Select Committee on Environment, Food and Rural Affairs Written Evidence

Memorandum submitted by Joan Noble (O55)


  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.


  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.


  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.


  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.


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.


  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.


  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.


  (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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