Examination of Witnesses (Questions 100-119)
MR CHRIS
TYAS, MS
ANNA LUCUK
AND MR
RICHARD LAMING
19 OCTOBER 2005
Q100 Mr Williams: We heard from Tate
& Lyle that over one million tonnes of quota were available.
Can you explain?
Mr Laming: Because the opportunity
for European producers to export so-called `C' sugar is going
to disappear, because as the price falls the cross-subsidy for
that will disappear, as part of compensation for that those countries
which are doing a lot of that right now are going to be given
the opportunity to increase the production of sugar for the EU
market roughly in proportion to their export markets right now.
So in the UK it is now about 80,000 or 90,000 tonnes.
Mr Tyas: The perverse thing is
that the Greek sugar producer gets a proportion of that one million
tonnes just as much as the British farmer does and the British
farmer cannot buy any of that Greek one however uncompetitive
and inefficient the farmer or processor may be.
Q101 Mr Williams: Under the present
recommendations then you seem very unconvinced that there is going
to be a fall in the price of sugar which has been anticipated
by the Commission. If there were that fall, would there be any
guarantee that that reduction would be passed onto the consumer?
Mr Laming: There are two reasons
to suppose that it would. First of all, think about the retail
environment, intensely competitive and any opportunity that retailers
have to reduce prices on their shelves for consumers they take.
Already manufacturers of soft drinks and confectionary are being
asked how much their prices are falling right now because of the
reform of the sugar regime. We have to say that actually it has
not happened yet, but we are already being asked those questions
now. There is very good reason to think that when it finally does
come through, the prices will fall. Secondly, it happened before.
Between 1996 and 2000 the price of sugar beet fell in this country
by 33% and the evidence from national statistics shows the way
in which that price fall was transmitted through the value chain
and did indeed reach the shelves. The biggest blockage was the
price of processed sugar that we buy as a result of the regime.
That price did not fall as much as it should have done.
Q102 Mr Williams: Experience from
chocolate eaters is that when the price of cocoa falls the price
of chocolate does not fall, as last year.
Mr Tyas: Mr Laming has made the
point that when sugar prices did fall, which is the largest single
ingredient, far more than cocoa, then the price did fall on the
previous occasion. The one key point we are concerned about is
that prices will move, but what we are more concerned about is
the competitiveness of British manufacturing industry. We are
not asking for a subsidy or anything like that, we just want a
level playing field so that we can compete on the same terms in
factories up and down with those in continental Europe or even
outside the EU on the edge of Europe. That is really what we are
looking for: just a level playing field and a level field of competitiveness.
Q103 Mr Williams: If there were a
substantial reduction in sugar would it replace or displace artificial
sweeteners in some of the products your companies make?
Mr Laming: I think by now that
the public focus on diet and health is such that people are making
choices for a wide range of reasons. These days, certainly the
experience in the soft drinks industry is that the taste and the
functionality and the effect of calories are taking over from
price as the thing which drives consumers. So we do not believe
that a fall in the price of sugar would have any impact on the
consumption; indeed consumption of sugar is falling right now.
Q104 Mr Williams: One of the reasons
for using artificial sweeteners is because they are cheaper than
sugar. I am asking whether, if the price of sugar fell, that would
displace or replace artificial sweeteners?
Mr Laming: No. From the point
of view of soft drinks that would not happen. That shift in public
attitude towards sugar and sweeteners is irreversible, particularly
in the state of the debate about public health of which we are
all aware right now.
Q105 Mr Williams: Are you saying
that a reduction in the price of sugar would not lead to an increase
in its consumption?
Mr Laming: No, the price of goods
containing sugar has fallen in real terms in recent years anyway
and consumption is not going up.
Q106 Mr Williams: So demand for sugar
is relatively inelastic and people have as much sugar as they
want?
Mr Laming: Yes.
Mr Tyas: We believe that the demand
for sugar is more based upon the competitiveness of the product
made here. If we can go back to a situation where we are exporting
280,000 to 290,000 tonnes from this country, as we were only five
years ago, that is going to be the largest driver of demand for
sugar in this country. It is industrial sugar users, such as those
represented by our companies here today, who take 70% of all sugar
which is grown in this country. If we have a thriving manufacturing
industry in this country, then that is going to generate the biggest
demand for sugar grown here.
