House of COMMONS
MINUTES OF EVIDENCE
ENVIRONMENT, FOOD AND RURAL AFFAIRS
REFORM OF THE EU SUGAR REGIME
Wednesday 19 October 2005
MR MARK WHITE and MS PATRICIA JAMIESON
MR CHRIS TYAS, MS ANNA LUCUK and MR RICHARD LAMING
USE OF THE TRANSCRIPT
Taken before the Environment, Food and Rural Affairs Committee
on Wednesday 19 October 2005
Mr Michael Jack, in the Chair
Mr Dan Rogerson
Sir Peter Soulsby
Mr Shailesh Vara
Mr Roger Williams
Memorandum submitted by Tate & Lyle Sugars, Europe
Examination of Witnesses
Witnesses: Mr Mark White, Chief Executive and Ms Patricia Jamieson, Director, Raw Sugar Supply and EU Affairs, Tate & Lyle Sugars, Europe (TALSE), examined.
Q1 Chairman: Good afternoon ladies and gentlemen. I am glad to see that there is such enormous interest in the reform of the European Sugar Regime that it is almost standing room only. Everybody is very welcome to this first public evidence session of our inquiry into the proposed reforms of the Common Agricultural Policy Sugar Regime. Our first witnesses come from Tate & Lyle Sugars Europe. Some things never change, so I am delighted to welcome back again Patricia Jamieson before the Committee, the Director of Raw Sugar Supply and EU Affairs and Mr Mark White, the company's chief executive. You are both very welcome. I remember some years ago, when I had a ministerial incarnation, having the pleasure of visiting the Silvertown refinery and learning for the first time that the sugar you deal with arrives as brown, then becomes white, then becomes brown again. At least I have remembered something about the process you are involved in. Cane sugar is certainly affected by the proposals to change the regime, but let me ask you at the outset whether you are, generally speaking, content with the proposals the Commission have come forward with to reform the sugar regime. If you had the proverbial clean piece of paper, would you have done it this way?
Mr White: The answer is no, we would not and we are not content. We do support the need for reform. This reform is trying to liberalise the market whilst supporting a beet regime. It has severe influences on the cane refining sector right across Europe and the cane refining sector is a sector which could compete effectively in a totally deregulated market. If you like, on the journey to deregulation this proposal actually hits the refiners and there are two key issues. The first issue is on supply. We need a base quantity to keep our refineries going through the period of the reform. The refineries in Europe currently operate at about 70 per cent capacity, so we need to ensure that we keep our current supplies of raw sugar. I think it is the Commission's intention to do that, but there are beet processors across Europe effectively trying to take our raw sugar away. We are a high fixed cost industry and if we lost our supply, then we would soon go out of business. The second major issue for us is margin. The cane refining sector is more efficient than the beet processing sector. We start with a margin which is lower than the beet processors, but this proposal actually reduces the beet processors' margin by 44 per cent. The cane refining margin, which is already lower, is reduced by 77 per cent. What this means is that an efficient beet processor will have a margin of €180 per tonne: if you are an efficient beet processor you can cover your costs, make a profit and make an acceptable return on your assets and that is €180 per tonne. The cane refining margin is moving to €44.
Q2 Chairman: Could you just explain, for the benefit of the Committee, how this margin is calculated? From the other odd things I remember, you get paid for doing your job in a different way than the beet producers do. Perhaps you had better just explain to the Committee how you get paid for what you do.
Mr White: The way we calculate our margin is the price at which we sell our white sugar less the institutional price we have to pay for our sugar - in our case raw cane sugar - and that is the difference. The €44 we are going to be left with does not even cover our total cost for refining.
Q3 Chairman: So if the cost of your raw material is coming down, which is one of the central planks of this proposal, why is your margin not going up?
Mr White: The raw sugar price is coming down but the white sugar price is coming down faster. It is the difference between the white and the raw, which is our margin, which is important for us. We cannot compete against the beet processor who has a margin of €180 and ours is only €44.
Q4 Chairman: Just tell me in terms of the structure of the sugar regime why it works out like that in a market where market access is supposed to be being improved? Am I not right that one of the things you are looking at is the possibility of getting more sugar into your refinery? At the outset it looked as though this might be quite good news for you.
Mr White: Maybe I could explain in a totally deregulated market where you want to go when you want totally free competition. A destination refinery, which is what we are, would expect a margin between €100 and €110 to operate with. We operate refineries in Canada, in Toronto, a joint venture in Saudi Arabia, we are building one in Egypt and that is the margin you would expect. When you get to the most competitive situation, you would expect that sort of margin. So the proposals at €44 are flawed. The only thing we can think of is that the cane refining sector was really bolted onto the beet sugar regime when the UK acceded to the European Union. The sugar reform is a very complex issue and there is so much attention to the beet sector that actually cane refining gets left and sometimes the analysis on the cane refining sector is not as good as it should be. As far as market access goes, in the first three years the amount of raw sugar which comes into the market stays exactly the same as it is now at 1.7 million tonnes. That is going to the six refineries within Europe. Then, from 2009, there is extra access from the Least Developed Countries (LDCs). Our argument is that we need this base quantity of sugar like the sugar processors have their base quantity, their quota of beet sugar, so we can really compete with them effectively. We think anybody should be able to compete for any of the new sugar which then comes in above the base quantities to produce more white sugar from LDC rules.
Q5 Chairman: So would that correct the problem you are facing?
Mr White: What is happening is that if we have a base quantity, if you look at the beet processors they have a beet quota, which is their base quantity, so they can cover all their fixed costs and make a profit. They have the opportunity to buy an increase in their quota. We are saying that we need a base quantity and that if we do not have a base quantity, basically the beet producers can use the profit they earn from their base quantity as a cross-subsidy to go and purchase our "raws". Once they are making a large profit on their beet, they can then go and pay a higher premium and actually take the "raws" away from us.
Q6 Chairman: Can I assume from what you have said that unless this thing is fixed Silvertown has no future?
Mr White: This is a very public hearing and we are quoted on the stock market. I am not allowed to answer that question.
Q7 Chairman: There is a large number of members of the public here and they are all listening very carefully to what you are going to tell us. We need to know, if we are talking about the future, whether you are saying to us either that you have a refinery, a big piece of fixed capital, and you do not have enough sugar in prospect to push through it to make it work, or the numbers do not add up. You are in a competitive business and either it is going to have a future or it is not in terms of whether you are going to carry on doing it. You have made a case out to the Committee that the margin you need is not big enough, so that can only be fixed, as far as I can see from what you have said, either by some way of pushing up the price of sugar, which is not going to happen, or you having more sugar to get better overheads and reduce the cost that way and increase your margin. Unless there is something I am missing.
Mr White: No; we do need the base raw sugar quantity, we do need the margin improving; you are absolutely correct, that needs fixing.
Q8 Chairman: Without that it puts a question-mark against Silvertown, does it not? You have just told us that if you are not getting the right returns then you are not in a profitable business.
Mr White: It does put a question-mark against Silvertown.
Q9 Patrick Hall: As Mr White says, this is complex, okay, but one thing to me is not complex and is clear and that is that there is a base line market, there is demand and you can predict that. Surely, because there are people ready to buy, it is worth refining and selling to those people.
Mr White: I agree, as long as we can get supply to meet the demand and nobody else has bought it, because in the first three years there is a limited quantity coming into the marketplace, and as long as while supplying that demand we are making the correct margin.
Q10 Patrick Hall: If there is any proven demand, most people in business make their way.
Mr White: Yes, but we have a sugar regime which is setting the price at which we sell it and the price at which we buy it. If the gap is not big enough between the two, then we have a problem.
Q11 Chairman: Looking at the written submission which you have made, you have teased out some of the arguments, but I wonder whether I could persuade you to provide us with a layman's guide to the pricing structure for sugar and perhaps a little bit of commentary on what you have just said to us about what needs to be fixed compared with where we are now and what is proposed, if you are to have what in your judgment is a fair and profitable business and a future for Silvertown. It would be very helpful for us to have that in writing.
Mr White: Okay, Chairman.
Q12 Mr Vara: If Silvertown refinery is closed, how many jobs are at stake?
Mr White: Newham is one of the poorest boroughs in the East End of London and we directly employ 1,000 people.
Q13 Mr Vara: You say "directly". What about others?
Mr White: There is then a multiplier effect obviously with the outsourcing.
Q14 Mr Vara: Can you give us a rough idea of how many others?
Mr White: I would think another 2,500.
Q15 Mr Vara: So it is a total of 3,500 jobs which are threatened.
