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Lord Middleton: My Lords, perhaps I may explain. Regions are not coterminous with member states' boundaries. For instance, the noble Lord mentioned the difficulty in respect of Italy. One region of Italy grows sugar beet easily and profitably but another region could not be a worse place to grow sugar beet. We refer to that as a region.

Lord Carter: My Lords, that explanation was extremely helpful and it is as I understood the position. However, reading the report quickly one may think that the regions were national and not across the Community. Throughout its existence a feature of the CAP has been that it has not led to the encouragement of efficient production in the right areas, or regions, and it is hardly surprising therefore that that is built into the sugar regime.

The committee is right to point out the Commission's failure to deal with the possible effects of the accession of the central and eastern European states and the effect of that on the sugar regime. I suspect that the real reason for the Commission's omission is that it does not have the first idea about how to deal with the problem. The noble Lord, Lord Mackie of Benshie, referred to the Foreign Secretary saying that the cost of accession would be about £50 billion. That can be compared with what was said only this week by Mr. William Waldegrave in the agricultural debate in the Commons. Referring to the accession of the eastern European countries, he said:

I believe that that is the first time the position has been expressed by the department. I can see that the noble Earl the Minister is surprised and obviously communications within the department are not good. I

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believe that the Minister is saying that because of the savings within the budgetary guideline, if we are below it, the cost of eastern European entry could be met and we could remain within the guideline.

I considered the effect of that statement on the sugar regime and others. I believe that when in 1999 we renegotiate GATT the eastern European countries will not by then have joined. Perhaps within the GATT negotiations it would be feasible to begin to build in the effects of the accession of the eastern European countries within the early years of the next century. I do not expect the Minister to reply to the point tonight. When one compares the figure given by the Minister of Agriculture for the cost of the eastern European accession, those given by his colleague the Foreign Secretary and others that are being mentioned, it is obvious that no one has the first idea what the actual cost will be.

The Minister made much of the analogy of the tanker—that the agricultural policy is slowly changing course—and that was picked up by the noble Lord, Lord Reay. Perhaps it is changing course but the oil slick is certainly not getting any smaller.

I was interested to note that at paragraph 73 the committee flirted once again with a variant of the bond system. It suggested that producers leaving the industry could be compensated by a buy-out scheme financed by the industry. It is certainly an interesting variation of the traditional idea of the bond, which would be financed by taxpayers. But when the committee refers to "the industry" it actually means the consumer. That point was made in opening by the noble Lord, Lord Middleton.

The committee's conclusion in paragraphs 74 to 80 was an excellent summary. However, I wonder whether it has really thought through the political agricultural and economic results of the tradable quotas which it suggests at paragraph 78. For once I shall pray in aid the Government's view as set out in their response to the report. I shall not quote it in full because that was done by the noble Lord, Lord Marlesford. The Government state:

    "we incline to the view that assigning quotas to growers instead of (or in addition to) processors might increase the difficulty of doing so".

That is, of improving the regime. They continue:

    "It might also make more difficult the eventual abolition of the quota system, if that seemed obtainable at some future date".

I wish to deal with the interesting points that were made by the noble Lord, Lord Marlesford, on the tradability of quotas. First, that will do nothing for new entrants. If one has to buy a sugar beet quota, it will be extremely hard for a new entrant to join the regime. We know that the price of a quota is an artificial price for a bureaucratic construct. From my experience, I argue that the ability to buy quota—of course, I refer to milk quota—is not related to efficiency but to one's command over capital and income stream. Often, that has as much to do with inheritance as with efficiency.

I was interested to hear the noble Lord's analogy—I do not believe that it would be rude to describe it as his free market ideology—which was expressed by proving that there is such a thing as a free lunch. He appeared

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to imply that although the capital asset would be created, it would be done without any real cost to anyone. Money used to buy quota is not available for what I would describe as "useful investment". It is merely a money transfer between farmers with no obvious effect on agricultural production and investment. It is a money transfer for the exchange of an artificial licence to produce.

There is a great deal more to be done on the proposal before one can agree with it. However desirable it may be in theory—and I emphasise "in theory" - if we were to give sugar beet quotas a monetary value, and if they were to be tradable across national boundaries, it would in practice create distortions between farmers, regions in each country and member states.

Lord Marlesford: My Lords, I was trying to make the point that the price paid for the quota is part of the profit that a more efficient producer can make compared to a less efficient producer. Therefore, that profit is being, as it were, shared. The level at which the quota reaches its price depends on many factors. One of them is the price at which one can sell the production. If there is greater production by more efficient rather than less efficient producers, a lower price can be paid to all producers. Therefore, all I am saying is that that would be a means of enabling cuts to be made in the support price for the product.

Lord Carter: My Lords, I understand the argument entirely but the fallacy is the assumption that efficiency gives the producer command over the income stream which enables him to buy the quota. In fact, milk quotas have shown that the ability to buy quotas depends on whether you are an owner/occupier who has inherited the farm and have no rent to pay or if you have heavy borrowings and so on. I believe that we should leave the point now and perhaps discuss it outside the Chamber. But I am not convinced on the argument that we should not be storing up trouble for the future if we were to make the quotas fully tradable.

With that one proviso on the committee's report, I repeat my congratulations to the committee and its chairman—the noble Lord, Lord Middleton—on producing an excellent report.

7.20 p.m.