Q107 Chairman: May I just explore
with you paragraph 2.8 of your evidence and also the table at
paragraph 2.6.[9]
This very clearly shows that when the raw sugar price fell you
went from 33.7% down in the period you have chosen to only 14%
down on the processed sugar price. You refer to that in paragraph
2.8. Could you try to explain to us why the fall in the price
of raw material is not visited in the processed sugar price? The
reason I ask that is that I would imagine both Nestleé
and Cadbury Schweppes would consider themselves to be good buyers
of raw material. If you saw that the raw sugar price had fallen
by that, how is it that your buyers have allowed the processing
industry to get away with a disproportionately small fall in the
price of the material to you?
Mr Laming: This is exactly the
point about tacit collusion and market share which we mentioned
earlier. There is nowhere else to go.
Q108 Chairman: I suppose there is
nowhere else to go unless you go to it. You said to us that there
was a 10% price differential between UK sugar and that from the
continent, roughly ascribing to the cost of transport. However,
you are big buyers. If you went along to continental suppliers,
could you not do a deal with them? The same circumstances must
apply to them. They might have been willing to give up a bit more
in terms of margin increase from the processor side to get your
business.
Mr Laming: Let us say we go to
another country. In every country the sugar produced already has
a customer. If we go to another Member State and buy the sugar
there, that means any sugar they export to the UK is sugar they
are taking away from existing customers in each Member State.
That is the whole point of the quota.
Q109 Chairman: Because it is a zero
sum game.
Mr Laming: Exactly. The whole
point of the quota system constrains the production of sugar.
That is the point.
Mr Tyas: The way you have described
the market is very much the way you would expect it to behave.
This market does not behave like a normal transparent market and
you come back to the amount which is dumped as sugar and the apparent
reluctance, which is referred to in the Swedish study, of companies
to transfer sugar across borders. Then the point you began with
that the price is still equivalent to the cost of transport across
the Channel.
Q110 Chairman: Are there any markets
outside the European Union which have over time, to your knowledge,
demonstrated a proper relationship between the rise and fall of
a market price for sugar and the price of the processed product?
Mr Tyas: If you look at the world
price of sugar, which some of our companies outside the EU are
able to buy, then it does react very much in that way, but also
taking into account supply and demand, as indeed Oxfam and the
other NGOs point out, the fact that the European market is not
open to many producers of the world means that to a large extent
even the world market does not work in a proper and free manner.
Q111 Lynne Jones: You did not answer
the question about why chocolate prices did not fall when cocoa
prices fell.
Mr Tyas: In many cases we would
argue that they did; certainly relative to other costs which increased
over that period. The point we were making, more importantly than
that, was that the balance of what we were really concerned with
here was the strength of the manufacturing industry, whether the
products ended up being made in this country or made somewhere
else.
Q112 Lynne Jones: You say that the
retailers put pressure on you to reduce your prices when your
commodity prices go down.
Ms Lucuk: It may be a bit simplistic
to say that a drastic fall in any commodity price would have an
immediate impact on retail prices and it is retail prices rather
than the price at which we sell to the retailers. At any one time
different raw materials may be going up or down; you may have
high cocoa prices, lower oil prices which impact on packaging
and distribution for example.
Mr Tyas: May I go back to the
point Mr Laming made. When the sugar prices did fall before then
it was transmitted through and there is very strong evidence that
it was transmitted through to the retail price.
Q113 Lynne Jones: In relation to
developing countries, obviously it is wrong that they should not
have access to our markets. On the other hand, they should not
have unnecessary tariffs; on another hand, if you are shipping
these you do have environmental implications. Obviously there
is an issue of local supply versus supply coming across the world.
Would you care to comment on that and should we have some kind
of a carbon tax, not tariffs preventing access to our market,
but some kind of taxation to reflect the impact on the environment
of shipping bulk items across the world?
