Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


Memorandum submitted by The Biscuit, Cake, Chocolate and Confectionery Association (BCCCA)

EXECUTIVE SUMMARY

  1.  The Committee's terms of reference are focused on the sugar beet-growing and processing, and cane refining, sectors. However, the health of the industrial sugar users (predominantly confectionery, etc and soft drinks) is of paramount importance to these other stakeholders. Together they take around 70% of UK sugar beet output, of which around half is for the biscuit, cake, chocolate and confectionery (BCCC) sector.

  2.  The BCCC sector has lost more than 20% of its workforce in the last five years, and the artificially high price of sugar in the UK and EU is an important factor in the loss of jobs and the shift of production to areas of lower sugar prices.

  3.  The Commission's draft legislative proposals may be `too little, too late' for the BCCC sector in the UK. Even if market prices fall to the reference price, there will probably be less competition in the processing sector rather than more, as the number of quota holders is reduced. As this Committee has itself previously noted, the quota system is the biggest stumbling-block to increased competition.

  4.  The proposed restructuring fund is excessively generous even by the Commission's own calculations, and unfair in that it places the onus of compensating private shareholders on industrial users and consumers.

  5.  Unless, as a minimum, the price cuts are introduced earlier than October 2007, and quotas are made tradeable across national boundaries, the flight of jobs from the UK BCCC sector will continue and the domestic market for UK beet growers and processors will continue to be eroded. If quotas are not abolished or made tradeable, the UK Government should immediately trigger the competition inquiry recommended in these circumstances by the EFRA Select Committee in its 2004 report.

INTRODUCTION

  6.  The Biscuit, Cake, Chocolate & Confectionery Association (BCCCA) represents all the leading and many smaller manufacturers of biscuits, cakes, chocolate and confectionery (BCCC) in the UK. In all, the Association represents more than 90 British businesses. The sector as a whole employs some 60,000 people (though this number is falling—see below) and has annual consumer sales of around £8 billion. Companies contribute around £1 billion in respect of these products in VAT receipts to the Exchequer.

OVERVIEW

  7.  The BCCC sector was disappointed with the very modest reform proposals put forward by the Commission, even less radical than the Commission's original Communication of July 2004. The Committee's terms of reference do not explicitly focus on the impact of the proposals on industrial sugar users, but the fate of the UK sugar industry (growers and processors) is inextricably linked to that of their industrial customers, who buy 70% of their output (roughly half of which is accounted for by the BCCC sector). Even if these proposals do deliver a 39% price reduction (which is by no means certain) from autumn 2007, this will probably be `too little, too late' to halt the loss and export of jobs from the UK, and hence the erosion of the domestic sugar market.

THE EXTENT AND TIMESCALE OF THE PROPOSED PRICE REDUCTIONS

  8.  The Commission's proposal creates a reference price (at which sugar is expected to trade in the future), which is 39% lower than the present intervention price. However, the EU sugar market is not fully integrated at the EU level, but consists of a number of national markets. There will be a market price monitoring system, but the proposal gives no details as to how this will operate. It appears that these matters will fall to the EU Sugar Management Committee, which in practice means that decisions will be taken according to majority vote by the individual member state representatives. This does not bode particularly well for sugar users and those in the reformist camp, as the Committee is dominated by countries with predominantly producer and processor interests.

  9.  These individual national markets are a consequence of the national production quota systems. The small number of processors operating within the EU and effectively in national markets (which will be further reduced following the restructuring programme incentive) means that even a substantial cut in the support price will not necessarily be reflected in a reduction in market prices owing to tacit collusion which has already been demonstrated between processors. Indeed the possibility of efficient processors exiting the industry and leaving the less efficient in production (see paragraph 20) could result in poorer quality; less volume supplied to market; extra demand pressures leading to rising prices.

  10.  The exceedingly high price of sugar has contributed significantly to the loss of up to 16,000 jobs (more than 20% of the workforce) in the UK biscuit, cake and confectionery sector in the last five years alone. We are accordingly concerned over the protracted timetable for the implementation of proposed price reductions. There will be no effective price cuts before October 2007. The Commission's proposals must be amended to return to the original July 2004 communication timetable ie real price cuts by July 2006 (rather than October 2007).

  11.  Export refunds are intended to bridge the gap between higher European and world raw material prices so that EU exporters of sugar-containing products can remain competitive in third country markets. The proposals do not say much about the mechanism for export refunds. The BCCCA welcomes the recognition that export refunds for processed foods (Non-Annex I) will be necessary, but it is not clear how they will be calculated. Will the new reference price act as a trigger in the relationship to world prices? Furthermore, if this is the case, will the calculation be on the full reference price or that net of the restructuring amount? This is particularly significant for sugar users/exporters, who will have to bear the burden of the restructuring amount while it is in place. Prices need to be stable or known up front, especially where contracts are being fixed a year ahead. The market does not want volatility.

  12.  Within the context of the WTO Doha Development Round the EU has already made the commitment to the ultimate abolition of export refunds. This means that as the latter disappear, the EU domestic support price for sugar must approximate towards world prices so as to allow EU exports of processed foods to remain competitive in third country markets.

