Memorandum submitted by British Sugar
PLC
1. EXECUTIVE
SUMMARY
1.1 The UK beet sugar industry has improved
efficiency dramatically over many years in order to be in a position
to compete in anticipation of reform.
1.2 British Sugar broadly supports the European
Commission's proposals which offer a balanced reform. We would
not support a longer timescale than proposed as this would lead
to an unstable and unsustainable market.
1.3 It must be clearly understood that the
consequence of the radical reform that is being proposed will
be to introduce an equally radical structural change in the EU
market. The market in individual country terms or to assign any
relevancy to whether sugar is derived from either beet or cane.
1.4 The price reductions proposed by the
Commission are unnecessarily severe to meet the objectives of
reform to retain an efficient, competitive and sustainable EU
sugar industry.
1.5 Decoupled grower compensation must be
consistently applied across the EU and given to beet growers.
1.6 The ability of the proposed Re-structuring
Scheme to take out 5-6 million tonnes of EU production quota will
be fundamental to the success of reform.
1.7 The removal of significant volumes of
sugar beet production in the UK would have a negative environmental
impact, especially on biodiversity.
1.8 Provided costs are controlled and work
continues to improve productivity, British Sugar is confident
that the UK beet sugar industry will be competitive within the
EU in the future.
1.9 Moves to offer further assistance to
cane refiners than are already offered in the Commission's proposals
would be unjustified and would risk severely upsetting the cane/beet
balance in the Sugar Regime.
2. THE UK BEET
SUGAR INDUSTRY
2.1 Over the last 25 years the UK beet sugar
industry has invested heavily to improve efficiency. Sugar beet
crop yields have been increased from a 5-year average of 6.5 tonnes
of sugar/hectare to an average of 9.6 tonnes of sugar/hectare
in 2002-04 (Annex 1). This 50% improvement in productivity has
been driven by a series of targeted initiatives for which quantified
objectives have been agreed on behalf of the whole industry and
systematically pursued. In recent years these have included: improved
crop quality, more effective crop storage techniques and earlier
national planting dates. Crop costs have been similarly targeted
and driven down. Targeted initiatives here include reduced fertiliser
and chemical applications, precision-controlled pesticides technology
and grower performance analysis.
2.2 The effect of this improvement has been
to progressively improve the UK industry's ranking in EU sugar
beet productivity. In the last decade UK sugar beet yields have
normally been ranked in the top 4 of EU Member States. A typical
example is in 2004-05 where the UK final yield of 10.4 tonnes
of sugar/hectare compares with a European range of 4.8 to 12.2
and a weighted EU average of 9.1 tonnes of sugar/hectare (Annex
1).
2.3 In this context, British Sugar would
wish to correct the impression given by Table 3 of DEFRA's Regulatory
Impact Assessment (p 29). UK sugar yields (as opposed to beet
yields), which take into account beet sugar content and extraction
rates, are the normal measure of efficiency as used by the European
Commission. Here the UK ranks the same as Belgium and the Netherlands
and only just below those of the best in France.
2.4 On the processing side of the industry,
British Sugar has invested over £1 billion (€1.4 billion) to improve efficiency in the last 20
years, and is continuing to invest an average of £35 million
a year at the moment. The number of operating factories has been
reduced from 17 to 6, and productivity has quadrupled from 180
tonnes of sugar produced per employee each year to 780, over the
same period (Annex 2).
2.5 In co-operation with growers, the length
of the processing season has been gradually extended due to a
combination of increased crop yields and factory closures. The
UK "campaign length" for crop processing of about 150
days compares to about 90 days for the rest of the EU15, and an
estimated 85 days for the EU25. Increasing campaign length makes
better use of the fixed assets used in the business, so is an
important indicator of efficiency.
3. A STRUCTURAL
CHANGE IN
THE MARKET
3.1 Although broadly balanced, the Commission's
proposals are radical and hard-hitting. All industries in the
European sugar sector will be affected by this change, and many
will be forced to rationalise or close down altogether. British
Sugar believes that this drive for greater competitiveness, which
it fully supports, should apply across all EU Member States and
to all related sectors of the industry.
3.2 An inevitable consequence of reform
will be greater concentration in the EU sugar industry and the
remaining industries will serve the overall European market. National
barriers for both markets and competition will become increasingly
irrelevant. In the same way, on the understanding that the EU's
commitments to the ACP (African, Caribbean and Pacific countries)
and the LDC (Least Developed Countries) must be met, the provision
of sugar from beet or cane will cease to be a policy concern,
with the market being supplied by those who are the most competitive.
4. THE EXTENT
OF PRICE
REDUCTIONS
4.1 Price reduction must be carefully balanced.
The support price must be set at a level low enough to drive the
Restructuring Scheme and help bring European supply/demand into
balance, but high enough to enable beet to be grown in efficient
areas of the EU.
4.2 Price reductions to €385 per tonne for sugar and €25 for beet are unnecessarily severe to meet the
EU's objectives, and would risk damaging even the most efficient
industries in Europe, including the UK's.
