Memorandum submitted by The UK Industrial
Sugar Users Group
UKISUG represents the UK's manufacturers of
food and drink, including companies both large and small. Overall,
they employ some 80,000 people in the UK, with consumer sales
of around £15 billion per annum. They use 70% of UK sugar
consumption (1.2 million tonnes) and are therefore an important
stakeholder in the sugar regime.
1. THE EXTENT
AND TIMESCALE
OF THE
PROPOSED PRICE
REDUCTIONS
1.1 UK industrial users of sugar fear that
the proposed price reductions will leave the EU price of sugar
still some way above the world price. The continuing pressure
in the WTO to reduce the size of the budget for export refunds
(which are intended to bridge the gap between the world and EU
prices) means that a higher EU price will always remain a worry.
The current gap between European and world prices has contributed
to the loss of 16,000 jobs in the confectionery sector in the
last five years.
1.2 As regards timescale, it is naturally
preferable to industrial users for the proposed price cut to be
implemented as quickly as possible. The loss of jobs and production
in the UK because of the high sugar price is a current and ongoing
problem and needs to be addressed straightaway.
2. THE EXTENT
TO WHICH
THE PROPOSED
REDUCTIONS IN
PRICE WILL
BE TRANSMITTED
TO THE
CONSUMER
2.1 There are two points to consider here:
first, the extent to which any reduction in the official price
will actually be reflected in the sugar market; and secondly,
the extent to which any reduction in the price in the sugar market
will be reflected in consumer prices.
2.2 Industrial users have grave doubts about
the first of these. At present, the market price is between 10
and 22% higher than the intervention price. This suggests that
the market is not functioning normally, given that there is an
excess of supply over demand. A look at the market structure explains
why this is. The quota system is in effect a division of market
share by law. Each sugar processor has an upper limit on the amount
of sugar it can sell each year. There is no incentive for a supplier
to win new business because it would have to relinquish existing
business as a result, due to the cap on how much sugar it is allowed
to sell. The normal process of competition—in which suppliers
compete with each other to attract customers—is simply absent.
The Swedish competition authority has described this as leading
to "tacit collusion".
2.3 The Commission's proposed reform changes
this arrangement barely at all. Quota will continue to be divided
among sugar processors, so the restraint on competition remains.
In fact, given that the number of sugar processing businesses
is likely to be reduced by up to two-thirds, the extent of tacit
collusion is likely to grow. Industrial users argue that, if the
whole notion of a quota system is to be retained at all, further
measures are needed to ensure that sugar processors are forced
to compete with each other rather than permitted to operate in
a partitioned and uncompetitive marketplace. For example, article
37 of the proposed regulation allows for the possibility that
import or EU production arrangements might be changed if the price
does not fall as it should. The circumstances under which this
article might be invoked are undefined and the measures to be
taken are not specified in sufficient detail. They should be.
2.4 Turning to the second consideration,
there is no doubt at all that, if the market price of sugar actually
falls under reform, consumers will benefit. There are two reasons
for saying this.
2.5 First, there is intense competition
among retailers. In pursuit of the lowest possible prices on the
shelves, they are continually searching for ways to cut costs.
This pressure is naturally felt by the suppliers to retailers,
too, including the industrial users of sugar. It is inconceivable
that retailers would not take the opportunity to reduce the prices
of goods containing sugar as far as they could, were the price
of sugar to fall.
2.6 The second reason for saying that the
consumer sugar price would fall is that it has happened before.
Between April 1996 and May 2000, the sugar price in the UK fell
by 33.7% when the pound rose in value against the euro. The consequent
impact on prices in the value chain was as follows (data from
the Office of National Statistics).
| Percentage change (1996-2000)
|
| Raw sugar (as a crop) | -33.7
|
| Processed sugar (as an ingredient) | -14.0
|
| Soft drinks—producer prices | - 5.7
|
| Confectionery—producer prices | - 8.1
|
| Soft drinks—retail prices | 7.6
|
| Confectionery—retail prices | 9.8
|
| All retail prices | 11.2
|
| |
2.7 Processed sugar represents between 10 and 20% of
the costs for a sugar user (from industry estimates). A 14% fall
in the cost of processed sugar should therefore translate into
a 1 to 3% fall in the cost of manufactured goods containing sugar,
all other things being equal. The actual price cut was much greater,
between 5 and 8%.
2.8 However, it should be pointed out that only 42% of
the fall in the price of sugar as a crop was passed on by processors
in a reduction in the price of sugar as an ingredient. Given that
raw sugar amounts to two-thirds of the cost of producing sugar
as an ingredient (from European Commission estimates), the price
fall should have been 22% rather than 14%, ie more than 50% greater
than it was. The stickiness in the price of sugar as an ingredient
bears out, in black and white, the contention that competition
among sugar processors is not as it should be.
3. THE PROPOSED
ARRANGEMENTS FOR
COMPENSATING EU PRODUCERS
3.1 The compensation arrangements for processors seem
rather generous, given that they are not actually agricultural
producers. By way of comparison, there has never been compensation
for dairies and slaughterhouses after reforms in the milk and
meat sectors.
4. THE CHANGES
TO THE
QUOTA ARRANGEMENTS
4.1 We have already explained the fundamental unfairness
of the quota system and the way it stifles competition in the
marketplace. We regret that the idea floated in the Commission's
communication of July 2004, that quota might be bought and sold
by sugar processing companies across national borders, has been
dropped. That would have gone some way towards encouraging and
rewarding efficient production, but sadly this turned out to be
politically unacceptable.
4.2 That leaves only two glimmers of hope for a competitive
marketplace. First, there is the possibility in article 11 of
the regulation that quota might be transferred from one processor
to another within the same member state. It would be unwise to
have much confidence in this option, though, because the rules
for this in Annex V do not, as currently drafted, foresee new
entrants into the marketplace, merely the reallocation of marginal
amounts of quota amongst existing players. (Rules of this sort
exist at present, in fact, but have rarely if ever been invoked.)
4.3 If there is no reform of the quota system to facilitate
competition amongst EU producers, the only hope is going to be
an increased level of imports. There are plenty of producers outside
the EU ready and willing to supply the European market. Contrary
to most people's belief, however, there is nothing in the Commission's
proposal that will increase market access for countries such as
Thailand or Brazil. It is possible that article 37 might be used
to inject more competition into the EU market, as has been suggested
in answer to a previous question, but no decision to that effect
appears to have been taken.
UKISUG
September 2005
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