Select Committee on Environment, Food and Rural Affairs Written Evidence


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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