Mr White: It is one of the poorest boroughs in the East End of London and we also do a lot of community work. We do things like supporting the community food enterprise which delivers fresh food. I do not know whether people know that Newham is the tuberculosis capital of Europe and we actually do a lot of work with a lot of very poor people.
Q16 Lynne Jones: You say that you would be better off in a deregulated market.
Mr White: Yes.
Q17 Lynne Jones: Is that because you could just buy sugar on the open market at a lower price?
Mr White: May I explain that? If there were a totally deregulated market, there would not be much beet production in Europe at all; maybe in the UK and maybe a little bit in northern France. The competition is Brazilian white sugar. There is something called the white/raw differential. We would actually go to the world market and buy world "raws" and that typically is about $65 less than the price for white sugar traded on the market. Then you put 35,000 tonnes of raw sugar in a big ship, take it up to the Thames, down the Thames and offload it. If you are making white sugar in Brazil you put it into 22-tonne food grade containers which are very expensive. That would typically cost $90 to Thames, whereas the big bulk ships cost $35. So there is a $55 difference there. When you are loading the food grade containers and actually offloading them at the port it costs another $20. In a world market we would get a margin of about $140 or €100 to €110, depending on the exchange rate. In a totally deregulated market that is the margin you expect. Another way of doing it would be if we had the same drop in margin as the beet processors, if our margin were cut by 44 per cent as well, then our margin would be €106. Whichever way you do it, we would make acceptable returns on our invested capital with that sort of margin.
Lynne Jones: I shall read what you have said and try to digest it.
Q18 Chairman: That is why I requested a further note from you: just to help us understand the mechanics. That would be very much appreciated.
Mr White: Yes, we will do that.
Q19 Patrick Hall: Looking at the evidence you have sent to this Committee, and thank you for doing that, you say in the conclusions that the business is one which "... could compete effectively in a deregulated market". You go on to say "The Tate & Lyle UK refining operation is not a business which needs artificial support to correct an inefficiency" et cetera. Would I conclude correctly therefore that your business would support the phasing out of the export subsidies through the World Trade Organisation (WTO) negotiations?
Mr White: Yes, we would.
Q20 Patrick Hall: Would you therefore deal, as a business, without the £100 million export subsidy which your business received last year?
Mr White: We would support the phasing out of export subsidies altogether and the Commission has to do that to comply with the WTO rulings. May I try to explain how the subsidies work today? We are the second player in the UK and our margin is not as big, so we have the second largest market share. We are a price follower. We cannot sell all our products currently today in Europe. What we cannot sell, we sell onto the world market. The way the export subsidies work currently is that at today's values we would get about €230 by selling our white sugar onto the world market. There is a guaranteed intervention price of €630. We get a subsidy of €400 but that does not go into our profits. If we bought our raw sugar on the world market, we would pay about €130. We actually pay €530. We see ourselves as a bridge to the African, Caribbean and Pacific (ACP), to be able to pay the ACP a €530. That €400 goes towards the €530 and then we add another €130 from the actual price we get from the world market and that goes to the ACP countries.
Q21 Patrick Hall: I shall certainly look forward to the note you have kindly agreed to produce, which might explain that scene a little more clearly. It does seem that this is not the way one would wish to design the system from scratch. It does seem to have built-in waste, although perhaps those who are involved in producing sugar beet would argue otherwise. What is your assessment of the balance of the whole situation in terms of security of supply, sugar beet in Europe and sugar cane producers and the refining industry, if we stripped away the complex system of subsidies? Would that lead, in your view, to a major economic impact, which would also have costs on the taxpayer, through redundancies and the diminution or reduction or indeed the end of sugar beet production in Europe.
Mr White: If you look at the demand/supply balance, there is no doubt that the EU produces five to six million tonnes too much beet sugar. To comply with the WTO we need to reduce our beet sugar production. There are major areas of Europe which really should not be producing beet or making sugar; they are very inefficient. When you look at the refining sector, destination refineries are the most economic business models for supplying refined sugar to a market. If you took away all subsidies, there would maybe be a small beet sugar industry in the UK and maybe northern France, which are the most efficient producing areas.
Q22 Patrick Hall: But not as efficient as the best cane ones.
Mr White: Exactly. Then you would have more refineries and you would have large-scale refineries and white sugar coming in from Brazil. If you went to no subsidies, not much beet would be produced in Europe and if you look at free markets around the world, when the market is free it is all cane.
Q23 Patrick Hall: But you feel that you could cope with this over a period of years, you could adapt to the changes.
Mr White: The issue is that this current proposal, which is obviously a liberalising proposal, actually makes it harder for us in this period of the regime than it would in the totally deregulated market. We get a better margin, about €60 more, in a totally deregulated market and we could also buy as much raw sugar as we wanted. We currently buy 1.1 million tonnes and our capacity is 1.5 million tonnes. If you look at the Commission's cases, the options they originally looked at, total deregulation was one of the options, but they obviously saw that as going too far because of the economic effect it would have on the beet sugar industry, but also the ACP countries as well. This is a liberalising proposal on the way to deregulation; we see it that way.
Q24 Chairman: In terms of the ACP countries and the LDCs which presently are allowed to send to Europe, are there any of them which, in your judgment, should not be in the sugar cane industry? Is there a league table of efficient to least efficient?
Mr White: I have known the ACP countries and the LDCs in this role for about two years and Patricia has actually been dealing with them for 35 years, so I am going to ask Patricia to answer that question.
Ms Jamieson: They are diverse industries from a wide range of countries. There is no doubt that they will be impacted very severely by the Commission's proposals, but the Commission has indicated and is urging them to produce action plans for the industries. Most of them now are heavily involved in looking at their industries and a long hard look is essential. The impact will not simply be on the finance of the industry itself: there will be social consequences; in one or two cases one could imagine problems of social cohesion; in a lot of cases the budget will be adversely affected. Sugar is a very important net foreign exchange earner, not a gross foreign exchange earner, but the EU - and quite rightly supported by the British Government - is looking at this on a country specific basis. These economies and the sugar industries within them do differ enormously: they have different histories; some are old, some are new; some are island economies, some are on the mainland; some are irrigated, some are rain fed; in some sugar plays a much bigger role in the economy and in employment than in others. Yes, there is probably a league table, but the countries themselves are conducting this examination at the moment and the Commission and British Government are urging them to come forward with plans which are bankable and the EU will make funding available to assist them.
The Committee suspended from 4pm to 4.14pm for a division in the House
Q25 Chairman: Ms Jamieson was just finishing off her answer on the subject of the pecking order of countries. I think we got the message that there was a pecking order. Do you want to add anything else?
Ms Jamieson: I think that was it: it is just important to recognise that the circumstances differ so very greatly amongst the industries and it will be dealt with on a country by country basis.
Chairman: Lynne, was there anything you wanted to follow up on that line of questioning, given your interest in LDC/ACP?
Q26 Lynne Jones: You say that you would be better off under a completely deregulated market. Yet you do say in your submission that it is essential for assistance to the Sugar Protocol countries to be adequate and they are obviously very concerned. How do you reconcile those two positions and how would you go about it? The ACP countries say that the proposals are totally inadequate to ensure their stability.
Mr White: We are better off in a deregulated market compared with the current proposals. If these current proposals could be fixed, then obviously we should like to continue purchasing from the ACP countries and the LDCs. We have a long-established relationship with these countries and we do understand the value of them selling the sugar to us at €530. We do also understand that the reduction in the raw price will affect some of these countries very badly. Our response to that question is that we need an improvement in the proposals and then we would be delighted to continue buying from the ACP and LDC countries.
Q27 Lynne Jones: What are these improvements? They say they want some help to restructure. You could challenge them by pointing out that they have had this subsidy since 1970 and they should have diversified, but they have not. What would you do, if you were the Commission?
Ms Jamieson: The Commission has come forward with a constructive idea which is looking at these countries on a country-by-country basis, asking them what it is they need for the future. Some of them may decide to cease production; indeed St Kitts has already done that. St Kitts is already now in discussion with the Commission - this is Directorate-General (DG) Development not DG Agriculture - about the sort of assistance which will be available to them. The EU has been unable to put figures on this yet; of course they have not seen the plans. There is a slight problem also with the budget as they do not yet have a budget horizon from 2007 going forwards because that is being debated in another forum in Brussels. So there is this difficulty about knowing what money is going to be available, but the EU is very anxious to start engaging with the countries concerned to work out the sort of assistance they need. Whether it is diversification, restructuring, perhaps budget support, perhaps technical support, a package of everything, perhaps some concessionary financing, this dialogue is starting.
