Memorandum submitted by Department for
Environment, Food and Rural Affairs
INTRODUCTION
1. On 22 June 2005 the European Commission
published formal legislative proposals for reform of the EU sugar
regime along with an updated impact assessment and a short guide
to the sugar sector. These represent the culmination of the preparatory
process begun by the European Commission in September 2003 with
the publication of an Options Paper and accompanying Extended
Impact Assessment, followed by a further Communication in July
2004 setting out the Commission's preferred approach. Prior to
the publication of these proposals there had already been an extensive
period of political and wider public debate of the issues, in
the Agriculture and Fisheries Council, in national and European
Parliaments, with Member States and with a wide range of stakeholder
interests.
2. The Commission's proposals are designed
to take account of views expressed and to reflect the need for
the EU to comply with the findings of the World Trade Organisation
(WTO) Appellate Body following the earlier Panel case brought
against aspects of the current regime by Brazil, Australia and
Thailand. A full analysis of the proposals and other options for
reform is set out in detail in the Regulatory Impact Assessment
(RIA) submitted to Parliament by Defra on 7 July 2005.
DISCUSSION TO
DATE AND
FUTURE TIMING
3. The Commission's proposals were presented
to the European Parliament on 22 June 2005 and to the Agriculture
Council on 18 July 2005.
4. The Commission has said that it would
like the Council to reach agreement by November in order to provide
a sustainable framework for the industry itself (particularly
in anticipation of the expiry of the present regime in June 2006),
to help the EU comply with the WTO Appellate Body ruling and to
send a strong positive signal ahead of the Doha Round Ministerial
meeting in Hong Kong in December. As Presidency, the United Kingdom
is organising a programme of work to meet this aim. A series of
technical discussions have already taken place at Council Working
Group level and further examination at the Special Committee for
Agriculture will prepare for continued Ministerial discussion
at succeeding Council meetings in September, October and November.
5. At the July Council there was broad support
for the concept of a voluntary restructuring scheme instead of
compulsory production quota cuts, and for a 10-year time horizon,
but some Member States argued that the proposed price cuts went
too far and too fast, that compensation should be higher, and
that the Everything But Arms import arrangements should be reviewed.
It is too early to say how these positions may evolve as negotiations
continue or to speculate about the prospects for agreement within
the present timetable.
GOVERNMENT APPROACH
6. The Government believes the proposals
form a good basis for negotiation consistent with its support
for a liberalising, market-based reform which would bring sugar
into line with other already reformed CAP sectors. On 30 June
Defra launched a full 12 week public consultation exercise (closing
date 23 September) and published a comprehensive RIA which looks
in detail at the effects of reform in the UK, taking account of
a wide range of evidence and analysis. The Government will need
to consider responses to this consultation and developments in
the EU negotiating process before reaching conclusions on where
the balance of the UK interest lies.
ISSUES RAISED
BY THE
COMMITTEE
7. The Committee has asked for evidence
on a number of specific points relating to the likely impact of
the Commission's proposals on UK agriculture in general as well
as on different parts of the sugar sector and on consumers. The
Government's assessment of these issues is set out in full in
its RIA. The analysis in the RIA brings out some key conclusions
which are repeated here:
Extent and timescale of the proposed price reductions
8. In brief, the Commission has proposed
a 39% price cut over two years starting in 2006-07, with compensation
paid to farmers at 60% of the price cut incorporated into the
Single Farm Payment and linked to environmental and land management
standards. A four-year voluntary restructuring scheme would be
established for EU sugar, isoglucose and insulin producers to
encourage factory closure and the renunciation of quota as well
as to cope with the social and environmental impact of the restructuring
process. This scheme will be financed by a degressive levy on
holders of quota, lasting three years, which will have the effect
of delaying the transmission of the proposed reduction in prices
to the consumer.
9. In presenting its proposals to the Council
the Commission said that an early and deep price cut was essential
to restore the competitiveness and market-orientation of the European
Union sugar sector, guaranteeing it a viable long-term future
and strengthening the EU's negotiating position in the current
round of world trade talks. In the absence of such action the
industry would face a "slow and painful death" without
the prospect of public funding to help it adjust. Changes as proposed
would also enable the EU to respond to the findings of the WTO
Panel, as upheld by the WTO Appellate Body, and comply with its
international commitments.
