing and future) and to existing trading
partners particularly in the developing world as well as the 49
LDCs. A greater degree of competition on the internal market would
be welcome following policy reforms and it is important that consumers
in the EU can be assured of continued security of supplies at
prices which will enable exporters of processed products to compete
on the world market.
19. It seems unlikely that the Commission's
option of full liberalisation will be acceptable to many member
states, many of whose industries would be destroyed by such a
move. This option would increase competition and cut out regulation
but would also have a severe impact on many of the UK's traditional
raw sugar cane suppliers. Whether the UK beet sugar industry would
survive depends on the world market situation but the UK's beet
industry is better placed to survive than many of the other processors
in the EU. Any move towards full liberalisation should be taken
in parallel with a change in policy of other countries applying
protectionist sugar policies (eg the USA).
20. A continuation of the current policy
(even with minor modifications) is not recommended as it would
be just putting of the time when a more liberal approach to the
sugar policy will have to be introduced. Continuation of the current
system does not address the problems of lack of competition or
indeed the complicated system whereby sugar beet farmers do not
know, when planting the seed, the level of quota sugar which they
can produce each year. Further support prices at current levels
are set too high.
21. The most realistic option is a phased
move towards liberalisation. This way prices will be phased downwards
and the least efficient producers will be forced to cease production.
Further by phasing in the reform's industries have time to adapt
and can plan for price reductions. This should allow the most
efficient to prosper while the inefficient diversify out of the
industry. It is important that the level of protectionism is decreased
without a total destruction of the industry. Not only is sugar
beet an important rotation crop in the UK, the food manufacturing
industry requires a secure supply of good quality sugar at more
reasonable prices than now.
22. An early decision is required to give
the industry time to plan for the future and adjust to the predicted
new market conditions.
References
(a) Communication from the Commission to
the Council and the European Parliament accomplishing a sustainable
agricultural model for Europe through the reformed CAP—the
tobacco, olive oil, cotton and sugar sectors COM (2003) 554.
(b) LDC Brussels sugar group press release
of 3 March 2004.
(c) Commission staff working paper on reforming
the European Union's sugar policy SEC(2003).
1 April 2004
55 Inwards processing relief (ipr) is a system which
allows manufacturers to import raw materials from the world market
without duty to re export the processed product within a certain
time limit without export refunds. Back
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