Memorandum submitted by Joan Noble
EXECUTIVE SUMMARY
The reform of the EU sugar regime is long overdue.
The current system is highly complicated, restricts competition,
encourages over production, is over protectionist and inflates
consumer sugar prices. The rules are now under pressure from the
EU's international commitments and a move to a more liberal regime
is required. Any change must be agreed as soon as possible to
allow the EU's sugar industries time to plan for the future and,
where necessary, diversify out of sugar production. Reforms have
to be agreed which will reduce support price levels.
While a system of full liberalisation and abolition
of regulation would be welcome in the future, there has to be
a phased change to allow the most efficient producers in the EU
to adapt to new circumstances. Sugar beet remains an important
crop for the British farmer and it must be possible to allow production
of sugar in the UK and at the same time continue to provide preferential
arrangements to the UK's traditional suppliers of raw cane sugar.
While much of the proposed change is to be welcomed
there are some details which could be improved, particularly to
avoid carrying forward imbalances from the current system and
provide a greater degree of flexibility despite the rigid quota
requirements. A more defined transition to a liberal market orientated
system would also be desirable.
GENERAL COMMENTS
1. This long awaited reform is essential.
The current system which has largely been in place with little
reform since 1968 has little relevance in today's political and
economic climate. The European Union has moved for other crop
products from a system of price to direct farm income support
and these proposals to reform the sugar regime (albeit only partially)
continue that trend. The current system is no longer sustainable
particularly when the EU's international commitments are taken
into account.
PRICES
2. The support price reduction is essential
although this price is still above world market levels at this
juncture. This may not always be the case because of the volatility
of world market prices. Initially consumers will not benefit from
the price cuts because of the application of the restructuring
scheme. It is unlikely that consumers will be able to source sugar
below the reference price even when world market prices are very
low as the reference price will be the trigger point for private
storage and other support arrangements which will replace intervention.
3. The proposals for the minimum sugar beet
price do provide some flexibility in that growers and processors
can negotiate up to 10% lower prices although at least 90% of
the minimum beet price will be paid on all sugar delivered, even
that produced for out of quota sales (for industrial and other
use). While the commission plans a less rigid approach to price
for farmers, there is still considerable rigidity in the proposed
floor to the market.
4. The price reporting mechanism is unclear.
Could this lead to competitive issues amongst sugar companies
following the restructuring envisaged?
5. In the proposed amendment to regulation
1782/2003 on direct payment to farmers, to compensate for the
price reductions, there is no provision to allow a higher level
of compensation to farmers in countries who have in the past been
paid higher sugar beet prices than the common level.
CHANGE IN
MARKETING YEAR
AND DURATION
OF THE
REGIME
6. The change in the start of the marketing
year from 1 July to 1 October is a good idea as this merges the
marketing year with the balance sheet year and stocks are at their
lowest by the end of September. However, some further clarification
is required as to how imports will be handled. Will additional
amounts be established for the three months?
7. The planned duration of the regime until
2014-15 is welcomed for the stability it produces but it must
be questionable whether there will need to be further price changes
following the conclusion to the Doha development agenda. There
is currently uncertainty about the future particularly as regards
import tariffs and the phasing out of export refunds.
PRODUCTION QUOTAS
8. The continuation of rigid production
quotas does not allow for a more liberal market and is out of
line with the approach taken for other crop products produced
within the EU. While there needs to be some control on production
while the restructuring process is underway, there are problems
because this continues some of the inequalities inherent in the
old regime. The basis of the reform is to help the most efficient
producers to continue sugar production while helping the least
efficient out of the market with financial incentives.
9. There are two possible ways the most
efficient producers can increase their market share under the
proposals. The first is through buying a reallocation of C sugar
production where the farmers and companies who produced the largest
quantities of C sugar in the 2004-05 marketing year gain the most.
Farmers and companies whose past production of C sugar was seen
as (what was originally envisaged) a "safety net" produced
less C sugar and will not benefit to the same extent from this
reallocation. Perhaps they too should be able to buy additional
quota on the same terms as those entitled under the proposals.
Some Member States—it could be argued—are being rewarded
for deliberate over production in the past.
10. The second allows for up to 10% transferability
of quota within a member state. This system can only benefit those
countries where there has not already been significant restructuring
and consolidation of the industry. Some countries where there
are efficient producers (like the UK) will be unable to benefit
from this reallocation and therefore unable to grow their market
share as they are already sole producers in that Member State.
In these circumstances there should be the possibility of cross
border transfers (subject to some control) to allow greater flexibility
of the redistribution of production quota in the longer term.