Q28 Lynne Jones: But the amount which is going to be proposed to support the ACP countries compared with the EU's fairly inefficient beet producers is quite small. Have you, having concern for your historical suppliers, got any other proposals?
Ms Jamieson: This is a direct negotiation between the countries themselves and the Commission. What we have been stressing in every forum we can is that these packages which are worked out, and I use their wording, must be wholly adequate for the countries concerned, correctly targeted, efficiently delivered - and that is important when dealing with DG Development - and also in a timely way - again very important when dealing with DG Development. I understand the British Government is also working through DFID to support this exercise, to ensure that this is dealt with in an adequate way.
Q29 Lynne Jones: So you would like your supplies to be as cheap as possible and for resources to come from elsewhere to support those countries.
Ms Jamieson: No. We will come back to this in our paper, but our margin is the difference between the raw sugar purchase price and the price at which we sell the white refined sugar. The raw sugar purchase price is a statutory price; it is set by the EU. There is no market effect on the price at which we buy our raw sugar, it is a statutory minimum.
Q30 Lynne Jones: But you would like that to be as low as possible.
Mr White: It is not the raw price, it is the difference between the raw price and the white; it is the operating margin. Actually it is irrelevant what the raw price is and what the white price is: it is the difference between the two. We should actually like a remunerative price for the ACP.
Q31 Lynne Jones: But if we want to move towards a deregulated market we should have the supply price as low as possible in order to protect countries who are sugar suppliers and to enable them to diversify.
Mr White: If we wanted to move to a totally deregulated market, some of our current suppliers would not exist in that.
Q32 Lynne Jones: But we have to move towards it, which means a reduction in the price at which they are able to sell to you over time.
Mr White: Which is what the proposal does.
Q33 Lynne Jones: But it does not go far enough for you.
Mr White: No, it is not the raw sugar price, it is the difference.
Q34 Lynne Jones: You want to carry on having it upped at the other end.
Mr White: No. As a cane refiner, it is actually the difference between the price at which you buy the raw sugar and the price at which you sell the white sugar. We are saying that our issue is that the Commission's proposal, where we make a margin of €44, is flawed.
Q35 Lynne Jones: I understand that, but I am saying that the logic of your position is that it should be support at the other end rather than in the price at which you are able to sell, support for the suppliers.
Mr White: I think the original question was: what would we do to help the ACP countries? The Commission has talked about accompanying measures to try to help those industries and we really have not seen any figures about the first year. What we would do differently is make sure, exactly as Patricia said, that different proposals are designed for different countries. We do know that a couple of countries have come and said that they do not want any money, but instead of sending 60,000 tonnes to the EU, even at this new price, they want 250,000 tonnes and that would compensate them for the effect on the price. That is one solution. Other countries, as Patricia has mentioned, like St Kitts, have actually said that at these prices there is no point making the product and they would like some money, please. There are different approaches and what we are saying is that you have to take every country one by one. In our discussions with the ACP countries, which are very valued suppliers and we have known for many years - and there are several in the room to whom we were talking earlier - it is very different by country. Everybody recognises that we have to reform. What does reform mean? It means reduced prices.
Q36 David Lepper: Do you have the impression that there is any discussion, liaison of any kind in working out the proposals for reform between DG Agriculture and DG Development? Would it be helpful, to the supplier countries in particular, if there had been that liaison if it did not exist?
Ms Jamieson: It is important to look at what the driver was behind this reform. The driving force is to enable the EU to comply with its WTO obligations and very quickly, which means taking out a very large tonnage of production and exports. This is DG Agriculture's responsibility and DG Agriculture chose the route we are looking at in the proposals now as the way of achieving this. However, we believe this was prepared in discussion with DG Development, with full sensitivity for the problems which would be created for the ACP countries. DG Agriculture have these international obligations to meet: the EU have obligations, which they recognise, towards ACP countries. This is why these country-specific plans to assist in the transition have been devised by DG Development.
Q37 David Lepper: Is the situation any different for those supplier countries which are French départements overseas to other supplier countries?
Ms Jamieson: Yes.
Q38 David Lepper: Or are they all affected in the same way?
Ms Jamieson: The départements d'outre mer, which for the purposes of sugar are really Guadeloupe in the Antilles and Réunion in the Indian Ocean, are legally and constitutionally a part of metropolitan France, so they are internal producers in the same way that a beet farmer in France is part of metropolitan France, part of the EU. They are subject obviously to very different terms and terms of compensation, in the same way that the beet farmers are being offered different compensation. Yes, they have a very different compensation package.
Q39 Chairman: Just to try to put this into context, I think you process 1.3 million tonnes of cane sugar.
Mr White: One point one million.
Q40 Chairman: That was carved out as your allocation when the sugar regime was first invented. I presume that any increase in the amount of cane coming from the countries we have just been discussing under the new regime will be entirely at the expense of production from beet.
Mr White: There are no new imports from those countries in the proposal.
Q41 Chairman: No, but you mentioned a second ago that there are some countries who said that, as a compensating variable, to take into account the reduction in the price of sugar, that they would like to send more sugar. Right?
Mr White: Yes; some said they do not want to send any.
Q42 Chairman: I suppose the first question ought to be: do the non senders net off against the extra that the others would like to send?
Mr White: We do not know the answer to that question because we do not know the whole picture. The proposal is that the amount of raw sugar that comes in from all the ACP countries remains the same.
Q43 Chairman: Let me approach this another way. You said earlier on that you have a capacity, with a few tweaks to your plant, to do 1.5 million tonnes, so you would like 400,000 extra tonnes to come in. Right?
Mr White: Yes.
Q44 Chairman: If those 400,000 extra came from producers who wanted to send more from ACP/LDC sources, that 400,000 would effectively be a diminution from the amount of sugar produced by beet. Is it a straight one for one swap?
Ms Jamieson: There is another area here which is another European policy area: the EU has to review the Sugar Protocol before 1 January 2008. We are not party to the policies which these individual governments are going to adopt on this. The EU is looking towards regional economic partnership agreements being the outcome of the Cotonou negotiations. The Sugar Protocol will be an issue in parallel with that. Some of these countries may, in that context in these free trade areas, be looking to have no restrictions perhaps on their exports to the EU, but this is an area which has not yet been tackled by the EU. A number of supplying countries have perhaps different views as to how they would like to see this process evolve.
Q45 Chairman: I do not want to prolong this area of discussion, but would I be right in thinking that it would be better if all of these items could be bolted down before finally the new regime is in place, because it does seem to me that if you get more sugar from one source, it is bound to have an effect on the sugar from the other source. Should it all be bolted down? You have given us the impression that there are still things that are in the air, notwithstanding what might be agreed by the Council of Ministers at the end of this year. Or do you think it will not be agreed at the end of this year?
Ms Jamieson: Again it is difficult, not being party to the inner circle.
Q46 Chairman: You have been in this business for 25 years; we know you know everything there is to know about sugar. Give us the benefit of your distilled wisdom.
Ms Jamieson: There is a considerable drive within Europe to try to reach agreement on this in November. Why? Because the EU has the WTO obligation which it must meet and they will have to be in a position to do that by 1 July 2006, perhaps latest October 2006. To do that there are decisions which have to be taken now; they cannot wait. From a number of people's point of view and the industry's point of view, ours certainly and I know others, if you are going to invest, if you want to remain in business, if you want to retain staff, remain a vibrant industry, you must be able to see the future. To keep putting if off continually is very damaging.
Q47 Mr Vara: You will of course be aware that in the draft regulation there is provision to restrict the ability to refine cane "raws" to full-time refiners for the first three years.
Mr White: Yes.
Q48 Mr Vara: Why should there be this regulation to restrict the refined cane "raws" to only full-time cane refiners?
Mr White: If you look at a beet processor, the beet processor has a quota, which is the same as today. They have the opportunity to go and purchase more beet quota. They lose a bit of sea sugar - from our analysis they do not make much money on sea sugar - and they might be able to sell it to make ethanol. They have basically a profitable business and they can go out and if they can buy "raws" they have a cross-subsidy, so they would only then have to cover their marginal costs. They might then be able to go and buy "raws" and pay a larger premium than we would pay. Today there are 1.7 million tonnes of raw sugar coming into the six refiners for refining. Our analysis shows that some countries will actually produce more, but in general there will be more which fall out of the ACP and that might go down to 1.6 million tonnes. So there is pressure on our raw sugar supplies already. If beet processors can use their cross subsidy from their beet quota to go and buy "raws" for refining, then the future is pretty grim, because we are a high fixed cost industry and to start losing volume when we are already only at 70 per cent capacity means we just will not cover our fixed costs. We think that as the beet processors have a base quantity and can actually purchase more, we should have a base quantity as well for the first three years. After the first three years, you then get the duty free access of the LDC supplies. As long as we have our base quantity, we then think above that base quantity anybody should be able to purchase those "raws" whether refining in a cane industry or refining in a beet industry because we are then playing on a level playing field.