Extent of transmission of price cut to consumers
10. The Commission has said that the reform
will result in lower prices at farm and processor level which
would normally feed through to lower ex-factory prices. The impact
on the prices of food and drinks containing sugar is more complex
as sugar tends to be one of many ingredients, and not necessarily
the major one, in many foods.
Implications for UK Agriculture and alternative
land uses
11. Detailed information on the implications
for UK agriculture following reform of the EU sugar sector can
be found in paragraphs 5.2.5 and 5.2.13 of the RIA. UK beet sugar
production is likely to fall, although it is unclear at this stage
how far. The net impact on individual growers who cease beet production
after reform will depend upon a range of factors, including costs
of beet growing (which would be saved) and the additional cost
and price of growing alternative crops (mainly winter cereals)
and the detailed arrangements for compensation. The Commission's
impact assessment states: "In the UK the future of sugar
beet growing will depend upon the capacity for gains in production
efficiency by improving yields and reducing costs".
Compensation for EU producers
12. The Commission has proposed decoupled
compensation to be paid to farmers at 60% of the price cut incorporated
in to the Single Farm Payment and linked to environmental and
land management standards. The Commission has said that the average
income loss will be fully compensated because, on top of compensatory
payments at 60%, the current production levy will disappear. Our
own analysis is that the inefficiency of price support and the
strong possibility that beet prices may not fall all the way to
the proposed
25/t suggests that the proposed direct payment to
beet growers (based on 60% of the notional price fall) ought to
fully compensate for the change in support price.
Changes to quota arrangements
13. In contrast to the approach in its July
2004 Communication the Commission's legislative proposals would
not necessarily involve mandatory quota cuts. The extent to which
any such reductions may be required will depend on the industry's
response to the voluntary restructuring scheme, under which processors
will receive an outgoers payment in return for the surrender of
production rights. If this does not result in a satisfactory balance
of supply and demand under the new price structure, the Commission
would have the power to impose a linear cut to all remaining quota.
14. The existing quota system will, however,
be modified by the elimination of the present "C" quota
arrangements and the merger of "A" and "B"
quotas in a single national supply entitlement for each sugar
producing Member State. This reflects the WTO Appellate Body ruling
which confirmed the earlier Panel finding that the present arrangements
effectively cross-subsidise sugar for export. In future sugar
for domestic EU consumption would qualify for in quota price support,
with any excess either having to be processed for non-food purposes
(eg in the chemical, pharmaceutical or bio-fuel sectors) or subject
to a supplementary levy to avoid market distortion. The future
market balance will also be regulated by a range of complementary
measures such as carry-over and private storage in order to prevent
the build up of any surpluses in the absence of intervention purchasing,
which will be abolished.
15. The Member States currently producing
"C" Sugar will be able to purchase a limited amount
of additional quota to add to their merged "A" and "B"
totals on the basis that they were able to produce efficiently
at lower levels of support in the existing system and should be
given the opportunity to reflect this in their continuing supply
entitlement.
16. The proposed reductions in the price
of sugar will also impact on the EU isoglucose sector. Therefore
in order to allow the isoglucose sector to benefit from economies
of scale and to be economically viable in the long term, the Commission
has proposed that the isoglucose quota be increased by 300,000
tonnes for the existing producer companies, phased-in over three
years with an increase of 100,000 tonnes each year.
Impact and long-term consequences of proposed
reform on UK beet processor and cane refiner
17. Paragraphs 5.2.14 and 5.2.15 of the
RIA set out in detail the Government's analysis of the potential
impact of the Commission's proposals on the UK beet processor
and cane refiner. With lower beet supplies, smaller margins and
restructuring funds available, beet processors across the EU will
have an incentive to close more factories and rationalise production
with a view to increasing productivity on their remaining business.
The UK has Europe's most efficient beet processor (as shown by
independent studies for the Commission and Defra) but whatever
the outcome of reform, it is clear that decisions on sugar production
levels in the UK will be very much a commercial matter for both
growers and processors. EU cane refiners, including in the UK,
are likely to be adversely impacted by this reform with lower
white sugar prices.
Department for Environment, Food and Rural Affairs
October 2005
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