Ms Lucuk: We would find it difficult
to argue for that, given that the LDC countries are expecting
to enter the EU markets under the Everything but Arms Agreement.
As the agreement stands at the moment, it would further prevent
that necessary access which both they and we require in order
to make the European sugar market more competitive and fairer
on all sugar producers.
Mr Tyas: One of the arguments
which might well come into play here, if one were looking at the
balance between beet and cane sugar is that from a processing
point of view significantly lower amounts of energy are involved
in processing cane than are involved in processing beet. Inherently
cane is a more efficient way of producing sugar than is beet in
certain countries. That might well be offset in some respects
by the transport costs involved, but it is still, in terms of
the world economy, the most efficient way of producing sugar.
Q114 Lynne Jones: You say that the
proposed restructuring is excessively generous.
Mr Tyas: Yes.
Q115 Lynne Jones: What would you
do to ensure restructuring and to ensure that quota is relinquished?
Mr Tyas: We find three things
iniquitous here. Firstly the level of restructuring,
360,000 per job was the estimate by the EU, which,
if you compare it with anything else, is generous in the extreme.
Secondly, what is also rather perverse is that it is actually
the manufacturers, the customers and the consumers who are paying
for it. If we look at anything else, such as the EU reform of
slaughterhouses or anything like that, the supermarkets, for example,
do not pay for the restructuring costs there. That also seems
rather perverse to us. Then we come back to this point which is
probably one of the ones we feel most strongly about: the fact
that there is no transferability of quota between the different
countries, therefore there is no movement to the most efficient
farmers and the most efficient processors of beet, who are undoubtedly
here in Britain and northern France.
Q116 Lynne Jones: So what are your
proposals? What would you do?
Mr Tyas: What we would want to
see is a return to the proposals which were made the first time
by the European Commission and which this Committee looked at
in its previous study 12 months ago, and they occur in most industries,
that is restructuring cost being carried by the industry concerned.
Q117 David Lepper: One question on
this issue of whether price reduction is passed on to consumers.
There was an article in The Independent on Sunday in June
this year headlined Cadbury's £70 million in sugar coated
savings. I am sure you saw it. The journalist writing that article
said that Cadbury Schweppes's management have claimed that savings
would be passed on to consumers. Do Cadbury Schweppes stand by
that?
Ms Lucuk: We were one of the companies,
two days after the Commission released its proposals on 22 June,
on 24 June, whose sales teams both in France and in the UK were
contacted by major retailers to whom we sell, they are our customers,
obviously assuming, as the journalist did, that we had sugar reform
and we had a 39% reduction in the price that we pay delivered
to our factory. That is the competitive nature of where we operate.
We sell to the retailers, we compete among ourselves and there
is no way a retailer will let anything past them should a saving
of that percentage be possible. I am sure the Committee are aware
of the power of the retailers.
Q118 Lynne Jones: If their customers
in the supermarket want to buy Cadbury's Dairy Milk, they are
going to want to supply them, are they not? They are not going
to say "Sorry, because we have not done a deal with Cadbury
we are not going to give you enough Fruit and Nut".
Ms Lucuk: Absolutely. We want
those retailers to stock our products, so we have an incentive
to do the best deal possible and better than Nestleé and
better than Master Foods, so that it is our products which are
more appealing to consumers when they go into the supermarkets.
Mr Tyas: Our case here today is
that we want those products to be manufactured in this country
with British jobs, not to be made elsewhere because the largest
material price is more expensive in this country.
Q119 Patrick Hall: Could we just
quickly look at the issue of security of supply? You have already
explained that cane sugar has far lower production costs than
beet. Is the source of sugar from beet maintained because it is
there or because of the security of supply in Europe argument?
How serious are those arguments about security of supply?
Mr Tyas: May I answer your question
in two parts? It is maintained because quota maintains it; that
is the reason why and that is the reason why the relative proportions
of cane and beet exist in Europe. Were those proportions to change,
then all of our companies are convinced that with the world market
as developed as it is today the sources of cane supply and the
assured sources of cane supply could be brought to this country
just as easily as beet is today. The proportions you refer to
are no result of the market, only of quota.
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