Q49 Mr Vara: Would you contest the right of beet processors like British Sugar to refine sugar under any terms of agreement?
Mr White: In the first three years it would be very uncompetitive of the EU Commission to allow the beet processors to refine cane "raws".
Q50 Mr Vara: Would that not be a restriction on trade?
Mr White: No. If you looked at the UK beet producers, there are two big issues here. One of the major drivers for the Commission is to have an efficient industry. Any way you look at it the refining industry are a lot more efficient than the beet industry. So you do not want to be losing the refining industry going forward. The second thing is that the Commission is trying to take out between five and six million tonnes of beet production. The efficient producers will stay in business. What will the inefficient ones do, the ones which the Commission want to go in certain countries? They will try to buy raw sugar for refining. They will actually process that as a way of earning extra money, putting cane refiners out of business, making the industry less competitive because people have dropped out of the industry and keeping themselves going. The objective of trying to take out five or six million tonnes of beet production will not be achieved. This is actually a very serious threat to the number one objective of the Commission's proposals which is to reduce beet production.
Q51 Mr Williams: Twice you have said that it was possible for beet processors to buy quota. Off whom would they buy quota? Would it be another nation? I did not think there was any transfer between nations.
Mr White: I think there is some misunderstanding there. I think what I said was that some of the beet processors are trying to buy cane sugar on top of their beet quota.
Q52 Mr Williams: But they cannot buy beet quota.
Mr White: No; sorry, they can. Everybody stays with their current quota and then there is an opportunity by country in the current proposals for the beet processors to purchase extra quota.
Q53 Mr Williams: From?
Mr White: The Commission have identified one million tonnes of extra quota across Europe and they split it percentagewise by country and the beet processors have the opportunity to purchase that quota.
Q54 Lynne Jones: May I just show my ignorance? When we talk about the inefficient producers are we talking about the farmers producing the beet or are we talking about the processors?
Mr White: No.
Q55 Lynne Jones: I thought the issue was that we have regions of the EU which are growing sugar beet and they are inefficient in the growing of the beet. That is not the issue.
Mr White: I was actually talking about the total beet industry. You are absolutely right: there are certain areas where the yield is bad and I was really talking about those. Also in those areas, typically where the yield is bad, there are not sufficient processors either. If you actually look at the beet processing industry, the best yields are in that basin across northern France and parts of the UK, but also the best processing industry is there as well.
Q56 Lynne Jones: Is the system that the countries which are producing beet process their own beet?
Mr White: Yes.
Lynne Jones: Right. I did not realise that.
Q57 David Lepper: I am right, am I not, that you are the major, in fact the only refiner of sugar cane in this country?
Mr White: Yes; we have six refineries.
Q58 David Lepper: You refine more than any other company in the EU.
Mr White: Yes, we are the largest sugar refiner in the world.
Q59 David Lepper: I just wanted to make sure I had got that right. Am I also right that one likely effect of the reforms is a concentration in the sugar processing sector generally?
Mr White: Yes.
Q60 David Lepper: Fewer people doing the job.
Mr White: Yes.
Q61 David Lepper: Back in 1998 Tate & Lyle was one of a number of companies which were fined by the European Commission for price fixing, rigging the market in granulated white sugar during the 1980s. Am I right there?
Mr White: Yes, you are.
Q62 David Lepper: Is one unforeseen - or perhaps foreseen - consequence of the reforms increased scope for price fixing among a smaller number of people involved in the industry?
Mr White: The core values of our business are safety, knowledge, integrity and innovation and I do not think any Tate & Lyle executive manager or director would ever do what was alluded to have happened back in the 1980s. Tate & Lyle would never ever, in the future, with the values we have in our business, do that sort of thing. To the other part of your question, yes, these proposals will increase the concentration of the business across Europe.
Q63 Lynne Jones: Are you denying that you did this in the past?
Mr White: This happened in the 1980s and the court case was eventually in 1998, which was before my time.
Q64 David Lepper: I was casting no doubt on your rectitude whatsoever; I was just trying to make sure I had got it right. Did this happen in the past?
Mr White: It did.
Q65 David Lepper: I was not suggesting that Tate & Lyle would be involved but that if there were fewer people doing the job, there would be a chance of them getting together to fix things.
Mr White: I do not think that ever happens.
Q66 David Lepper: I have in mind that when this Committee produced a report on the sugar regime a year or so ago, the Government, in its response, told us that if progress was not made on increasing competition, then the competition authorities should consider the case for an investigation into the market. Should there be such an investigation, are you confident that the market would have nothing to fear?
Mr White: Absolutely.
Q67 Mr Rogerson: If we are talking about concentration of the industry, from what you are saying, if these proposals were to go through and these effects you are describing were to happen, that concentration might well be at the expense of the cane refiners rather than necessarily the beet industry.
Mr White: It is fair to say that the French industry, part of the German industry and the UK industry will be very happy with this proposal. The more inefficient areas of Europe actually might be happy with the proposal as well because there is a restructuring fund where you can get €730 per tonne, which is a good payment. They might be happy as well, but there are certain players who will come out. There is also a danger that certain cane refiners might come out as well. Yes, there will be fewer players within the European market.
Q68 Mr Rogerson: Changing the subject quite considerably, we are in the middle of a UK Presidency of the EU and therefore when matters such as this are discussed we have a UK Presidency of that. What sort of effect do you think that is likely to have in terms of the UK Presidency at those negotiations in terms of being able to argue the effects domestically?
Mr White: It is a difficult question and a bit of a double-edged sword. We need the British Government to stand up for the needs of British industry and British farmers and also the ACP and the LDCs. They also have another task which is as UK President they obviously want to try to get this through. We are not sure; I am sure we will be able to answer that question better in January, but there is a worry there.
Q69 Mr Rogerson: Do you think it would have been better for your industry if a deal had been struck outside the UK Presidency?
Mr White: It is very hard to answer that; it really is very, very hard to answer that.
Q70 Mr Vara: You say that there is no possibility of price fixing. Two points: you would say that would you not? Secondly, you say you are the biggest refiners in the world, how often do you meet with your colleagues who are also world refiners? When you do meet, what do you talk about?
Mr White: We have a business called Tate & Lyle Process Technology and we have some proprietary technology about how to make refining industries all over the world. So we actually have a business which builds refineries. We are just building one in Egypt, we are building one in Jeddah, we have one in Dubai and we are looking at several projects across the world. Then we use outside studies to measure the efficiency and benchmark those refineries against others in the sugar industry. Effectively, when we do meet other refiners across the world, what we are talking about is improving technology, trying to get our costs down, all the sorts of things you do in industry. We operate in a very different market. Within our own company, as we own assets in Canada and we own assets in a joint venture Saudi Arabia, we obviously share more information.
Q71 Mr Vara: Because you have this global reach, there is nevertheless a possibility of price fixing because you are such a huge multinational player.
Mr White: I would not say we are a huge multinational player.
Q72 Mr Vara: Did you not say earlier on that you are the world's biggest refiner.
Mr White: The biggest refiner but in a market of 145million tonnes, we process about 3.5 million tonnes. So in a market of 145 million tonnes the whole of Tate & Lyle across the world processes 3.5 million tonnes and the whole world market is 145 million. Although we have the biggest refinery in the world, we are not the biggest sugar company in the world and our total share would be 3.5 divided by 145.
Q73 Chairman: Just a couple of little points to conclude. In paragraph 12 of your evidence you say "The resulting refining margin would allow the refinery to cover the fixed and variable production costs, as well as allowing for an acceptable return on capital invested in the plant". What is "an acceptable return" as far as Tate & Lyle are concerned?
Mr White: In line with other food processors, a return on net operating assets of 20 per cent. That would be in line with other food processing businesses within the UK.
Q74 Chairman: Given that you have a range of refineries outside the United Kingdom, do they make that kind of return or is there a variation?
Mr White: Our businesses vary between 20 and 25 per cent.
Q75 Chairman: I could not find in your evidence the word "isoglucose". Why?
Mr White: Because Tate & Lyle Sugars, Europe do not produce or have anything to do with isoglucose. That is a different part of the business called Tate & Lyle Food and Industrial Ingredients.
Q76 Chairman: Do you not talk to the other part of your own business?
