Documents considered by the Committee on 12 January 2011 - European Scrutiny Committee Contents

9 Effectiveness of reforms of the EU sugar market



Special Report No 6/2010 of the European Court of Auditors: Has the reform of the sugar market achieved its main objectives?

Legal base
Deposited in Parliament18 November 2010
DepartmentEnvironment, Food & Rural Affairs
Basis of considerationEM of 1 December 2010
Previous Committee ReportNone, but see footnote
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionCleared


9.1 The EU sugar market is extremely complex, as is the associated common market organisation, which was set up in 1967 to ensure a fair income to EU producers, and to stabilise the market. The sugar regime has in subsequent years undergone a number of reforms, the most recent of these having been in 2006, and it was the subject of a Special Report (No 20/2000)[52] by the European Court of Auditors in 2000. In this latest such Report, the Court has sought to assess the extent to which the objectives of the 2006 reforms have been achieved as regards the future competitiveness of the EU sugar industry, whether they have stabilised markets and guaranteed the availability of supplies, and whether the specific instruments adopted have succeeded in alleviating the adaptation problems related to reform.

The current document

9.2 The Court notes that sugar is produced either from beet cultivated within the EU or from imported cane, and that the common market organisation enabled producers to sell it at guaranteed (intervention) prices which from 1996 to 2006 were significantly higher than the world market price. It points out that the regime also set (and distributed among Member States) production quotas; that import levies were imposed on external production; and that surplus sugar was exported, with export refunds (subsidies) being available for production within quota (but not for that outside it).

9.3 The Court goes to recall that, prior to the reform, the EU came under increasing pressure to avoid exporting surplus sugar at subsidised rates on the world market, which resulted in a ruling by the World Trade Organisation (WTO) in 2005 obliging it to include out-of-quota exports (and re-exports of sugar imported from the African Caribbean and Pacific (ACP) countries) within its overall sugar export limit laid down by an earlier protocol to the General Agreement of Tariffs and Trade (GATT). The effect of this was to reduce average EU exports of subsidised sugar from 6.5 million tonnes a year to 1.37 million tonnes. It also notes that the EU adopted in 2001 the Everything But Arms (EBA) initiative, under which import tariffs for products from 49 developing countries — including six signatories of the ACP Sugar Protocol — were suspended, and that the sugar in question has had free unrestricted access since 1 October 2009, all of which increased the pressure for reform.

9.4 The Court says that the main features of the reform were:

  • the maintenance of production quotas, but with a reduction of some 6 million tonnes (about 30% of total quota production) by 2010, which the Commission estimated would preserve market balance;
  • the provision of additional quota of some 1.5 million tonnes, mostly for those producers which considered themselves to be competitive in the new market environment;
  • gradual reductions in the price for white sugar, from an intervention price of €631.9 per tonne prior to the 2006-07 marketing year to a reference price of €404.4 as from 2009-10;
  • gradual reductions from €44.01 to €26.29 in the minimum price of quota sugar beet paid to producers;
  • the maintenance of a refund mechanism for quota sugar exports, but with the expectation[53] that, as from 2007-08, it would not be used;
  • partial compensation to sugar beet growers for the reduction in price, through the introduction of payment entitlements into the decoupled Single Payment Scheme;
  • the setting up of a temporary restructuring fund, financed by a contribution from producers on quota totalling €6.2 billion, the expectation being that any funds remaining after September 2012 will be assigned to the European Agricultural Guarantee Fund (EAGF), with the fund being used in the meantime for restructuring aid (€4.75 billion), for diversification (€675 million), or transitional aid to full time refiners (€150 million).

Impact of reform on EU competitiveness

9.5 The Court notes that the Commission expected the economic incentives offered to result in the undertakings with the lowest productivity renouncing their quota by accepting restructuring aid, thereby increasing average productivity and the future competitiveness of the industry. However, the Court found that neither the Commission nor Member States required the industry to provide the data needed to assess the reform in terms of individual producers or factories, and that categorisation was based on whether the combined profitability of growers and producers in regions was low, medium, or high, and on 2001 data (so that it did not show the incidence of high profitability undertakings in low profitability areas, or vice versa).

9.6 The Court also notes that, in the first two years of the reform, only about 2.2 million tonnes out of the targeted 6 million tonnes was voluntarily renounced, which it suggests was due to the aid available being too low and uncertainty as to its rate. However, it says that, after a number of modifications had been made to the restructuring fund, the 6 million target was largely achieved in the third year, though it adds that, since it had become evident that this could not be done solely by the cessation of production by the least competitive factories in the regions least suited to beet production, a strong incentive was created for all producers to renounce at least a part of their quota. In addition, the Court suggests that some of the chosen mechanisms conflicted with each other, in that the reform aimed on the one hand to persuade undertakings to give up their quota, whilst at the same time offering up to 1.5 million additional tonnes for the more competitive producers.

Stable markets and the availability of sugar supplies

9.7 The Court examined whether the reforms had stabilised markets and guaranteed the availability of sugar supplies, and has concluded that, in the first three years, markets have been stable around the reference price. However, it notes that, since there are no longer any quantitative restrictions on imports from the least developed countries, the level of internal production needed has become the key market stabilising factor, and that the latter is now only about 85% of consumption, making the EU a net importer.

9.8 The Court suggests that an increase in imports would adversely affect the balance of the EU sugar market, and that the Commission may therefore have to again reduce producers' quotas, resulting in further factory closures (with the lost capacity unlikely to be recovered, at least in the short term). It goes on to conclude that the EU has become more dependent on imports for what is a strategic product for the agri-food and chemical industries, whilst new uses also place increased demand on supplies at a time when these are dominated by a limited number of exporting countries: and it also suggests that increased rights of access for suppliers from third countries provides an incentive for producers to invest in those countries, thus increasing the EU's dependency on imports and having a potentially negative effect on the social fabric in its affected areas.