11. The proposed introduction of the principle
of a levy on sugar produced outside the quota, which is not carried
forward or used in the industrial sector, is a sensible way to
control over production. Such a scheme already exists in the dairy
sector and the so called "super levy" has largely been
effective in controlling over production outside the quota. It
is curious, therefore, that the commission proposes this at the
same time as proposing to "reward" past over producers
with allowing them to increase their quota.
12. The simplification of the quota system
by merging the A quota with the B quota should be welcomed as
a principle. However, this has some hidden difficulties. To meet
WTO commitments on exports, the commission has to adjust quotas
on an annual basis. This is achieved through the use of coefficients
which were established by the council of ministers. The impact
of the coefficients was to weight the quota changes so that those
producing greater quantities of B sugar (which originally was
envisaged as quota for export with the largest B quotas being
held by countries producing surpluses) had a larger share of the
production quota reductions. Although not spelt out in the proposal,
it must be assumed that future quota changes, if required, to
meet international commitments would not reflect the historical
built in surplus and would have equal impact on all member states
whether they were in surplus or deficit.
13. On a more positive note, from 2007-08
the announcement of quota adjustments will be made earlier than
currently applies. Under the existing rules the adjustments are
made in September—long after the beet has been planted—while
from 2007-08 it is envisaged that the adjustments should be made
by the end of February the previous marketing year.
14. The planned increase in isoglucose quota
is to be allocated to existing producers, basically as compensation
for price cuts. Margins in the isoglucose industry will be severely
cut because of the support price reductions.
FUTURE QUOTA
CUTS
15. A system of voluntary restructuring
rather than compulsory quota cuts should be welcomed as this takes
into account the economic reality of sugar production. However,
if the restructuring does not produce the desired effect then
there will be compulsory quota cuts. While details are still to
be decided it must be assumed that future quota cuts (both temporary
and permanent) would be on a pro rata basis. This would
not reflect either areas of particular market deficits or surplus
and could result in possible supply difficulties or higher consumer
prices in peripheral regions.
16. The proposals allow for a permanent
quota reduction from 2010 (to be agreed under management committee
procedure). It is not clear what would happen if the restructuring
measures result in a need for quota increases to meet domestic
consumption requirements. Further there is no provision to allow
for the ultimate abolition of production quotas to allow a more
market orientated scheme to emerge.
EXPORTS
17. Exports are expected to be reduced to
virtually nil under the new regime. However, under the current
WTO commitment (until the conclusion of the Doha development agenda)
the EU is able to export just under 1.3 million tonnes (exact
tonnage to be confirmed following enlargement from EU15 to EU25).
There are markets for EU sugar and this is a dramatic cut from
the 2005-06 level of exports (around six million tonnes?). Under
the proposed new rules there is no scope to export so called C
sugar at world prices (without subsidy) and the only exports will
be production within the quota arrangements. If there is less
than the 1.3 million tonnes of quota sugar available for export
(because of domestic demand or the financial restraints also applicable)
then the EU will lose these export markets. The possibility of
flexibility should be introduced to allow the export of sugar
produced outside quota (not eligible for refunds) if there is
too little quota sugar for export. Already many third country
customers of sugar are being disappointed because of the WTO disputes
panel ruling which has disallowed exports of C sugar and the re-export
of ACP sugar.
18. It would be sensible to allow flexibility
to ensure that the EU (if this is required) is able to export
up to the maximum allowed under its international commitments.
INDUSTRIAL SUGAR
19. It is proposed to allow certain industrial
users of sugar to contract with sugar producers to buy non quota
sugar. If this is not available at world market prices, a production
refund will be paid on production for domestic consumption only.
There are many details to be established on how the scheme will
operate, how the price will be set and whether a production refund
should be paid on quota and/or non quota sugar. Further clarification
is required on the details of the scheme and the products involved.
Under the import arrangements (Article 26(3)) it appears that
import tariffs can be suspended or reduced to allow world market
price white sugar imports for this sector. It is unclear how this
system would operate or why this is only for white sugar and does
not include raw sugar.
NON ANNEX
I USERS
20. The EU is committed to the abolition
of export refunds in the long term. It is clear that the planned
reforms are likely to reduce sugar exports to a trickle as production
levels are reduced while levels of imports will still be protected
through high (if decreasing) tariffs. Prices therefore within
the EU are likely for the most part to continue to be higher than
world market prices. While there may be legitimate concerns from
consumers over high prices these do not pose commercial risks
for domestic consumption as there will be equal competition within
EU territory. However, there is a real concern for food and industrial
manufacturers within the EU looking to compete on the world market.
