2 Common Agricultural Policy: reform of
the sugar sector
| (25836)
11491/04
COM(04) 499
| Commission Communication: "Accomplishing a sustainable model for Europe through the reformed CAP — sugar sector reform."
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| Legal base | — |
| Document originated | 14 July 2004
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| Deposited in Parliament | 21 July 2004
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| Department | Environment, Food and Rural Affairs
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| Basis of consideration | EM of 27 September 2004
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| Previous Committee Report | None, but see footnotes
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| To be discussed in Council | See para 2.18 below
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Standing Committee A
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Background
2.1 When the Agriculture Council agreed in June 2003 the mid-term
reform of the Common Agricultural Policy (CAP) for the three main
"northern" sectors (beef, milk and arable crops), it
invited the Commission to submit in the autumn a Communication
on the reform of three "Mediterranean" commodities —
tobacco, olive oil and cotton. The Commission duly did so in
September 2003 in a document[7]
which also set out a number of policy options for sugar, the one
major area of the CAP yet to be reformed.
2.2 This noted that, when the Council had last considered
the sugar regime in 2001,[8]
it had decided to extend the present arrangements until 30 June
2006, with only minor modifications, but had asked the Commission
to carry out an extensive study of the sugar market, and to submit
a report, together with any appropriate proposals. However, a
two-stage approach was now being adopted instead, the aim being
to provide the opportunity for a political debate, before proceeding
to formal proposals.
2.3 The document pointed out that the market situation
remained similar to that in 2001, with sugar beet accounting for
about 1.4% of agricultural land within the Community, and annual
production varying between 15 and 18 million tonnes, as against
an annual consumption of around 12-13 million tonnes. It also
noted that, since the regime had yet to be reformed, it still
contained the same essential features as at the time of its introduction
in 1968. These were set out at some length in our predecessors'
Report of 29 November 2000, and comprise in particular a system
of internal price guarantees and production quotas, together with
the payment of export subsidies (financed by levies on producers)
and import duties, designed to take account of the fact that prices
within the Community have tended to be between two and three times
those on world markets. In addition, fixed quantities of traditional
supplies from the African, Caribbean and Pacific (ACP) countries
— mainly for the UK market — enter at preferential
rates, and the cane producers concerned receive the same price
as Community beet growers. The regime thus endeavours to cover
the interests of both beet and cane producers and refiners, but,
as a consequence, the Community has been a substantial net exporter,
even before it meets the new commitments it has now made to the
least developed countries (LLDCs) under the Everything But Arms
(EBA) Agreement.
2.4 The Commission suggested that the policy had
offered a number of advantages over the years, including the assured
availability of a stable and high-quality supply of sugar, and
stability at relatively high prices for producers both within
the Community and in the ACP countries. However, it had come under
growing pressure, and its inherent disadvantages had become increasingly
apparent. These included the encouragement of substantial quantities
of sugar at non-competitive prices, which were surplus to domestic
requirements, and which therefore had to be disposed of on the
international market, thus hindering the growth of primary industry
in some developing countries; the imposition of higher costs on
processors and consumers; and market partitioning, resulting from
the system of national quotas.
2.5 The Commission also commented that further pressures
for reform now included the extent to which the arrangements in
this sector were out of line with the reforms agreed for other
commodities; the commitments made by the Community under the EBA
Agreement (which it said could lead to substantial market imbalance
and a decline in the industry in many parts of the Community);
and the pressure for reform arising from the World Trade Organisation
(WTO) negotiations. As a result, it concluded that the balance
previously struck between the various interests now needed to
be reconsidered, and a new and sustainable policy agreed. It
accordingly put forward three options — an extension of
the present regime beyond 2006, a reduction in the internal Community
price, and complete liberalisation.
2.6 We were told in an Explanatory Memorandum of
14 October 2003 from the Parliamentary Under-Secretary of State
(Farming, Foods and Sustainable Energy) at the Department for
Environment, Food and Rural Affairs (Lord Whitty) that successive
UK Governments had pressed for reform, but had found little support
from other Member States. However, the EBA Agreement, which would
allow in "unlimited" quantities of sugar duty-free from
2009, was now a major influence. The Minister also said that,
of the three options put forward by the Commission, an extension
of the present regime beyond 2006 would mean maintaining the existing
price and quota structure, against a background of EBA imports
which would inevitably lead to quota cuts for beet growers and
cane refiners; that a reduction in the Community price, whilst
leaving the main instruments of the regime intact, would bring
prices down to world levels, mean the phasing out of production
quotas, and enable Community sugar producers to benefit from the
single farm payment; whilst complete liberalisation would involve
the dismantling of the present support system, and pave the way
for income support for Community producers.