Mr White: We do, but they are based in Europe and their submissions have actually gone through mainly to the Belgian Government and Dutch Government, although we do have a small factory the other side of the Thames.
Q77 Chairman: They might like an increase in the isoglucose quota? Does that not throw a spanner into your works?
Mr White: The proposal has a small increase in the isoglucose quota. However, the real issue on isoglucose - obviously we do talk and we know the key issues - is that as the sugar price within the sugar market decreases - the white price, but also the raw price, whether it is beet or cane; within the isoglucose market the price is set by the sugar price and it is slightly under, but the wheat or corn price has not moved at all - so the margins in isoglucose will fall and that is partly compensated by the proposals which increase the quota for isoglucose.
Q78 Chairman: Is it right that that part of the sweetening market should be constrained by a quota?
Mr White: The whole market is constrained by quota; the beet production is and we are constrained by the amount of sugar "raws" we can get.
Q79 Chairman: The increase is very small. If they said in the farming industry that they would grow less sugar beet but they could compensate for that by growing more crop for the isoglucose market, they would go after that, they would be constrained by the size of the market by virtue of the quota. What happens if they fiddle about and persuade the Commission to increase the amount of isoglucose quota? Does that unbalance the market or does it have to be a zero sum game that it still comes back to the same quantity of sugar produced?
Mr White: The isoglucose figures are actually in the whole demand/supply balance, so if isoglucose went up further, then sugar would have to come down further.
Q80 Chairman: From your standpoint I presume you would tell your chums in the rest of your company "Lay off, we don't want any more isoglucose, please". We are friends now ...
Mr White: We have to look at it as one Tate & Lyle.
Q81 Chairman: There is one Tate & Lyle, but you might just not be encouraging them to push too hard for that.
Mr White: We are here and my role is to look after our sugar interests. If I were offered more quota for Tate & Lyle Sugars' refinery, like the beet guys have and like isoglucose, I should be very happy, but we have not been offered more quota.
Chairman: Very good. Mr White, Patricia Jamieson, thank you very much indeed for your evidence. We shall look forward to your written submission to us of further education and enlightenment on refining margins and price. If there is anything else you want to add to it by way of clarification when you get home and you think "Oh my God, I should have said that", do add it. If you regret anything you have said, it is too late.
Memoranda submitted by UK Industrial Sugar Users' Group, Biscuit, Cake, Chocolate and Confectionery Association and Cadbury Schweppes plc
Examination of Witnesses
Witnesses: Mr Chris Tyas, Group Supply Chain and Systems Director, Nestlé UK & Ireland and Chair of the Biscuit, Cake, Chocolate and Confectionery Association (BCCCA) Commercial Committee, Ms Anna Lucuk, External Affairs Manager, Cadbury Schweppes plc and Mr Richard Laming, Secretary, UK Industrial Sugar Users' Group and Public Affairs Manager, British Soft Drinks Association, examined.
Q82 Chairman: One or two further familiar faces in front of the Committee, so let me formally welcome Chris Tyas, who I know has been before us previously and thank you for coming again. He has a very long title: Group Supply Chain and Systems Director, Nestlé UK & Ireland and Chair of the British Cake, Chocolate and Confectionery Association Commercial Committee. You are very welcome indeed. You are supported by Anna Lucuk, who is the External Affairs Manager, Cadbury Schweppes - easier than the last title. Mr Richard Laming is the Secretary of the United Kingdom Industrial Sugar Users' Group and Public Affairs Manager of the British Soft Drinks Association. Thank you very much for coming and thank you very much for your written evidence. Your industry has over the years that this Committee has been inquiring into matters connected with sugar made it very clear that the existing regime puts you at a competitive disadvantage and that it could well be that the high price of sugar has affected jobs in your industry. Comment.
Mr Tyas: If we could start on that, there are two really big pieces of evidence which have suggested that it has put us at a disadvantage and in particular that it has harmed British manufacturing interests. The first is that our industry was for many years a net contributor to the balance of payments and then in 2002 it slipped into a debit situation of some 20 per cent, which has worsened in fact in the three years since then. Secondly, a piece of independent research, yes, has demonstrated that our industry has lost something like 16,000 over the course of the last five years and that the very high price of sugar, which I can just remind other members of the Committee who are not so experienced in this area as yourself means that we pay three times the world price in the UK and 10 per cent more than anywhere else in Europe, has been the major contributor to the loss of those jobs.
Q83 Chairman: Which sectors have lost the most? Perhaps I could ask Anna Lucuk. Have you reduced your labour force in Cadbury Schweppes as a direct result of uncompetitive prices?
Ms Lucuk: The cost of sugar has been one of the factors which we have taken into consideration when deciding where to relocate production lines within the Cadbury Schweppes family. We do have production facilities all across the world. It is only one element and yes, we have closed a number of lines in the last few years. In Chesterfield, for example, we have relocated sugar confectionery to other parts of the UK, but also to Eastern Europe. It is one factor, as is the upgrade of facilities, the cost of labour, the cost of distribution.
Q84 Chairman: Let me turn the situation round. The underlying proposal the Commission are suggesting is a 39 per cent decrease in the price of sugar and roughly speaking that is what would be passed on to the users of it. Is there going to be any kind of positive reaction? In other words, you may not become as competitive, because the price in Europe would still be above the world price, but does it restore some of the competitiveness? Would you say long term we might see a reversal of your 16,000 job loss?
Mr Tyas: Let me make it clear. We reluctantly support the reform package which is in front of us at the moment, but probably because it is the only show in town and it certainly is too little and too late. It is certainly not as good as the proposed reform package which the Commission put out in the first place some 12 months or so ago. If I may take each of your points in turn, you said it would result in a 39 per cent reduction. We would certainly hope to see that, but it is by no means clear that that will happen. We already see the situation that this market does not work in a transparent manner. You can have a complete glut of production and indeed in the last month we have seen that the EU has taken the decision to dump 1.9 million tonnes of excess sugar from Europe onto the world markets, contrary to the WTO ruling, yet the price in Europe is still way above the support price. So we are concerned, and article 37 refers to it in the proposals, that that is not strong enough and that even these proposals will not see the price inside the European Union drop even to the prices which are being suggested. Even if they were, they will still be well above what is paid outside of the EU. If I might make one further point on that, we are also concerned that without the ability for British farmers and British processors to buy quota from other less competitive parts of Europe, then the price in the UK will still remain above that of the rest of Europe.
Q85 Chairman: We are going to come on to talk about where some of the price changes go in a minute. Given the doom and gloom scenario, I just wonder why you are still here. You must still be making some profit in terms of your activities in the United Kingdom, notwithstanding the current high price of sugar. You are making a profit, are you not, in Nestlé in the United Kingdom?
Mr Tyas: We still are, but what we are concerned to see, rather like Ms Lucuk's comment, in representing the UK interests as a UK manager, is that we have the best prospects for manufacturing to continue in this country rather than the products to be made abroad.
Q86 Chairman: Let me just ask about the vulnerability factor and this business of production abroad. Anna Lucuk was kind enough to indicate that some confectionery production had gone to Eastern Europe as far as Cadbury Schweppes were concerned. What are the vulnerable sectors to further changes in location of production if in fact your industry does not get the kind of price change you really want? What are the long-term prospects?
Ms Lucuk: One vulnerable area would be the products we are still currently exporting and we have seen a deficit in the balance of exports and imports of finished products. One area which may be a vulnerable area in the proposals, if the export refunds we receive which compensate us to a degree for the high price of sugar that we pay are eliminated, if they are calculated not to take account of the fact that the market price may not come down in line with the reference price, that would certainly be a vulnerable area for remaining exporters of our sector.
Q87 Chairman: Is it going to be cakes, biscuits, confectionery, soft drinks? In the pecking order what are the ones which could go?
Mr Laming: Across the range of those products; it is across the range. That is what we have seen in the last five years in the biscuit, chocolate, cake and confectionery sector; it is across the range. What we fear is that that will continue. There is no reason to suppose it will be biscuits and not cake or anything like that. It looks like across the range, if the sugar price is not actually brought into some kind of a balance in the marketplace so giving us access to more competitive markets. On the question of soft drinks, the big news in soft drinks actually is the switch from drinks with sugar to drinks without sugar. Consumption of drinks with sugar in this country is actually falling and it is rising in the diet area. I would suspect that part of the reason for that is the price.
Q88 Sir Peter Soulsby: May I just follow the point you were making there? You have described the price of sugar as an important factor in the loss of jobs and so on. You have also acknowledged that it is not the only factor. I wonder whether it is possible to quantify the extent to which the cost of sugar is a significant part of manufacturing costs. Do you actually have some figures?