THE EXTENT TO WHICH THE PROPOSED REDUCTIONS IN PRICE WILL BE TRANSMITTED TO THE CONSUMER

  13.  It is difficult to quantify the extent to which the proposed reductions in price, to the extent that they actually materialise, will be transmitted to the consumer. Research carried out by Agra CEAS Consulting for the European Commission ("Study on Price Transmission in the Agri-food Sector" (unpublished)) suggests that a price reduction is likely for sugar for direct (retail) consumption, particularly in view of the higher levels of competition in retail sales. In the case of sugar incorporated in processed products, which concerns our members, the impact of the reduced sugar reference price will depend on many factors, including the cost of other raw materials in the final product. However, the competitive nature of the processed food manufacturing industry is such that the reduced price will be passed on by manufacturers to retailers. Equally, several years ago when the price of sugar in the UK dropped significantly owing to exchange rate movements of the £ v

, the reductions in price of sugar at the farm gate were passed on by food and drink manufacturers to the extent that they had been passed on by the sugar processors.

  14.  UK-manufactured products are always competing against imported products which benefit from much lower sugar prices, so there will inevitably be downward pressure on the prices of British-made products.

THE IMPLICATIONS FOR UK AGRICULTURE, WITH PARTICULAR REGARD TO POSSIBLE ALTERNATIVE LAND USES

  15.  The Commission's proposal represents an opportunity to increase the competitiveness of the whole of the European sugar chain, including farmers, but this will depend on how the proposals are finalised and then implemented.

  16.  As the UK is one of the most competitive sugar beet producers in the EU, there could be scope for increased sugar beet production following the price reductions. Any reduction in the differential in the industrial sugar price between the UK and other member states will help ameliorate the position for BCCCA member companies. Increased competitiveness for BCCCA member companies will in turn help to maintain demand by them for other raw materials produced by other UK agricultural sectors (such as dairy ingredients and cereals).

  17.  Sugar beet will be eligible to be grown as a non-food crop on set-aside land and will also be eligible for the energy crop aid ("carbon credit") of

45 per hectare. These measures will offer the opportunity for beet farmers to supply the bioethanol market, whilst sugar for the latter and for the chemical and pharmaceutical industries will be excluded from production quotas. These options, coupled with compensation to sugar beet farmers of up to 60% of the price cut, should mean that the majority of UK sugar beet farmers will want to continue.

THE PROPOSED ARRANGEMENTS FOR COMPENSATING EU PRODUCERS

  18.  The EU sugar industry needs support to restructure, but both the objective and the mechanism of the proposed restructuring aid are highly questionable. The Commission proposes a restructuring fund which amounts to a sum in excess of

4 billion to help the sugar industry—to be financed by sugar users and consumers through a levy system.

  19.  The proposed restructuring fund is excessively generous, will delay price reductions and will mean that industrial users and consumers of sugar are paying to compensate private shareholders in other countries. The restructuring fund must be remodelled to reduce the burden on industry and ultimately consumers.

  20.  The scheme has been made deliberately attractive to persuade those non-reformist member states to accept reform ie it is the political price to secure agreement. The scheme will last for four years and is particularly generous in the first year, at

730/tonne. Commission figures suggest that the average cost of closing down a factory is around only

668/tonne. The intention is that inefficient sugar processors will drop out and leave the efficient in the market. However, it is possible that the efficient could choose to be bought out (the financial returns are very attractive) and leave the inefficient behind (see paragraph 9), with the possibility of further buyout funding therefore being necessary in later years. It is unclear as to how the amount for the restructuring fund has been calculated, but it has been suggested that it is worth at least

360,000 per sugar processing employee in the EU.

  21.  The proposal to compensate private shareholders of sugar refiners for loss of revenues and profits is, in any case, wrong in principle. Restructuring aid to less competitive sugar processing plants in order to retrain workers and diversify into other product markets could be justified, if managed in a fair and transparent way, but the financial aid offered in this package is much more than that required to meet this objective.

  22.  This levy would seriously harm competitiveness, exports and jobs in the European sugar using industries, which include a high number of SMEs, for which sugar represents a significant raw material cost. In the initial years of the reform, these sugar users are likely to end up worse off than under the current regime, since they will have to pay the restructuring tax to benefit other, larger, businesses in another sector of the supply chain. This cannot be equitable, or sound economics.

THE CHANGES TO THE QUOTA ARRANGEMENTS

  23.  The proposal to leave the quota system untouched is unacceptable and potentially very damaging for UK manufacturing employment. If production quotas are to be retained, the Commission's original proposal to make quotas tradeable across national boundaries must be reinstated (which we believe would benefit all UK stakeholders).

  24.  The sugar quota system will be maintained, but existing A and B quotas will be merged into a single production quota. There will be no compulsory quota cuts. Furthermore, to prevent a sharp cut in production in those countries currently producing non-quota C sugar, an additional amount of 1 million tonnes will be made available against a one-off payment corresponding to the amount of restructuring aid per tonne in the first year. The limit of 1 million tonnes, coupled with the provision in Article 10(2) for the possible downward revision of production volumes in 2010, presuppose that future EU production will contract. However, whilst this may be the case, there should be provision to allow for expansion, should there be an increase in production of sugar incorporated in food products for sale on both the EU and export markets.