2.7 More generally, he said that the Government welcomed
the Commission's paper, and was keen to see early progress, since
it believed that the current regime was highly distorting and
unsustainable, particularly in the light of the EBA Agreement,
and encouraged anti-competitive behaviour, resulting in high prices
for consumers. The Government also welcomed the CAP reforms agreed
earlier in the year, and would like the sugar sector to evolve
in a similar way, through fundamental, but managed, reform, leading
to a market-driven, simplified and deregulated approach, subject
to the proviso that no sector of the UK industry should suffer
unfairly as a result of reform. Also, account needed to be taken
of the needs of traditional ACP suppliers, who might not be able
to compete in a reformed Community sugar market with lower prices.
The current document
2.8 In this document, the Commission has sought to
suggest the way forward in the light of reactions to its earlier
Communication, which it says have confirmed the urgent need for
significant reform of the sugar regime, subject to the need for
any such reform to be balanced, to Community producers and trade
partners being provided with realistic long-term perspectives,
and to keeping open the possibility of further reform in the medium-term,
when a number of considerations will be clearer. It also suggests
that, as with the changes made in other commodity areas, it will
be necessary to achieve improved competitiveness, greater market
orientation and a sustainable market balance consistent with the
Community's external obligations, but that these objectives must
be achieved whilst taking proper account of the interests of producers,
consumers and processors, and involving a period of transition
to allow the necessary adjustments.
2.9 More specifically, the Commission proposes:
- that intervention for sugar
should be abolished, and replaced by a reference price, which
would serve to establish the minimum price for sugar beet producers,
to trigger private storage arrangements, to set the level of border
protection, and to determine the guaranteed price under the preferential
import arrangement: since the present intervention price of €632
per tonne is currently more than three times the prevailing world
price, it is proposed that the reference price should from 2007-08
be established at €421
per tonne, some 33% below the intervention price, with an intermediate
level of €506
per tonne in 2005-06 and 2006-07;
- that the minimum price for
beet sugar should be reduced to the same amounts, implying a percentage
reduction of 37% in 2007-08 as compared with current market
prices, with a similar percentage reduction applying to the price
received by ACP suppliers;
- the introduction of partial compensation for
those who have produced sugar beet under quota in the 2000-02
reference period, calculated by reference to national envelopes
for each Member State, depending upon the balance of their present
production between A and B quotas (see below), and amounting by
2007-08 to 60% of the estimated revenue loss (or €93 million
in the UK): this sum would then by translated by each Member State
into a direct de-coupled payment, which would be integrated into
the single farm payment scheme;
- that the A and B quotas[9]
should be merged, and the combined tonnage reduced from the present
level of 17.4 million tonnes to 14.6 million tonnes in 2008-09,
so as to bring it into line with internal consumption and thus
eliminate the current level of highly subsidised exports: there
would be intermediate levels of 16.1, 15.6 and 15.1 million
tonnes in 2005-06, 2006-07 and 2007-08 respectively; and
- the restructuring of the sugar sector as a whole
through the introduction of quota transferability between Member
States.
2.10 There would also be a number of other changes,
including a conversion aid scheme for removing excess processing
capacity, and the removal of the production refunds currently
available for sugar used by the chemical and pharmaceutical industries
and of the aid available to refiners of raw cane sugar. In each
of these three latter cases, the present measures arise as a result
of the relatively high price of raw sugar, and the Commission
argues that they will no longer be necessary if the price reductions
it has proposed were to be adopted.
2.11 The Commission also says that these proposals
will provide the basis for initiating a dialogue with the Community's
sugar partners in the developing world, but it points out that
full account cannot be taken at this stage of all possible future
international developments, such as the outcome of the Doha Development
Agenda, the challenge mounted within the World Trade Organisation
(WTO) against elements of the present regime (in particular those
relating to exports),[10]
and the prospects for the development of the world market price.
The Commission therefore proposes to review in 2008 the price
and quota levels it has proposed.
2.12 In the meantime, and in recognition of the fact
that the proposals would imply adjustments to the sugar sector
in the ACP countries (and India), the Commission intends to enter
into discussions with them, in order to identify appropriate accompanying
measures, and to introduce specific measures to help them to adapt
to the new market conditions. It has, however, rejected a request
from the LLDCs that there should be a longer phase-in period for
the EBA arrangements, with a limit on export volumes over the
next ten years in return for a smaller cut in the guaranteed price.