Mr Laming: Yes, we have. It is the biggest single input in raw material for soft drinks and for many aspects of confectionery. We have presented data to Defra, and we could supply that to you, on varying finished output from as low as five per cent to as much as 60 per cent of the raw material cost of a product is sugar, so it can be quite significant indeed from the point of view of manufacturing.
Q89 Sir Peter Soulsby: You have heard what Tate & Lyle said to us earlier on and I just want to pick up a couple of quotes from your evidence to us. You said "... given that the number of sugar processing businesses is likely to be reduced by up to two thirds, the extent of tacit collusion is likely to grow". Those are fairly strong words about others from whom we have heard. You also say "... further measures are needed to ensure that sugar processors are forced to compete with each other rather than permitted to operate in a partitioned and uncompetitive marketplace". That is a very different impression from the one we have got from Tate & Lyle. Would you like to say a little more about why you think that is likely to happen and why what we heard earlier on is not perhaps a full reflection of what lies ahead?
Mr Tyas: I perhaps alluded to it in answer to the Chairman's question, but if you look at the market there are many features of this market which are very odd. For example, the price in the UK is 10 per cent higher than the rest of Europe, which does oddly seem to correspond to roughly the cost of bringing product across the Channel from other producers in continental Europe. Secondly, you have a market which is vastly oversupplied. You go back to 1.9 million tonnes being dumped just the other month on the world market and yet the price can be held significantly above the support price within Europe itself. Then, one of your colleagues made the point in the previous set of evidence, both of the major sugar processors have been fined in recent years for price fixing. The third point, which I also alluded to previously, is that we believe that situation will only get worse if there is not the transferability of quota, if there is not the opportunity for the competitive farmers and processors in the UK to be able to buy quota from the uncompetitive parts of Europe like Greece or southern Italy. I always rather liken it to whether we would really see subsidies to wine growers in Lancashire to grow wine to compete with southern France and Italy. It just seems madness.
Mr Laming: May I say a bit more about this question of tacit collusion which is somewhat different from what has been seen in the past when the Swedish competition authority coined this description. That is not to say that there are individual acts of culpable behaviour by suppliers of sugar, but the market price behaves as though these acts are going on. The reason is not because individual companies are cheating, but their market share is fixed by law, by quota, so however good a supply business is, however effective it is, it cannot grow its market share, it is constrained by law, by the quota. That is the effect of the quota. Overall, because companies are not in the normal competitive environment, they do not have normal competitive opportunities, the price tends to lift upwards. That is what is meant by tacit collusion; the word "tacit" is important. It is not individual acts of cheating, but the market structure leads to the market price behaving as though they were, which is why we believe further action needs to be taken to ensure it does not happen in the future.
Mr Tyas: I believe that one point we would like to see as a result of this process is that if the recommendations do go through with no ability for this buying of quota outside the country, transferability of quota, then your select committee at its last hearing did recommend that the competition authorities should look at the situation in this country. We really firmly believe that if the proposals go through on this basis with no transferability of quota, if British industry is to compete, then that review by the competition authorities has to take place.
Q90 Lynne Jones: Your remarks about the analogy with producing wine in Lancashire would imply what I had always thought, that the reason certain parts of the EU were uncompetitive was because of climate conditions making their farmers, whereas representatives from Tate & Lyle implied that it was not just that, it was about their processing. If it is primarily climatic, then you cannot do anything about it. If it is about processing then you could improve your efficiency there and perhaps, on the basis that each country ought to have security of its own supply or that we should not be shipping sugar around unnecessarily, if it is relating to processing, should not at least part of the approach be to try to improve the productivity of processing in those countries?
Ms Lucuk: What you are saying is absolutely right. In some countries it is about the productivity of the yield, the actual growing of the sugar beet, but I have some examples from our sugar purchasing department that when we bought sugar in Ireland, for example, up until five years ago the processing industry there was not computerised and that is compared with the UK processing industry which has always been ahead of its time in terms of efficiency and making cost efficient savings and increasing their productivity using every part of the sugar beet processing process to get returns back for their industry. So it is in some areas and you might expect that Ireland had the right climate, if we are talking about that basin in northern Europe, to be amongst the most efficient producers. Obviously there are less efficient producers but I think you will find that is a factor in some of the processing industries. Similarly in Poland the new processing industries which have gone into the country make great strides to build modern plants, close down inefficient plants, but you will see that the state-owned processors have not done that and will suffer as a result of not being able to compete against the more efficient processors.
Q91 Lynne Jones: Why are you buying in Europe? Is there not sufficient capacity in the UK processors?
Ms Lucuk: Sorry; for our UK sugar needs we buy in the UK because we have to. In Poland we are buying for our Polish business. In Ireland we are buying for our Irish business.
Q92 Lynne Jones: You said that you were paying 10 per cent more because of shipping across the Channel.
Ms Lucuk: No; no.
Mr Tyas: No. I think what Ms Lucuk was referring to was that clearly she works for a company which has manufacturing sites across Europe, as indeed does my own, and that is why we know that when we buy sugar within the UK for our UK factories, we have to pay 10 per cent more than does our equivalent factory in Germany or our equivalent factory in Poland.
Q93 Lynne Jones: So you are implying that the processors here know that they can get away with adding 10 per cent on their prices because you would have to add 10 per cent on to ship from cheaper suppliers. Is that what you are implying?
Mr Tyas: Yes, that is a reasonable assumption.
Q94 Sir Peter Soulsby: May I get it absolutely clear that I understand what you are saying? Tate & Lyle were fined in the past for fixing prices.
Mr Tyas: Yes; as were British Sugar.
Q95 Sir Peter Soulsby: You are saying that it is still going on. Is it fair to say that when you describe it as "tacit collusion" what you are really saying to us is that they are just being a bit more careful now to cover their tracks?
Mr Laming: "Tacit collusion" is something different. I do not want to say whether or not that is true but "tacit collusion" is something noticeably different. It rises from the structure of the market itself, not from any individual culpable act. That is the point. It is inherent in the current structure of the regime and that is what needs to be addressed. There may in addition be other stuff, but I could not say anything about that because I do not have any evidence for it.
Mr Tyas: That is why the competition authorities should look at the situation.
Q96 Mr Rogerson: While we might have points of disagreement with the processing industry, one thing which we could draw from this is that you both agree that moving to a real genuine market, the sort of thing we were hearing from our last witnesses would be good for their business, essentially would also be good for yours.
Mr Tyas: Yes.
Q97 Mr Williams: One point on the quota. You said that you would hope that processors in this country would be able to buy quota because they are more efficient.
Mr Tyas: Yes.
Q98 Mr Williams: And that would be more likely to guarantee the price reduction.
Mr Tyas: For the farmers and the processors; yes.
Q99 Mr Williams: My understanding was that the recommendation from the Commission was that that should not take place, but that there should be decommissioning.
Mr Tyas: Yes; in the first recommendations which the Commission made, which this select committee heard before, they were recommending that there was transferability of quota between countries. Regrettably this revised version has taken that away and we find that a very retrograde step.
Q100 Mr Williams: We heard from Tate & Lyle that over one million tonnes of quota were available. Can you explain?
Mr Laming: Because the opportunity for European producers to export so-called sea sugar is going to disappear, because as the price falls the cross-subsidy for that will disappear, as part of compensation for that those countries which are doing a lot of that right now are going to be given the opportunity to increase the reduction of sugar for the EU market roughly in proportion to their export markets right now. So in the UK it is now about 80,000 or 90,000 tonnes.
Mr Tyas: The perverse thing is that the Greek sugar producer gets a proportion of that one million tonnes just as much as the British farmer does and the British farmer cannot buy any of that Greek one however uncompetitive and inefficient the farmer or processor may be.
Q101 Mr Williams: Under the present recommendations then you seem very unconvinced that there is going to be a fall in the price of sugar which has been anticipated by the Commission. If there were that fall, would there be any guarantee that that reduction would be passed onto the consumer?
Mr Laming: There are two reasons to suppose that it would. First of all, think about the retail environment, intensely competitive and any opportunity that retailers have to reduce prices on their shelves for consumers they take. Already manufacturers of soft drinks and confectionary are being asked how much their prices are falling right now because of the reform of the sugar regime. We have to say that actually it has not happened yet, but we are already being asked those questions now. There is very good reason to think that when it finally does come through, the prices will fall. Secondly, it happened before. Between 1996 and 2000 the price of sugar beet fell in this country by 33 per cent and the evidence from national statistics shows the way in which that price fall was transmitted through the value chain and did indeed reach the shelves. The biggest blockage was the price of processed sugar that we buy as an overall region. That price did not fall as much as it should have done.