When there is no longer the possibility of the payment of export
refunds to make up the difference between world and EU prices
(following the conclusion of the Doha development agenda) EU manufacturers
may be subject to unfair competition from third country manufacturers
while there is still a rigid system of price support afforded
to sugar (and milk) producers. Although raw material prices are
only part of the overall manufacturing cost, the impact may be
that manufacturers looking to export will relocate outside the
EU for that production and/or rely totally on the use of inwards
processing relief to allow them to continue to be competitive.
Note that it is suggested that the use of inwards processing relief
(Article 24) can be "fully or partially prohibited"
to ensure the "proper functioning" of the sugar market
which provides uncertainty to the food industry.
APPROVED OPERATORS
21. There is a new provision in that Member
States have to approve sugar, isoglucose and inuline producers.
If companies fail to comply with requirements approval status
can presumably be removed and the company would lose their right
to quota. It seems with the information which can be requested
by Member States there could be commercial confidentiality issues
to be considered.
MARKET SUPPORT
ARRANGEMENTS
22. Sugar companies will have to report
prices so the commission can introduce measures such as private
storage or quota withdrawal (or the reverse when prices rise)
to support the market on a temporary basis. The reference price
is used for the introduction of private storage ("if the
price recorded is below the reference price") but the exact
price at which withdrawal is introduced remains undefined ("close
to the reference price").
SUGAR REFINERS
23. The proposals could cause problems for
the EU's sugar refiners. Under the present system there are set
quotas for each of the refining Member State. While the overall
quantity remains the same, there will no longer be any allocation
to the individual Member States. At the same time the proposed
abolition of refining aid will put pressure on all, but particularly,
the least efficient refineries. This aid was deemed necessary
under the current regime because of the difference in margins
between sugar beet producers and cane refiners. The difference
in margins between the two sectors is increased under these proposals
so it seems incongruous to abandon refining aids at this juncture.
Refineries are outside the restructuring scheme and cannot benefit
from restructuring finance.
24. There is some protection afforded to
refiners in that for the first three years the import quota will
be allocated entirely to them and thereafter, the refineries will
have initial rights to the quota for the first three months of
each marketing year. However, there should be some clearer definition
of "full time refinery". What happens where a refiner
is also a beet processor. Can that factory benefit from restructuring
finance?
25. It also appears that all sugar imports
from both ACP and EBA countries will be subject to a guaranteed
price taking price negotiation for EBA imports out of the hands
of the refiners.
BUDGET
26. The current regime is broadly "self
financing" apart from the cost of intervention and the re-export
of sugar imports. While the restructuring scheme is broadly "self
financing", it is not clear if the production charge planned
of
12/tonne will be sufficient to meet the costs of
the regime, including production and export refunds.
RESTRUCTURING PLAN
27. These radical proposals will have a
profound impact on sugar production in the European Union. It
is clear that several countries will cease sugar production as
they will not be profitable when the internal price falls by 39%
and some farmers looking to maximise returns will prefer to plant
other crops when the sugar beet price is reduced. It is anticipated
that production within quota will fall from the current 17.44
million tonnes by about five million tonnes as sugar companies
take up the option of restructuring aid.
28. Whether the scheme will be too successful
and introduce supply problems for EU consumers is yet to be seen
though there is a ceiling on the amount of restructuring aid available
which should ensure adequate supplies despite the possibly generous
amount of per tonnage payment, although local supply difficulties
could emerge. It must be anticipated that the major share of the
aid will be taken up in the first year of the scheme.
NEED TO
ENCOURAGE BIOFUELS
29. While a restructuring plan should be
welcomed to ease the least efficient out of the market, it is
curious that no provision is included to encourage the use of
factories ceasing production of sugar to convert into biofuel
production. Presumably part of the factory could be salvaged for
such use. I wonder if the economics of this possibility have been
considered and if there is any "joined up thinking"
between DG agri and DG environment on this matter.
30. It seems inevitable that oil prices,
which already have increased by over 50% in the last year, will
continue to be volatile with the current instability in the middle
east, concerns over US production following hurricane Katrina,
increased demand from China and elsewhere. There is no better
time than now to provide incentives to replace fossil fuels with
renewable energy sources.
31. While not wishing to further complicate
the proposals it would be sensible to allow for some form of incentive
to encourage the production of biofuels, not necessarily from
sugar beet but from any crop product and to encourage the use
of those parts of the factories which will be subject to restructuring
finance.
32. It is proposed that sugar beet grown
to be sold to the industrial market (non food uses) should attract
the minimum beet price which cannot be negotiated downwards by
the 10% allowed for sugar beet grown for normal sugar production.
Joan Noble
September 2005
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