2.13 Finally, the Commission has sought to identify
the financial and economic impact of its proposals. It says that
the costs of the reform should remain within the expenditure scenario
which it established for the period to 2013 at the time of its
proposal in January 2003 for the mid-term reforms of the Agenda
2000 measures, with the increased costs of providing direct support
to producers in this sector being offset by the savings resulting
from a substantial reduction in expenditure on export refunds
and the abolition of production refunds for the chemical and pharmaceutical
industries and of the refining aid. In economic terms, it suggests
that there will be a significant reduction in the level of Community
production under quota, but that, due to the increased competitiveness
of that production, any increase in imports will be limited to
0.5 million tonnes (from the preferential sources): as a result,
the Commission estimates that the level of the Community's subsidised
sugar exports will fall by around 2 million tonnes.
The Government's view
2.14 In his Explanatory Memorandum of 27 September
2004, the Minister recalls that the UK's support for early and
radical reform is clearly on record, and that it would like to
see the reform of the sugar sector evolve in a fundamental, but
managed way similar to those agreed in June 2003 for other sectors,
and leading to a market-driven, simplified and deregulated approach.
It therefore gave a general welcome to the proposals in the Agriculture
Council on 19 July as representing a step in the right direction,
whilst urging a swifter end to quotas and emphasizing the need
to address urgently the impacts on those developing countries
which currently enjoy preferential access to the Community market.
2.15 The Minister highlights the cost of the existing
regime; the extent to which it protects inefficient production
which would not otherwise be profitable; the significantly higher
returns received by growers of sugar beet as compared with other
crops; and lack of scope for newcomers, or for rationalisation
within or between Member States, resulting from the quota system.
He also comments on the guaranteed margins for processors and
for preferential imports of cane sugar, though he adds that it
is not clear whether the cane refiners would actually be better
off than under an unconstrained free market.
2.16 On the other hand, the Minister says that the
benefits of access enjoyed by the preferential suppliers to the
Community market, including those eligible for the Everything
But Arms agreement, would be substantially less without the price
guarantees, and that the question of appropriate and effective
transitional measures for the UK's traditional raw cane sugar
suppliers from the ACP countries will form an important part of
the negotiations. The UK therefore welcomes the commitment by
the Commission to draw up an action plan to define suitable measures
by the end of 2004, and is itself commissioning a study with the
Overseas Development Institute to facilitate dialogue between
the Community and those countries, in order to help them to define
their priorities.
2.17 The Minister also notes
that, unless they can restructure adequately, several existing
Member States are likely to go out of sugar production because
of their high costs, and that the Commission has therefore proposed
a conversion aid for excess beet capacity. He suggests that the
relatively efficient UK industry — along with other northern
European producers — would
be expected to survive at lower production levels, but he says
that the Government is also aware of the need to ensure that no
sector of the UK sugar industry suffers unfairly as a result of
reform or interim measures.
2.18 Finally, the Minister says that, although the
Commission had originally indicated that legislative proposals
would be brought forward before the end of 2004, with the resultant
reforms taking effect from July 2005, the findings of the WTO
Panel may now delay this process. Consequently, although the
Agriculture Council on 22-23 November is due to debate sugar,
it is unlikely that legislative proposals will be on the table
by then, and that consequently decisions may not be possible until
the UK Presidency in the second half of 2005.
Conclusion
2.19 We are conscious that there have been frequent
debates on the sugar regime, most recently on 29 January 2004
following the Commission's previous Communication, and that there
will be a further opportunity for the House to consider the latest
reforms when the legislative proposals arising from the current
document are brought forward. We did, therefore, consider carefully
whether a further debate would be helpful at this stage, or whether
it would be sufficient simply to clear this document on the basis
of a fairly full Report to the House.
2.20 On balance, we have concluded that further
consideration now would be appropriate, partly to enable the House
to make an input when the issues are still open to further discussion
and partly because those issues do seem to us to be of considerable
importance, not only to producers in this country, but also to
the UK's traditional suppliers (and indeed to other suppliers
in the Least Developed Countries who stand to benefit from the
Everything But Arms Agreement). We are therefore recommending
that this Communication should be debated in European Standing
Committee A.
7 (24905) 12965/03; see HC 63-xxxv (2002-03), para
2 (29 October 2003) and HC 42-i (2003-04), para 3 (3 December
2003). Stg Co Deb, European Standing Committee A, 29 January
2004. Back
8
(21743) 12087/00; see HC 23-xxxi (1999-2000), para 10 (29 November
2000), HC 93 (2000-01), oral evidence taken by the European Scrutiny
Committee on 20 December 2000, HC 28-ii (2000-01), para 4 (10
January 2001) and HC 28-ix (2000-01), para 9 (21 March 2001). Back
9
A quotas are intended to correspond to demand on the internal
market, whilst B quotas represent the quantity of excess sugar
which may be exported with the aid of refunds. Back
10
We understand that the Panel investigating this complaint has
concluded that aspects of the regime are out of line with WTO
rules. Back
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