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


Examination of Witness (Questions 240-259)

DR MARK CARR, MR CHRIS CARTER, MS CLARE WENNER AND MR SIMON HARRIS

24 OCTOBER 2005

  Q240  Lynne Jones: The Polish farmers are less efficient than the UK farmers. Presumably because the processors in Poland are less efficient then you have some competitive advantage over them but you might still have difficulties getting supplies. Why are you not concentrating on the UK where our farmers are more efficient? What do you think about what the NFU are saying about the relationship between the processors and farmers as being skewed in your favour notwithstanding there is some element of good relations between the two of you? What should be done? Should Defra be involved in the negotiations on a new Inter-Professional Agreement?

  Dr Carr: There are a number of questions in that. Firstly, on Poland we have worked at the efficiency of that operation for a number of years and we continue to do so. The premise there is that we can be a highly efficient operator in processing terms able to supply the domestic Polish market, which is largely what we are focused on. There are specific challenges to the grower base in Poland in exactly the same way as there are in the UK and, you are right, their efficiency is lower so they come from a lower base and we will have to work with them on that. In terms of the UK, as I have stated previously, we have had a very good working relationship with the NFU, we have successive Inter-Professional Agreements which we have steadfastly stood by and I think jointly seen the opportunities arising from that and we hope that can continue. We would like to do that clearly directly with the NFU as we have in the past.

  Q241  Lynne Jones: Do you accept that there is an imbalance? The NFU say that your profit per tonne is more than the minimum price proposed by the Commission. I know your prices are going to come down but you are making huge profits. Does the Department have any role in trying to redress that balance or do you not accept that it exists?

  Mr Carter: The Government already has a role in the contract. It is the custodian of the contract between the UK growers and the processor and there is a defined arbitration clause in that where if either party has a grievance it can place that grievance before Defra on behalf of the Government and Defra has to resolve the grievance.

  Q242  Sir Peter Soulsby: You have told us about your operations in Poland and you have told us about the reductions that you have already made in the number of UK factories you have got, and I think a little earlier you told us that you would not be entering into the restructuring scheme which means that subsequent factory closures will not attract the EU restructuring payment. Can we return to the question that the Chairman asked you earlier on: Is it likely that you will close one or more of your existing UK factories?

  Dr Carr: What you have to understand is that the challenges laid down in this proposal drive us to be even more efficient than we have been in the past and that efficiency can be achieved through agricultural improvements, through processing efficiencies, through energy reduction schemes and through your operating configuration. On that basis we would not rule out in the future reducing the number of factories that operate in any region that we operate in.

  Q243  Sir Peter Soulsby: That did not quite answer the question but I think we are getting nearer to it. It does sound to me as if you are saying that it is quite likely that you will have to reduce the number of factories in the UK.

  Dr Carr: I think it still depends on the final outcome of reform but we do not rule it out. By that I mean that the competitive challenge is there for us and we have got to do things better in the future, as we have done in the past. There is still the option of purchasing quota if we so wish, a point that was raised earlier. When we have put all that together we will make some decisions, but no decisions have been made at this time.

  Q244  Sir Peter Soulsby: I understand that no decisions have been taken, I understand what you are saying, but it does sound to me as if there is a strong likelihood that you will have to reduce the number of factories in the UK. Is that right?

  Dr Carr: We will have to look at the configuration we choose to operate as part of a total plan to continue to drive the efficiency forward.

  Sir Peter Soulsby: I think that probably means yes.

  Q245  Chairman: Just to be clear, if it comes out as currently proposed can you have the existing number of plants in operation? When you say you will have to look at it, presumably you have done some scenario work already on it.

  Dr Carr: We have got many scenarios and many outcomes because you will appreciate that there are still many things up for grabs in terms of this final position. As I say, once we have seen the outcome of that we will make that decision. We have not made that decision yet.

  Q246  Chairman: Heroically if there was an agreement by the end of this year, when do you show your hand? When do you think your calculations will be completed?

