Memorandum submitted by Professor Sir
John Marsh
THE EXTENT
OF THE
REFORM
1. The Commission's proposal, to reform
the sugar regime (COM (2005) 263 final), represents the most significant
change in the CAP regime for sugar since its inception in the
1960s. It is a significant step forward in lowering internal EU
prices from around three times the level in the world market to
twice the level. This will limit production, hopefully to a point
at which the Community exports no more than is permitted under
the rules of WTO, a reduction of some four million tonnes in total
exports. Lower internal prices imply less revenue for those sugar
exporters who benefit from the Sugar Protocol and the Commission
has initiated Action Plans that will help the countries affected
to adjust.
2. Although this is a substantial reform
the sugar regime continues to distort resource use within the
Community. Within the EU sugar beet is still grown within a market
protected from outside competition by a substantial tariff and
from internal competition by quotas and limits placed on the production
of isoglucose. It is expected that lower prices and a restructuring
of sugar beet processing will result in a reduction or even the
end of production in the highest cost areas of the Union. There
will also be downward pressure on internal prices as a result
of the Everything But Arms (EBA) commitment, which, from 2009,
will allow access to the EU market for sugar from the Least Developed
Countries.
3. Defra estimates that the reform will
result in a gain of
2,400 million in the economic welfare of the EU of
which
340 million will occur in the UK. Although such calculations
must incorporate assumptions about uncertain economic variables,
for example the level of world prices and exchange rates, the
picture that emerges is clear. The reform will have a strongly
positive economic effect. However, the same analysis shows that
even after the reform there will be a continuing loss of welfare
of some
4,400 million for the EU as a whole. [2]
4. The Commission has made important progress
in bringing the policy into line with reforms in other agricultural
sectors since June 2003. These seek to provide support for people
and rural public goods but not for products. The provision of
a decoupled payment covering 60% of the price cut and paid on
the same basis as the existing Single Farm Payment fits into this
pattern. However, the continued regulation of volume by quota
means that production of sugar beet will still be determined by
political convenience rather than by market forces.
5. The Commission's analysis of the impact
of reform on farmers[3]
gives the impression that at the projected post reform price much
of the production currently undertaken within the EU would be
unprofitable. It foresees a price of
25 per tonne. At this level only producers in France,
Germany, Denmark and the Benelux countries would break even. For
the UK although the break-even price at
40/t is well above the point forecast the Commission
believes that adjustments could allow for some continued production.
There are reasons to believe that prices to
farmers may not fall as low as
25 per tonne[4].
The Commission bases its analysis on the assumption that the compensatory
payment is fully decoupled, so sugar beet becomes unattractive
as soon as its profit margin falls below that of the next most
profitable enterprise. If the payment remains tied, in whole or
in part to continued sugar beet production, farmers may still
find it sensible to produce the crop, even though the return from
the market is less than profitable. Whilst this may argue in favour
of more farmers remaining in sugar than the Commission's calculations
suggest it is clear that the reform as proposed would result in
a radical change in sugar beet production within the Community.
6. Given the scale of distortion entrenched
within the existing sugar regime it is understandable that the
Commission should pursue a gradual approach to reform. This may
make political sense but it is economic nonsense. The "reformed"
policy ties the Union to a continued waste of resources, it will
still trap resources in lower value uses in sugar production within
the EU and the Sugar Protocol countries and it will leave the
EU budget with a commitment to pay farmers a substantial annual
amount because in the past (in 2000-02) they grew sugar beet.
7. Sugar beet has been grown in Europe to
ensure security of supply. There is no reason to believe this
still provides a justification for support. World sugar markets
are abundantly supplied at current prices. Sugar can be produced
in a diversity of locations. There are a variety of alternative
sweeteners that can substitute for sugar. Sugar can be stored
so that markets can discount uncertainties of weather or transport
that might temporarily reduce supplies.
8. Because sugar has been a protected crop
a substantial amount of resources, human and capital has been
drawn into its production. Any change in policy will have social
repercussions as some jobs disappear and the value of capital
embodied in specialist equipment declines. The scale of this should
not be exaggerated. Sugar beet is grown by 230,000 farmers in
the EU 15 (3% of all farmers) and of these only 8,000 are specialist
growers. It is a crop grown mainly by larger farmers, who have
more opportunities to diversify their activities. It accounts
for a small part of the total agricultural area of the EU (1.4%)
and, at the peak of its activity during the processing campaign,
engages a small some 31,862 staff in sugar factories[5].