9.9 The Court notes that the recent reforms were designed to reduce sugar prices by up to 36%, and that the EU price has followed the reductions in the reference price. However, it says that it is very difficult to determine to what extent this reduction has been reflected in the price paid by the final consumer, which is also influenced by other factors, such as energy and labour costs. Nevertheless, it observes that studies indicate that the bulk of the reduction is unlikely to be passed on, in that most of the saving will accrue to the producers of processed products (which account for over two-thirds of consumption).

Addressing and alleviating adaptation problems

9.10 The Court notes that it was anticipated the closing of factories would have an important direct and indirect social impact on the agricultural community and the regions concerned, and that the legislation therefore provided for a fund to finance restructuring, diversification and transitional aid. In the case of restructuring aid, it notes that producers were granted roughly 90%, with the rest being reserved for sugar beet growers and machinery contractors; that, since sugar production in the EU is rather concentrated, the geographical distribution of this aid is limited; that, although the aid scheme was intended to include a plan for the re-training, redeployment and early retirement of the work force concerned, there are no comprehensive data on how this has worked in practice; and that there had also been delays in restoring the environmental conditions of former factory sites. As regards diversification aid, the Court says that some 80 sugar beet factories have been closed, and that the wider local community has been affected rather than just those key stakeholders in the sugar sector which were earmarked to receive the aid; that the criteria used for the allocation of aid varied widely between Member States; that there had in some cases been delays in its implementation; and that the Commission had no overview of the impact of the aid on the regions affected. The Court also found that there was no evidence that the transitional aid paid to full time refiners was based on a technical assessment of their needs, or that the amounts were based on objective criteria. It added that the vagueness of the objectives to be achieved made it impossible to evaluate the efficiency or effectiveness of the aid, and that it appears in the main to have been seen as compensation for the future loss on the monopoly those refiners enjoyed in imports of raw cane sugar.

9.11 Finally, the Court notes that around €640 million will be available in the restructuring fund to be assigned to the EAGF in 2012, but that there are significant additional related costs, not directly charged to the agricultural section of the budget, for compensating traditional ACP country exporters for their loss of income, which it says means that the overall cost of the reform is €1.2 billion higher than the average budgetary support before the reform.


9.12 The Court concludes with the following recommendations:

  • that, for any further adjustment of internal production deemed necessary, measures should be designed so as to ensure overall consistency and be based on a thorough technical assessment of needs and on objective criteria;
  • that the Commission should propose measures to remove the rigidities and constraints in the current quota system which affect adversely the competitiveness of growers and producers;
  • that any future decisions which impact EU sugar production should take into account the level of internal sugar production which is considered necessary given the Treaty objective of assuring availability of supply;
  • that price formation should be subject to regular monitoring by the Commission, and that the Commission and Member States should ensure that competition law is correctly enforced in this sector, thus ensuring the Treaty objective that supplies reach consumers at reasonable prices;
  • that the Commission and Member States should take urgent measures to ensure that diversification measures become rapidly operational and produce the intended impact;
  • that the Commission and Member States should become more actively involved in ensuring that the environmental obligations entered into by the closed factories are fully complied with.


9.13 In its response, the Commission suggests that the 2006 reform has successfully managed the restructuring of the sector, providing it with a long-term policy framework, and it says that it has been budget neutral in terms of agricultural expenditure, with the adjustment needs in ACP countries having been explicitly addressed in a specific aid programme agreed as part of the reform package. It also points out that the reform has to be considered against the background of the Everything But Arms Initiative, and in particular the WTO ruling in 2005 obliging the EU to reduce its subsidised exports, which required it to cut its sugar production quotas to maintain an appropriate market balance, and it says that the reform has led to an evident increase in the overall competitiveness of the EU sugar sector, with the simultaneous abandonment of existing quotas and the provision of new quotas for more competitive producers having contributed to this.

The Government's view

9.14 In his Explanatory Memorandum of 1 December 2010, the Minister of State for Agriculture and Food at the Department for Environment, Food & Rural Affairs (Mr Jim Paice) says that the Government welcomes the Court's report, and that, although the UK was not one of the Member States specifically examined, the overall conclusions about competitiveness and the functioning of the EU sugar market are of relevance to it. He also says that the Court has recommended further action from the Commission to remove rigidities and constraints in the sugar quota system which adversely affect competitiveness, and that this will be examined during the forthcoming round of CAP reforms, in which increasing efficiency and competitiveness will be important objectives for the UK. He adds that this Report of the Court will prove an important contribution to the forthcoming debate.


9.15 As we have noted, the EU sugar regime has been subject to various changes over the years, and this Report by the European Court of Auditors provides an interesting analysis of the impact of the most recent such reform in 2006, which we are drawing to the attention of the House. Having said that, the Government has pointed out that the Court's conclusions and recommendations will be examined in the context of a recent Communication[54] on the further reform of the CAP, and we note its view that the document will make an important contribution to that debate. For that reason, we do not think any further consideration by the House is called for at this stage, and we are therefore clearing the document.

52   (21932) 14925/00: see HC 28-iv (2000-01), chapter 12 (24 January 2001). Back

53   However, the Court points out that, because of market balance, subsidised exports did in fact take place in 2007-08. Back

54   (32233) 16348/10: see HC 428-ix (2010-11), chapter 7 (15 December 2010). Back

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