  Dr Carr: We will need to move very quickly on the basis that these reforms are particularly radical and, therefore, particularly challenging for us.

  Q247  Mr Vara: British Sugar has said: "an inevitable consequence of reform will be greater concentration in the EU sugar industry".[20] This Committee is mindful, as you are no doubt aware, that in 1988 British Sugar was fined a substantial amount of money by the European Commission for fixing prices and rigging the market for granulated white sugar in the latter part of the 1980s. Last week we had Tate & Lyle before us and they assured us that price fixing would not happen again. Can we have the same assurance from you bearing in mind that you are mindful that the number of producers will be concentrated. Can we have an assurance that you will do everything possible to ensure that there is no more price rigging?

  Dr Carr: I think you have to think about what concentration means.

  Q248  Mr Vara: A yes or no will do.

  Dr Carr: If I may, for one moment, concentration essentially means that we will have many bigger producers encircling the UK. There will be huge surpluses in France—the French surplus will be as much as the UK's domestic consumption alone—as there will be surpluses in the Netherlands, Belgium and Germany as well. On that basis we expect the level of competition in the UK market to increase because of those surpluses needing to be placed in Europe and, therefore, I think the competitive stakes are increased, not reduced in any way, shape or form. In terms of price setting arrangements of the past, I was not around at that time, which is nice to be able to say, but of course we would fully support any investigation that was deemed necessary.

  Q249  Mr Vara: There would be an element of transparency to ensure that there would be no collusion with others on price rigging or whatever. Do you have any such procedures in place at the moment?

  Dr Carr: Absolutely. We have a full compliance programme within the business, as you would expect, and that is routinely audited both by internal staff and external staff. We have a full compliance programme.

  Q250  Chairman: Just help me to understand something. You just said a second ago that there are going to be surpluses in the new regime, and you quoted the French specifically, yet earlier you said that the price reduction was pretty well at the severe end of the scale. Help me to understand how, if we have got a severe price reduction, we are still going to end up with surpluses in certain producer countries when I thought the whole reform of the regime was to try to bring some kind of balance into the marketplace? Why would this rebalancing not occur?

  Dr Carr: I think you have to understand that there is a structural surplus today in many of these states and the restructuring scheme, which is going to take all the quota volume out, will be based on those volunteering to exit and, given the efficiency of the agricultural base and to a lesser extent the efficiency of the processing base in France, really I would not expect any of their quotas to be volunteered for elimination.

  Q251  Chairman: The message I am getting is you expect to see a European sugar market where the real market price of sugar in Europe could be below the proposed reference price levels.

  Dr Carr: I am not sure what draws you to that conclusion.

  Q252  Chairman: If you have got surpluses in markets, and you were talking about us being encircled by lots of efficient producers from elsewhere, the message I am getting from that is somehow it will drive down the market price for sugar in the United Kingdom. Last week we were told that the UK market price was 10% above the Continent simply because of the question of the shipping costs of sugar. The message I am getting is that maybe there will be so much sugar around that prices in total will be driven down to very low levels.

  Dr Carr: No, you misunderstand my point. What I was saying was the restructuring scheme will take eight million tonnes of European beet sugar production out, six million tonnes gross of quota, but that will not be universally spread across every Member State, it will come from those Member States that are particularly inefficient and elect to leave. As there will be big surpluses, and it happens by virtue of efficiency those sit around the UK, certainly Western Europe in the future, there will be substantial deficits in some of the northern Mediterranean states. The overall position will be a net surplus in Europe of beet sugar production of some four million tonnes.[21]



  Q253  Lynne Jones: You said that there will not be any reduction in efficient countries like the UK and France, yet the NFU were telling us they cannot produce at the €25 price and you seem to be accepting that in terms of your concern about getting adequate supplies. How do you reconcile those? Can I also raise a point that Tate & Lyle raised last week about their margins being cut far lower than beet processing margins and whether you would care to comment on that. If what they are saying is correct, why are you interested in getting into cane which seems to contradict what they were saying?