4.3 The Reference Price mechanism will not
work effectively because experience in other sectors demonstrates
that it will not put a definite floor in the market.
4.4 There is an intellectual inconsistency
between a fluid market price and a fixed minimum beet price. If
the market price reaches levels significantly below the Reference
Price, processors will take the entire hit of a market collapse.
Even the provision for a 10% adjustment (Article 5 1 (b)) will
make little practical difference.
4.5 To avoid the risk of market collapse
at worst and serious instability at best, in the initial years
while the Restructuring Scheme is being implemented and until
the EU market re-stabilises, the Intervention Price should be
retained.
5. TIMESCALE
5.1 British Sugar supports the timescale
for changes as set out in the Commission's proposals. The extent
of the proposed reform is radical. Our view is that implementation
should be introduced as quickly as possible to achieve the reform
objectives and avoid uncertainty in industry adjustment.
5.2 We particularly welcome the removal
of any mid-term review clause which would introduce uncertainty
and hamper the reform process.
5.3 We would not support any moves to delay
reform by other means. For example, the re-introduction of an
element of re-coupling for grower compensation (see Para 8 below)
or a more gradual transition.
6. THE EXTENT
TO WHICH
THE PROPOSED
REDUCTIONS IN
PRICE WILL
BE TRANSMITTED
TO THE
CONSUMER
6.1 Historically, effective price reductions
in the EU sugar sector have not been passed through to the consumer.
However, we would assume that, with such dramatic price falls,
some element would be passed down the chain. Where such savings
would in practice end up will depend on the relative prices of
other ingredients and food manufacturers' and retailers' perception
of their own commercial interests.
7. THE IMPLICATIONS
FOR UK AGRICULTURE,
WITH PARTICULAR
REGARD TO
POSSIBLE ALTERNATIVE
LAND USES
7.1 British Sugar agrees broadly with the
section of the conclusions of the study by Cambridge University
("Economic, social and environmental implications of EU sugar
reform"—September 2004) which covers the likely UK
beet production response to various support price changes, and
in particular the severe effects on UK beet production which would
be caused by a 40% cut in beet price.
7.2 However, we would question the conclusion
that direct and indirect employment is currently the equivalent
of only 10,000 full-time jobs. A further independent study up-dating
that of the University of Reading report of 1994 has been carried
out by Professor Peter Midmore (one of the original authors) and
concludes that between 13,000 and 18,500 jobs are created by the
UK beet sugar industry, depending on the methodology used. An
Executive Summary of this report is attached at Annex 3.
7.3 British Sugar would also draw the Committee's
attention to work carried out by Broom's Barn Research Station
on the Environmental Impacts of Sugar Reform attached at Annex
4. [16]This
points out that the environmental consequences of replacing sugar
beet with winter cereal or potatoes are generally negative with
particular regard to biodiversity (especially farmland birds),
soil erosion and nitrate leaching.
7.4 British Sugar has been keen to see the
development of a domestic biofuels industry in the UK as a way
to reduce greenhouse gas emissions in the transport sector and
to contribute to agricultural diversification. However, reform
of the EU Sugar Regime should not be seen as providing a significant
source of beet sugar feedstock for an emerging bioethanol industry.
The volumes that can be produced from sugar will be small and
significant bioethanol volumes will only come from cereals. In
this context we would like to point out that the development of
any reasonable sized market to comply with the EU Biofuels Directive
targets will require the early introduction of a Renewable Transport
Fuel Obligation.
7.5 In contrast with the beneficial effects
of the UK beet sugar industry on the country's economy, employment
and environment, substitution of this production by expansion
in countries with lower standards (like Brazil) would be highly
damaging. We attach at Annex 5 the Executive Summary of a report
prepared by the environmental consultancy Sancroft, on "The
Brazilian Sugar Industry Environmental and Social Impacts."
[17]This
concludes that sugar cane cultivation caused the virtual destruction
of the North-East Atlantic Forest and that further fragile and
valuable ecosystems such as the Pantanal wetland and the Cerrado
savannah could be under grave threat. Furthermore, the Brazilian
sugar industry has been associated with widespread labour abuses
and semi-slavery. Further expansion of the Brazilian sugar cane
industry therefore has serious implications for both environmental
and social standards in the country. This conclusion corroborates
the evidence supplied by the RSPB and Birdlife International to
the House of Commons Environment, Food and Rural Affairs Committee
sugar inquiry of 2004, which warned that expansion of the Brazilian
sugar industry would have devastating consequences for biodiversity,
particularly in the Cerrado region.
8. THE PROPOSED
ARRANGEMENTS FOR
COMPENSATING EU PRODUCERS
8.1 At a minimum beet price of €25.05/tonne, beet supplies become critical, even
in the most efficient growing regions of Europe like the UK.
8.2 Grower compensation must be consistently
applied across the EU:
— De-coupling should be mandatory (as
has been proposed by the Commission) and Member States should
not be allowed to apply it "a" la carte".