  25.  The reform proposal would leave the national quota system in place until 2014-15 and there is no provision for a mid-term review. The quota system stifles competition by isolating each national sugar market, and allowing the few large processing companies that dominate to collude and raise prices. This will continue after the reform and the situation will even be exacerbated by the likelihood that national quotas will be retained by an even smaller number of sugar processors.

  26.  The retention of the national quota system will reduce manufacturing of biscuits, cakes, chocolate and confectionery in the UK, as a recent Agra CEAS Consulting Report (commissioned by the BCCCA) suggests. [7]The report highlights the loss of jobs; reduction in volume of production; movement of production out of the UK; and the erosion in the balance of trade situation over the last five years.

  27.  The report finds specifically that:

    —  up to 16,000 jobs have been lost in the BCCCA sector in the last five years (a fall in employment of more than 20%);

    —  there has been a fall in production of BCCCA products in the UK in the last five years (sugar confectionery -11.6% against "EU 15" +7.8%; biscuits -6% against "EU 15" 0%; chocolate -4.5% against "EU 15" +5.2%);

    —  a healthy positive balance of trade in BCCCA products has been eroded to the point where for the last couple of years the UK has been importing more than it exports.

  28.  There has been a trend towards concentration in the BCCCA sector through merger and acquisition and towards divestment of production facilities out of the UK, which will persist if there is no reform of the sugar regime. BCCCA members are more readily able to produce for the UK market in another EU member state where it is more economic to do so (eg where the cost of sugar for industrial use is cheaper). This has led to a series of divestments with production being moved outside the UK, further reducing employment in the sector.

  29.  One of the key contributory factors to this deteriorating situation is identified in the report as the existence of the production quota system (". . . the only reform options which allow an improvement in the competitive nature of the sugar supply chain are those that result in the elimination of production quotas.").

  30.  The iniquities of the quota system were identified by this Committee in its Twelfth Report of 2003-04: "Competition will be increased more by abolishing quotas than through any other policy change. However, if the new sugar regime does not contain provision for eliminating production quotas, we recommend that the competition authorities conduct an investigation into the UK processing industry" (paragraph 52). In its response, the Government said that ". . . increasing competition will be a major UK negotiating objective and if sufficient progress is not made we agree that the competition authorities should consider the case for an investigation into the market".

  31.  The Commission's earlier suggestion (in its Communication of July 2004) that quota transfer should be permitted across member state boundaries would be a reasonable second best to outright abolition. However, even this modest proposal has been dropped from the draft legislative text which is less market-oriented than the proposal of July 2004 (quotas are retained and are not even tradeable). Quota transfer would help to halt the flight of manufacturing jobs out of the EU.

  32.  If quotas are not abolished or made tradeable, the UK Government should immediately trigger the competition inquiry recommended in these circumstances by the EFRA Select Committee in its 2004 report.

THE POTENTIAL IMPACT OF THE REFORMS ON UK-BASED SUGAR BEET PROCESSORS AND CANE REFINERS, AND THE LONG-TERM CONSEQUENCES FOR THEIR INDUSTRIES

  33.  The continuation of production quotas will effectively maintain barriers to entry for new sugar-refining companies. The current differential in the price of industrial sugar between the UK and EU markets, and its volatility in the UK, will remain. This lack of competition in the EU sugar supply market will ensure a continued downward spiral for the BCCCA sector.

  34.  The fortunes of UK-based sugar beet processors and cane refiners are inextricably linked to those of UK industrial sugar users. 70% of all UK processed/refined sugar is sold to UK food and drink manufacturers. As such, the impact of the sugar reform proposals on UK industrial sugar users must not be ignored by the former stakeholders.

  35.  Competition in the market is vital for the future of industrial sugar users, but may not materialise given the restricted scope of the proposals. The reform must create the right regulatory environment for competition to flourish and end any apparent price collusion in the EU sugar supply market. Competition in the sugar supply sector will benefit both producers and consumers and increase overall economic welfare. There is no true competition in the EU sugar industry under the current regime, which is clearly demonstrated by the fact that EU buyers are paying 8% to 22% more than the institutional price for their sugar, in spite of a situation of surplus supply. It is crucial that effective measures are put in place to prevent sugar processors from colluding on prices. This is why it is important to increase alternative supply sources, in particular sugar imports and isoglucose. In this regard, the proposal to open up the market to further supplies from third countries when Community prices have been substantially disturbed (recital 34; article 37) is welcome, but it is doubtful whether it will have much impact in practice as the EU Sugar Management Committee, the body likely to discharge this function, is dominated by countries with grower and processor interests (see paragraph 8).

Biscuit, Cake, Chocolate & Confectionery Association (BCCCA)

September 2005



An executive summary of the Report can be found at:

http://www.bccca.org.uk/Ease/servlet/DynamicPageBuild?siteID=1516&categoryID=172


7   The Impact of the EU Sugar Regime on BCCCA Member Companies: A Study by Agra CEAS Consulting. Back


 
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