  Mr Carter: Taking the quota and European production cut question first: the point here is that it is the European Commission's intention, as Mark has said, to reduce overall production by about eight million tonnes, quota production net by five million tonnes. That is their intention to bring the European market supply-demand into balance for the first time ever and to allow room for imports from developing countries. That is their aim. The whole thesis of the efficiency driving part of the argument is that would not be across the board in every single Member State because some Member States have very efficient industries and some have relatively high cost industries. The idea of the current set of proposals and the restructuring scheme is to target those reductions by voluntary mechanism to those countries which are highest cost and, therefore, will find it hardest.

  Q254  Lynne Jones: I understand that.

  Mr Carter: Therefore, some countries will rationalise heavily or disappear altogether. Those countries which are lowest cost will either reduce only a little bit or more or less stay. We are in that latter category, we believe. It just so happens for the same reason that the UK is geographically in one of the best areas of Europe to produce, most of our European competitor and neighbouring countries are in much the same position as we are, so it is very likely that the mid north-west of Europe, that aggregation of countries, will survive. That is the reason why the majority of the ones surrounding us—France, Belgium, Germany, Holland—will be surplus producers post-reform.

  Q255  Lynne Jones: I understand all that. My question was you were doubting that the UK could supply you with the beet based on the prices that the EU is going to pay them and now you are saying they are efficient and, therefore, they will be able to cope.

  Mr Carter: This goes back to the Chairman's question right at the beginning. That is the Commission's proposal of €25 a tonne of beet and €385 as the support price for a tonne of sugar. We have already said we think those are a little too low and they should be lifted slightly to achieve the Commission's reform objectives and, secondly, to secure adequate beet supplies in the very same countries that you are referring to.

  Q256  Chairman: If that four million tonnes of surplus by your calculation is going to come out of this reform programme within Europe we do not seem to be achieving the objectives.

  Mr Carter: I am sorry, I do not understand why not.

  Q257  Chairman: Dr Carr said there is going to be a surplus of four million tonnes of beet production—

  Dr Carr: There is today. There is today a surplus in production over European consumption of four million tonnes. There will be a deficit of four million tonnes production to consumption in the future to allow for LDC access and continued ACP access. That will allow the market to come into balance with consumption at the end of this reform.

  Q258  Lynne Jones: Your assumption must be that if you say that the efficient producers like France, the UK and the Netherlands will not reduce their output, you anticipate that the price will eventually be higher than the €25.

  Mr Carter: Unless the price lifts somewhat above the €25 production in Europe will be cut so severely that it will be a massive deficit.

  Q259  Lynne Jones: What about the Tate & Lyle point about the margins?

  Mr Carter: We have done detailed analysis on this issue and this demonstrates that if you compare efficient refiners with efficient processors under the terms that the European Commission has offered then the result is broadly comparable, broadly similar. We have done a paper on this which we can let you have if you are interested. Indeed, at the high cost end, if you compare high cost refiners with high cost processors, if anything, high cost processors are harder hit.

  Chairman: I am going to draw our discussions to a conclusion.

  Lynne Jones: Could we have that information?

  Chairman: I am going to ask not only for that information, because I would hate our witnesses to go away saying "They do not really understand this business about the surplus, they have not got it". If we have not got it we will put our hands up and apologise. I know Mr Harris has a very clear mind in understanding the way the sugar market operates because he has been involved in this for many years. I am sure between all of you, Mr Harris, you could write us a little clear explanation to make certain that we really understand whether or not there is a big pile of four million tonnes sitting there after the reforms or if we have missed some structural change you can shed a little light into what still is a complex regime as far as we are concerned. May I thank you for your contributions, both oral and written, and we look forward to your further evidence. Thank you very much for coming before us.





20   Ev 60 Back

21   Note by witness: "net surplus" should read "net deficit". (See Q257 for clarification on this, and see also British Sugar's supplementary memorandum at Ev 73) Back


 
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