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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