The social repercussions of changing the policy are not large
nor do they provide a justification for its continuation but they
may form a rational basis for compensation.
9. The Commission recognises that reforming
the sugar regime will cause problems for those ACP countries that
currently benefit from high prices for the quantity of sugar they
are allowed to sell to the EU. This obstacle to reform arises
as a result of distortions within the economies of these countries
induced by the existing regime. Resources in these countries are
located in non-competitive uses because this has been necessary
to access benefits from the relationship with the EU. Much greater
benefit would accrue to these countries from an equivalent income
transfer provided as aid and used to support their overall economic
development. The Commission's Action Plans point in this direction
but the "reformed" sugar regime will still require ACP
countries to keep more resources in sugar production than could
be justified in an open market. It should be changed to encourage
resource uses that will make the maximum contribution to the economic
welfare of these countries.
10. The case for taking reform further is
compelling. Complete liberalisation would provide a saving of
some
4.4 billion per annum for consumers and taxpayers.
It would encourage economic growth within the Union, shifting
resources from less to more productive uses. It would facilitate
world trade offering new opportunities for economic growth to
some tropical countries. It would release EU budget funds to address
issues of greater relevance to the growth and coherence of the
Community.
11. Whilst the Commission's gradual approach
may be acceptable in political terms, it should be seen as a starting
point rather than the achievement of reform. As a first step quota
restrictions should be withdrawn on timescale not exceeding five
years and the tariff level brought to a point at which it is no
higher than the level of protection accorded to other products.
IMPLICATIONS FOR
UK AGRICULTURE
12. In the UK sugar beet accounts for about
1.5% of agricultural land and for some 2% of gross agricultural
output. Production is concentrated in the east of England, with
40% located in Norfolk. At a national level adjustments in sugar
beet production are of relatively small economic or environmental
significance although their regional impact may merit special
consideration.
13. Under the proposed reform less sugar
will be produced in the UK. At the price level,
25/t, anticipated by the Commission very few UK farms
could produce sugar beet profitably[6].
There are grounds for thinking that this may be too pessimistic.
The UK will remain a deficit region for sugar within the EU and
so may experience prices above those of surplus regions. Sugar
beet factories, which in the UK are relatively efficient, may
accept lower margins in order to offer higher prices to growers
to ensure supplies. Under the pressure of competition improvements
on the farm and lower prices for some inputs may push production
costs on the farm downwards. The closure of higher cost sugar
factories and growers will reduce the average national cost level
enabling a smaller but still viable sugar sector to survive. Defra's
estimate is that production may fall by between 20% and 50%.
14. The social impact of the reform concerns
mainly employees of the sugar beet processors, less than 1,000
people[7].
Farmers' interests are protected by the compensatory payments.
The impact on the much larger group of people for which there
is some indirect or induced employment, around 8,000, will be
diluted by the opportunities for these businesses to use their
resources in other activities. Hauliers for example will find
a decline in part of their business but overall, provided the
economy as a whole is prosperous, this is likely to be taken up
by new business. In regions where processing factories close there
may be a need to assist restructuring but this needs to be seen
as adjustment within the regional economy not an issue for agricultural
policy.
15. The scale of sugar beet farming means
that changes in the level of output will only have a noticeable
impact on land use in selected areas. There land is likely to
be absorbed in other arable enterprises, in most cases cereal
production. This may lead to some loss of variety in the appearance
of the countryside and a decline in wildlife diversity since sugar
beet as a broad leaf spring crop allows for habitat niches that
cereals do not. If this is regarded as a problem the solution
lies not so much in a crop-by-crop approach but in an overall
strategy for shaping the agricultural environment funded on its
own merits, not defined by the levels of support once given to
crop production.
COMPENSATION FOR
EU PRODUCERS
16. The proposal to compensate growers for the
lower price under the reformed policy is described as "partial".
In practice it might be described as "over the top".
For many farmers costs of production will be greater than 76%
of the initial price. For them a 60% rate of compensation for
a 40% price cut will result in higher incomes than at present.
[8]
17. There appear to be two reasons why compensation
might be paid. The first is that the incomes of the recipients
are too low and society should grant them an annual payment to
top it up. There is no evidence to justify that conclusion. The
second is that as a result of past policy farmers have been induced
into a pattern of investment that has now become unprofitable
as a result of the changed regime. This assumes that farmers unlike
other businessmen cannot be expected to take policy risk considerations
into account in planning their investment. If the argument is
accepted then complete compensation would place the farmer in
a position to make the set of decisions that would have been open
to him had he not been misled by policy. This would provide, at
the most, a basis for a defined payment not for a continuing annual
pension based on an area of sugar beet grown in the past.
