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
| 