— Beet growers should get the compensation
in recognition of their loss of income.
— The reference years for calculating
the compensation should be 2002-04 for the UK to take account
of the reorganisation of the industry in the 2001 buy-out scheme
for beet contracts.
8.3 Any suggestion that partial coupling
should be permitted at the discretion of individual Member States
should be strongly resisted. If it were permitted it would introduce
competitive distortions doing particular damage to the UK. It
would also frustrate the success of the Re-structuring Scheme,
which is so vital to the success of reform of the sector.
9. CHANGES TO
THE QUOTA
ARRANGEMENTS
9.1 British Sugar did not support the Commission's
earlier concept of mandatory quota cuts at the start of the reform
process. We favour the proposed Re-structuring Scheme as being
more economically rational and in line with the efficiency and
competitiveness objectives of reform. There should be no compulsory
quota reductions during the re-structuring period.
9.2 We acknowledge that the relationship
between the re-structuring aid and the Reference Price is one
of fine balance. The key to the success of the Re-structuring
Scheme will be the cancellation of sufficient quota (5-6 million
tonnes) to bring the EU market into balance.
9.3 The merging of the "A" and
"B" quotas will result in some price disadvantage for
the UK as we have a relatively smaller "B" quota. Nevertheless
the merger is a simplification of the regime. The comparative
disadvantage to the UK should be compensated for in a commensurate
increase in the UK's financial envelope for grower compensation.
9.4 The proposal to increase isoglucose
quotas are the maximum that should be included. The potential
for success in re-balancing the EU sugar market is already finely
poised. Calls for additional isoglucose quota should be resisted
lest an already difficult task be made impossible.
9.5 British Sugar notes that Private Storage
and/or withdrawal are the only market balance tools available
in the event of an oversupplied market. If EU quota is cancelled
(either through the Re-structuring Scheme or subsequent mandatory
quota cuts) then oversupply can only come from imports. It is
therefore imperative that imports should be managed as effectively
as possible, assuming that LDC quotas will not be introduced:
— Safeguard measures should be made
automatic and be quantified.
— Robust rules of origin should be
implemented to prevent fraud.
— SWAPS bring little development benefit
for developing countries and should be severely restricted though
a net surplus requirement.
10. THE POTENTIAL
IMPACT OF
REFORMS ON
UK-BASED SUGAR
BEET PROCESSORS
AND CANE
REFINERS, AND
THE LONG-TERM
CONSEQUENCES FOR
THEIR INDUSTRIES
10.1 As stated above (Para 6.1) beet supplies
into British Sugar will become critical. The proposed price cuts
are unnecessarily severe and if they remain at the proposed levels
the production response will need to be carefully managed. Nevertheless,
British Sugar remains confident that, provided costs are controlled
to retain our efficiency and work continues to improve productivity,
UK production can remain at current or even greater levels.
10.2 British Sugar would like to point out
that cane raws can be refined highly efficiently in suitably located
beet factories. These therefore offer a credible alternative gateway
for developing country raw sugar exports to the EU. We would take
issue with the implication of the comments in DEFRA's Regulatory
Impact Assessment which states (p 62) that current refining capacity
in the EU is "a necessary outlet for ACP raw sugar."
Refining the full ACP Sugar Protocol quotas of 1.3 million tonnes
could be accommodated within EU beet processing capacity.
10.3 As is strongly acknowledged by them,
it is in the interests of ACP and LDC developing countries to
be able to supply their raw sugar to as wide a range of customers
as possible, as this is likely to improve their contract conditions
and prices. It is against their interests to be restricted to
only one outlet, eg full-time refiners, as proposed by the Commission
in Article 29 (2). (See the attached letter from the Chairman
of the Fiji Sugar Marketing Company—Annex 6). [18]
10.4 The provision to restrict the ability
to refine cane raws to "full time refiners" for 2006-07,
2007-08, 2008-09 and for the first three months of each of the
following marketing years represents a major concession to current
EU cane refiners. Taken with the rest of the reform package, this
concession risks upsetting the cane/beet balance in the UK and
the EU. Any further concession, in the form of some element of
refining aid or other assistance for current cane refiners, would
severely upset the cane/beet balance and should be strongly resisted.
Further assistance should be unnecessary if, as DEFRA's Regulatory
Impact Assessment indicates (p 29), a cane refiner is "able
to compete in a fully liberalised market". In such a case
the refining margin afforded by the Commission's proposals as
they stand would be more than adequate to give returns competitive
with those in the beet processing sector.
10.5 British Sugar believes that there may
be a case for including refiners at the end of the Re-structuring
Scheme. While an exception would have to be made for quota cancellation
(access for ACP quotas is an on-going commitment of the EU and
could not be cancelled), offering re-structuring aid to cane refiners
wishing to exit in the event that reform produced conditions in
which they could not compete, would be equitable. ACP commitments
would continue to be honoured across the EU through beet/cane
co-refining.
British Sugar
September 2005
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