18. The most elegant and budget efficient
means of doing this would be by a tradable bond. This would establish
the amount of compensation due and pay it as an annual sum for
a defined period to current owner of the bond. By making the bond
tradable the farmer is placed in a position at which he can determine
his own investment strategy, whether to invest in the farm or
some other enterprise or simply to hold the bond as a source of
income. The effect for the EU budget is a continued annual payment
for an agreed period of years. Because the payment is wholly decoupled
the impact on resource allocation and economic welfare is strongly
positive.
CHANGES TO
QUOTA ARRANGEMENTS
19. There remains a profound illogicality
in the reform proposals. Quotas exist to prevent competition,
to allocate the right to produce or market to favoured recipients
and to ensure that they receive higher prices than would exist
in a free market. The philosophy of the 2003 reforms, to which
this reform is intended to shift the sugar regime, is that production
must be determined by markets and the public good goals of agricultural
policy must be secured by other measures. In that situation prices
regulate output and quota restrictions are redundant.
20. The logical outcome of a reform that
embodied these principles would be the end of quotas and the opening
up of the market to all who believe they can compete. This appears
to have been regarded as politically unacceptable. There remains
a fear that the level of production may still exceed the volume
that WTO allows the Community to sell at subsidised prices on
the world market and an unwillingness to accept the lower prices
that might result. As a result quotas are retained.
21. The proposals do make a welcome simplification
of the quota regime by the merging of A, B and C quota allowance.
There is, too, an increase in the volume of quota and this will
be allocated to growers for a once and for all payment. This should
lead to some improvement in overall efficiency within the EU sugar
sector, since the lowest cost farmers will be best placed to bid
for additional quota.
22. The system remains profoundly unsatisfactory.
It discriminates against the producers of isoglucose, it constrains
consumer choice and it underpins a price level unjustified by
underlying market conditions. The solution is to abandon quota
and allow competitive forces to determine the amount and location
of sugar production within the EU.
IMPACT ON
UK-BASED SUGAR
BEET PROCESSORS
AND CANE
REFINERS AND
THE LONG-TERM
CONSEQUENCES FOR
THEIR INDUSTRIES
23. Sugar beet processors will face a reduction
in throughput. The extent of this will depend on how low prices
fall and what incentives exist for farmers to shift to other crops.
Processors may find a new market should government choose to support
the use of sugar as a source of biofuel. However, such a decision
will have to take into account competition from other sources
of biofuels.
24. The Commission's proposal includes a
suggestion that beet processors might spread their costs by refining
cane sugar. Such a development is likely to be taken up only by
factories close to the point of entry of raw sugar. Even there
it may be unattractive. Cane sugar refining appears to enjoy substantial
economies of scale. Within the UK there already exists excess
capacity to process cane sugar. Beet processors entering this
market would need to justify additional investment in this context.
25. Given this economic background the proposals
for restructuring grants contained within the Commission's proposals
may well encourage British Sugar, the only beet processing business
in the UK, to close one or more of its factories.
26. Sugar refiners seem to be particularly
penalised. They are to lose their refining margin. This must reduce
their profitability. Access to raw material is still impeded by
the EU tariff regime. Although from 2009 there may be unrestricted
supplies from EBA countries, this is not necessarily the lowest
cost sugar available on world markets. If tariff levels on white
sugar fall they will be exposed to greater competition from imports.
As a large, efficient technologically sophisticated business,
the UK sugar refining business may be able to exploit improved
methods and market segmentation to retain market share, but the
reformed policy itself makes its position more not less difficult.
In contrast a full reform of the policy would open up opportunities
for refining cane sugar within the EU and provide a basis for
the expansion of an international business.
Professor Sir John Marsh
August 2005
30 per tonne.
2 Partial Regulatory Impact Assessment of options
for Reform of the EU Sugar Defra June 2005. Back
3
Commission Of The European Communities Reforming the European
Union's sugar policy Update of impact assessment [SEC (2003) 1022]
ÑCOM (2005) 263 finalÇ June 2005. Back
4
The Defra analysis cited above suggests a price to farmers might
be nearer Back
5
The European Sugar Sector-Its importance and future EC Commission
June 2005. Back
6
Economic, social and environmental consequences of EU sugar reform-University
of Cambridge and the Royal Agricultural College study for Defra
September 2004. Back
7
Defra op cit. Back
8
See Defra op cit. Back
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