Q102 Mr Williams: Experience from chocolate eaters is that when the price of cocoa falls the price of chocolate does not fall, as last year.
Mr Tyas: Mr Laming has made the point that when sugar prices did fall, which is the largest single ingredient, far more than cocoa, then the price did fall on the previous occasion. The one key point we are concerned about is that prices will move, but what we are more concerned about is the competitiveness of British manufacturing industry. We are not asking for a subsidy or anything like that, we just want a level playing field so that we can compete on the same terms in factories up and down with those in continental Europe or even outside the EU on the edge of Europe. That is really what we are looking for: just a level playing field and a level field of competitiveness.
Q103 Mr Williams: If there were a substantial reduction in sugar would it replace or displace artificial sweeteners in some of the products your companies make?
Mr Laming: I think by now that the public focus on diet and health is such that people are making choices for a wide range of reasons. These days, certainly the experience in the soft drinks industry is that the taste and the functionality and the effect of calories are taking over from price as the thing which drives consumers. So we do not believe that a fall in the price of sugar would have any impact on the consumption; indeed consumption of sugar is falling right now.
Q104 Mr Williams: One of the reasons for using artificial sweeteners is because they are cheaper than sugar. I am asking whether, if the price of sugar fell, that would displace or replace artificial sweeteners.
Mr Laming: No. From the point of view of soft drinks that would not happen. That shift in public attitude towards sugar and sweeteners is irreversible, particularly in the state of the debate about public health of which we are all aware right now.
Q105 Mr Williams: Are you saying that a reduction in the price of sugar would not lead to an increase in its consumption?
Mr Laming: No, the price of goods containing sugar has fallen in real terms in recent years anyway and consumption is not going up.
Q106 Mr Williams: So demand for sugar is relatively inelastic and people have as much sugar as they want.
Mr Laming: Yes.
Mr Tyas: We believe that the demand for sugar is more based upon the competitiveness of the product made here. If we can go back to a situation where we are exporting 80,000 to 90,000 tonnes from this country, as we were only five years ago, that is going to be the largest driver of demand for sugar in this country. It is industrial sugar users, such as those represented by our companies here today, who take 70 per cent of all sugar which is grown in this country. If we have a thriving manufacturing industry in this country, then that is going to generate the biggest demand for sugar grown here.
Q107 Chairman: May I just explore with you paragraph 2.8 of your evidence and also the table at paragraph 2.6. This very clearly shows that when the raw sugar price fell you went from 33.7 per cent down in the period you have chosen to only 14 per cent down on the processed sugar price. You refer to that in paragraph 2.8. Could you try to explain to us why the fall in the price of raw material is not visited in the processed sugar price? The reason I ask that is that I would imagine both Nestlé and Cadbury Schweppes would consider themselves to be good buyers of raw material. If you saw that the raw sugar price had fallen by that, how is it that your buyers have allowed the processing industry to get away with a disproportionately small fall in the price of the material to you?
Mr Laming: This is exactly the point about tacit collusion and market share which we mentioned earlier. There is nowhere else to go.
Q108 Chairman: I suppose there is nowhere else to go unless you go to it. You said to us that there was a 10 per cent price differential between UK sugar and that from the continent, roughly ascribing to the cost of transport. However, you are big buyers. If you went along to continental suppliers, could you not do a deal with them? The same circumstances must apply to them. They might have been willing to give up a bit more in terms of margin increase from the processor side to get your business.
Mr Laming: Let us say we go to another country. In every country the sugar produced already has a customer. If we go to another Member State and buy the sugar there, that means any sugar they export to the UK is sugar they are taking away from existing customers in each Member State. That is the whole point of the quota.
Q109 Chairman: Because it is a zero sum game.
Mr Laming: Exactly. The whole point of the quota system constrains the production of sugar. That is the point.
Mr Tyas: The way you have described the market is very much the way you would expect it to behave. This market does not behave like a normal transparent market and you come back to the amount which is dumped as sugar and the apparent reluctance, which is referred to in the Swedish study, of companies to transfer sugar across borders. Then the point you began with that the price is still equivalent to the cost of transport across the Channel.
Q110 Chairman: Are there any markets outside the European Union which have over time, to your knowledge, demonstrated a proper relationship between the rise and fall of a market price for sugar and the price of the processed product?
Mr Tyas: If you look at the world price of sugar, which some of our companies outside the EU are able to buy, then it does react very much in that way, but also taking into account supply and demand, as indeed Oxfam and the other NGOs point out, the fact that the European market is not open to many producers of the world means that to a large extent even the world market does not work in a proper and free manner.
Q111 Lynne Jones: You did not answer the question about why chocolate prices did not fall when cocoa prices fell.
Mr Tyas: In many cases we would argue that they did; certainly relative to other costs which increased over that period. The point we were making, more importantly than that, was that the balance of what we were really concerned with here was the strength of the manufacturing industry, whether the products ended up being made in this country or made somewhere else.
Q112 Lynne Jones: You say that the retailers put pressure on you to reduce your prices when your commodity prices go down.
Ms Lucuk: It may be a bit simplistic to see that a drastic fall in any commodity price would have an immediate impact on retail prices and it is retail prices rather than the price at which we sell to the retailers. At any one time different raw materials may be going up or down; you may have high cocoa prices, lower oil prices which impact on packaging and distribution for example.
Mr Tyas: May I go back to the point Mr Laming made. When the sugar prices did fall before then it was transmitted through and there is very strong evidence that it was transmitted through to the retail price.
Q113 Lynne Jones: In relation to developing countries, obviously it is wrong that they should not have access to our markets. On the other hand, they should not have unnecessary tariffs; on the other hand, if you are shipping these you do have environmental implications. Obviously there is an issue of local supply versus supply coming across the world. Would you care to comment on that and should we have some kind of a carbon tax, not tariffs preventing access to our market, but some kind of taxation to reflect the impact on the environment of shipping bulk items across the world?
Ms Lucuk: We would find it difficult to argue for that, given that the LDC countries are expecting to enter the EU markets under the Everything but Arms Agreement. As the agreement stands at the moment, it would further prevent that necessary access which both they and we require in order to make the European sugar market more competitive and fairer on all sugar producers.
Mr Tyas: One of the arguments which might well come into play here, if one were looking at the balance between beet and cane sugar is that from a processing point of view significantly lower amounts of energy are involved in processing cane than are involved in processing beet. Inherently cane is a more efficient way of producing sugar than is beet in certain countries. That might well be offset in some respects by the transport costs involved, but it is still, in terms of the world economy, the most efficient way of producing sugar.
Q114 Lynne Jones: You say that the proposed restructuring is excessively generous.
Mr Tyas: Yes.
Q115 Lynne Jones: What would you do to ensure restructuring and to ensure that quota is relinquished.
Mr Tyas: We find three things iniquitous here. Firstly the level of restructuring, €360,000 per job was the estimate by the EU, which, if you compare it with anything else, is generous in the extreme. Secondly, what is also rather perverse is that it is actually the manufacturers, the customers and the consumers who are paying for it. If we look at anything else, such as the EU reform of slaughterhouses or anything like that, the supermarkets, for example, do not pay for the restructuring costs there. That also seems rather perverse to us. Then we come back to this point which is probably one of the ones we feel most strongly about: the fact that there is no transferability of quota between the different countries, therefore there is no movement to the most efficient farmers and the most efficient processors of beet, who are undoubtedly here in Britain and northern France.
Q116 Lynne Jones: So what are your proposals? What would you do?
Mr Tyas: What we would want to see is a return to the proposals which were made the first time by the European Commission and which this Committee looked at in its previous study 12 months ago, and they occur in most industries, that is restructuring cost being carried by the industry concerned.
Q117 David Lepper: One question on this issue of whether price reduction is passed on to consumers. There was an article in The Independent on Sunday in June this year headlined Cadbury's £70 million in sugar coated savings. I am sure you saw it. The journalist writing that article said that Cadbury Schweppes's management have claimed that savings would be passed on to consumers. Do Cadbury Schweppes stand by that?
Ms Lucuk: We were one of the companies, two days after the Commission released its proposals on 18 June, on 20 June, whose sales teams both in France and in the UK were contacted by major retailers to whom we sell, they are our customers, obviously assuming, as the journalist did, that we had sugar reform and we had a 39 per cent reduction in the price that we pay delivered to our factory. That is the competitive nature of where we operate. We sell to the retailers, we compete among ourselves and there is no way a retailer will let anything past them should a saving of that percentage be possible. I am sure the Committee are aware of the power of the retailers.
Q118 Lynne Jones: If their customers in the supermarket want to buy Cadbury's Dairy Milk, they are going to want to supply them, are they not? They are not going to say "Sorry, because we have not done a deal with Cadbury we are not going to give you enough Fruit and Nut".
Ms Lucuk: Absolutely. We want those retailers to stock our products, so we have an incentive to do the best deal possible and better than Nestlé and better than Master Foods, so that it is our products which are more appealing to consumers when they go into the supermarkets.
Mr Tyas: Our case here today is that we want those products to be manufactured in this country with British jobs, not to be made elsewhere because the largest material price is more expensive in this country.
Q119 Patrick Hall: Could we just quickly look at the issue of security of supply? You have already explained that cane sugar has far lower production costs than beet. Is the source of sugar from beet maintained because it is there or because of the security of supply in Europe argument? How serious are those arguments about security of supply?
Mr Tyas: May I answer your question in two parts? It is maintained because quota maintains it; that is the reason why and that is the reason why the relative proportions of cane and beet exist in Europe. Were those proportions to change, then all of our companies are convinced that with the world market as developed as it is today the sources of cane supply and the assured sources of cane supply could be brought to this country just as easily as beet is today. The proportions you refer to are no result of the market, only of quota.
Q120 Patrick Hall: So in terms of strategic concerns about supply, you seem to be discounting that. That may or may not be an argument for the complex quota and subsidy system.
Mr Tyas: There is a plentiful world supply of sugar. There are many suppliers outside of Europe who would love to have access to European markets and at the moment they are prevented from doing so.
Q121 Patrick Hall: I suppose they would also like to be able to add value in their own countries by refining it there.
Mr Tyas: Yes and we would encourage that.
Q122 Chairman: I should like to turn to one thing about export refunds in conclusion. We had some evidence from a lady called Joan Noble who very kindly wrote to us and briefed us. I shall just read you a few sentences of what she said which encapsulates her concern. "However, there is a real concern for food and industrial manufacturers within the EU looking to compete on the world market". She says that when there is no longer the possibility of the payment of export refunds to make up the difference between the world and EU prices, EU manufacturers may be subject to unfair competition from third country manufacturers while there is still a rigid system of price support afforded to the sugar producer. Would you like to comment on her expression of concern for your industry?
Ms Lucuk: We absolutely agree. We receive export refunds for the high price of raw materials such as dairy products and sugar which we purchase within the EU. When we export to markets such as the US and Canada we have two concerns with the current proposals as they stand: obviously the commitment of the European Commission to eliminate export refunds entirely. We would like to do business without any export refunds. We do not want subsidies, we want to be able to trade on a fair playing field, but we need to be able to buy raw materials at the prices at which our competitors outside the EU can buy those raw materials. That is our first concern: if export refunds are decreased or eliminated will the price cuts, for example in sugar, actually materialise? Our second concern is that the proposals as they stand - and we have not had clarification about how the export refunds will be calculated - at the moment are compensating us for the difference between the world market price and the EU intervention price, but remember already we are paying 10 per cent above that EU intervention price in many countries including the UK, so we are already losing some of the value. We are not sure whether the export refund will be calculated on the basis of the EU reference price and obviously if our market price continues to be above that, we are losing. Will it be calculated net of the restructuring levy or gross? These are the concerns we have and it is of concern to all companies in our sectors.
Mr Tyas: It brings us back to the point that we do not seek subsidy, we just want a level playing field. The only reason that the export refunds are there today is because it is not a level playing field. If we can get back to a level playing field, then we would be happy to do without those refunds.
Q123 Chairman: I presume, because of the uncertainties, there is no way you could quantify the effect on your businesses of an unsatisfactory situation as far as export refunds are concerned then.
Ms Lucuk: I do not have a sector figure in my head, but we can provide the Committee afterwards with a calculation of that. It has certainly been done on an EU level for our sector and there is a study about the impact of the loss of export refunds which we can provide the Committee with. Certainly products such as cream eggs are enjoyed in the US and in Canada and they are manufactured for export in the UK, so it would interest us.
Chairman: That information would be very helpful.
Q124 Mr Vara: The underlying theme, Mr Tyas, of what you and your colleagues are saying is that the price of sugar determines the cost which the manufacturers eventually pass over to the consumer. Mr Laming, you referred to the sugarless goods being produced now. Of course there is a major debate going on about sugar, obesity, diet and everything else. If we go into any store or supermarket now we find items, whether it be jam, drinks, biscuits, whatever, which have less sugar than before. Let me put a proposition to you. If you are paying a certain amount of money for sugar and if it is at a high level, if you are buying less sugar than you did before and you are still charging the same to the consumer, which you are, then why are you complaining? You are using less sugar, even if the prices are high, the cost for your materials are not as much because you are using less sugar.
Mr Tyas: Our main argument is that the products are produced with the amount of sugar which the consumer likes in terms of taste.
Q125 Mr Vara: The consumer wants to use less sugar. That is the premise. You said earlier on that the consumer decides based on cost. I am saying to you that the consumer is now deciding based on health.
Mr Tyas: I think we are agreeing with you: the consumer chooses the products which they prefer in taste. Many of our products are treats. Our concern is that they will buy those products with a greater or lesser amount of sugar regardless, depending upon their taste. What we want to do is to have those products manufactured in this country, with British jobs. We do not want them to be produced elsewhere because we pay, in this country, a higher price for that sugar than they do elsewhere. That is the principal argument.
Q126 Mr Vara: You are not addressing the question. You are paying a higher price, if it is higher, but you are buying less of it.
Mr Tyas: We are paying a higher price ---
Q127 Mr Vara: But less of it.
Mr Tyas: Even if the product is made in Poland, for example, or outside the EU in Bulgaria, it is still going to have the same amount of sugar. If it is a low sugar product, it is going to be a low sugar product. The consumer buys on taste, but products are generally manufactured on location dependent upon cost. It is the cost of manufacturing in this country which we are so concerned about.
Mr Laming: May I expand on that, specifically in the context of soft drinks, because I think you were picking up my earlier remarks? There has been an historic shift, if you look at the budget lines in this range of drinks, the ones which retail at the lowest prices, from sugar to intense sweeteners, supposedly for cost reasons. This has happened over the last 20 years. That is a fundamental shift which has happened and it is basically irreversible. Now, looking ahead, the choice people make is really based on taste rather than price, in terms of the amounts of different kinds of products which people choose because we see that consumption of goods containing sugar is not going up even though the price is falling in real terms. There is no elasticity there. Above all that there is an increasing awareness of the value of including drinks with intense sweeteners in the diet as opposed to drinks with nutritive sweeteners for people who wish to enjoy soft drinks, but restrict their calorie intake. While the soft drinks industry is buying a bit less sugar than it did 20 years ago ---
Q128 Mr Vara: A lot less I would have said and the trend is towards that.
Mr Laming: Yes, the trend is towards less. It is going into fewer drinks. The drink which contains sugar contains the same amount of sugar it contained 20 years ago. It is just that increasing proportions of drinks are diet, low calorie and have no sugar at all. Mixed sweetener drinks, some sugar and some intense sweetener, are a very small proportion of the market.
Q129 Chairman: I think what Mr Vara may be getting at, and I hope that I am interpreting his question correctly, is that if the price of the product remains the same and the amount of sugar in it goes down, then there is a little more in it for you. Mr Tyas has said that the product is the product the consumer wants and you are selling in a market where relativities are important and therefore it does not matter what the proportion of sugar is, it is one similar product compared with another which dictates whether the product sells or not.
Mr Tyas: Yes, that is exactly right. It is where the product is produced which perhaps concerns us most.
Q130 Chairman: A final brief comment from Mr Laming.
Mr Laming: The idea that there are drinks with less sugar in, no. The recipes are staying pretty much the same. What is happening is that people are switching from drinks with sugar to drinks without sugar. There is no incremental fall per drink.
Chairman: I think we have got the message. It was very interesting to hear all the discussion about sugar. I can remember as a small boy being taken to the Castle Museum in York in the period of post-war sugar rationing and standing in front of an exhibition labelled Sugar Mountain. There was this wonderful dome-shaped piece of sugar which had been in this museum since before the war and my mother always used to look at it and say it was a year's ration of sugar. Some of us come at this from perhaps a slightly different point of view to other colleagues who have not had a similar mind-setting experience. May I thank you all very much indeed for the evidence you have given; thank you very much for your evidence.