The Parliamentary Secretary, Ministry of Agriculture, Fisheries and Food (Earl Howe): My Lords, I should like to begin by echoing the comments of other noble Lords and by congratulating my noble friend Lord Middleton and the committee on the thoroughness of their analysis of what is a complex regime and the Commission's associated proposals. The committee took evidence from the wide spectrum of interests involved in the sugar sector and, although faced with a large number of often conflicting arguments, it has succeeded in producing a report which sets out clear views on the regime, the Commission's proposals and ideals for change. The Government welcome the report and agree with its underlying theme that the sugar regime badly needs to be reformed.

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Before discussing the substance of the report, perhaps I may respond to the noble Lord, Lord Carter, by bringing your Lordships up to date with developments in Brussels on the Commission's proposals. At the time the proposals were issued, last November, it seemed there would be pressure on the Council to take an early decision. In the event, that timetable slipped, but the indications are that the Presidency will be seeking to press towards agreement at next week's meeting of the Agriculture Council. The debate we are having today is therefore very timely and will contribute to the Government's preparations for the Council negotiations.

The Government have long been critical of the sugar regime, which, as my noble friend Lord Middleton said, has changed little since its introduction in 1968. High support prices in the Community encourage the production and export of a large surplus and work against the interests of both domestic and industrial consumers. Further, the quota regime does not reflect the relative efficiency of production among member states; nor does it encourage efficiency. We had hoped that the Commission would have taken the opportunity of the current review to undertake a thoroughgoing reform of the regime.

Therefore, like the committee, we were disappointed by the limited nature of the Commission's proposals. Those do little more than introduce provisions to enable production quotas to be cut, if necessary, for GATT purposes and modifications to elements of the cane sugar supply arrangements necessitated by the end of the Portuguese transition period. In particular, the proposals make no recommendations for any reductions in support prices.

The Government agree with the committee that reductions in price are necessary to reduce the imbalance with other arable crops, to benefit consumers and to respond to GATT pressures. The minimalist approach adopted by the Commission will send entirely the wrong signal to producers who will have to face up to continuing GATT pressures and, as the report points out, the prospect of the accession of Central and Eastern European states. It can not be right to encourage producers to believe that the regime can continue unchanged indefinitely.

The main elements of the GATT agreement to affect sugar are requirements for a 36 per cent. cut in the level of export refund expenditure; and a 21 per cent. cut in the volume of subsidised exports compared with the 1986-1990 base period. That means that, in the year 2000-01, expenditure will be limited to 497 mecu and volume to 1.277 million tonnes—excluding a quantity equivalent to ACP imports.

It is difficult to predict exactly how these limits will affect the sugar regime because of the number of variables affecting EU consumption and world prices. Depending on assumptions used, production cuts needed can range from minimal to over 500,000 tonnes. The Commission has taken the optimistic view that the effect will be minimal. GATT also requires a 20 per cent. reduction in border protection, which may, in the latter years of the GATT period, lead to pressure on Community prices—but again, as the noble Lord, Lord

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Carter, said, much depends on the level of world prices. Like the committee, we believe that it is better to prepare now for those changes by planned reductions.

We agree with the committee that the prospect of accession of the Central and East European States to the Community should have been considered by the Commission. Their accession would require major changes to Community agricultural policy as a whole. That is essentially because of the very significant budgetary consequences of applying the CAP in its present form. Further, the CEE countries, under GATT, have only very small entitlements to make subsidised exports. It is difficult to consider in isolation the detailed effects on sugar of absorbing these countries into the Community, but accession will clearly put more pressure on the regime.

We share the committee's conclusion that there should be a planned, phased reduction in support levels. In Brussels we have argued for a 12 per cent. price reduction over three years, followed by a review. In answer to my noble friend Lord Mottistone, I should say that we share the view that a 6-year regime as proposed is not satisfactory. However, I would say to the noble Lord, Lord Mackie, that we do not agree that price reductions should be accompanied by compensation to growers. We believe compensation should be considered only as a transitional measure to enable growers to adapt to sudden and significant reductions in prices. We see no need for it at all if prices are reduced gradually over time. For sugar, it also has to be remembered that there is a considerable margin for price cuts before compensation could even become an issue. Before the 1992 CAP reform package introduced the concept of compensation, cereals prices were cut significantly whereas sugar prices changed little. Therefore, sugar has more than a little catching up to do.

Sugar prices are seriously out of line with those for other crops. Including agrimonetary changes, sugar prices have been cut by only about 4 per cent. since 1985. Cereals prices have seen cuts by around 19 per cent. before compensation was offered under CAP reform. Therefore there is scope for price cuts before the question of compensation need arise.

It is said that the sugar regime is self-financing. It is true that levies on growers and processors cover the costs of disposing of surplus quota sugar with the exception of a tonnage equivalent to imports—essentially sugar brought in under preferential arrangements, mainly from the African, Caribbean and Pacific countries and India. Similarly, storage aids are covered by levies on sugar when it is first marketed. The net budgetary cost is therefore relatively low. However, as many noble Lords have said, the cost is passed on to consumers in the form of higher prices.

The noble Lord, Lord Carter, wondered how any price cuts might be passed on to consumers. It would be surprising if competitive pressures did not result in the benefit being passed on to consumers in the form of lower prices. The Consumers in Europe Group, in its submission to the committee, indicated clearly that consumers would pay less for both sugar and products containing sugar—such as biscuits, drinks and

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confectionery—if prices were cut. Obviously, where sugar is only one of several ingredients, that would contribute to keeping down end product prices but would not lead to substantial price cuts.

My noble friend Lord Reay made some wise comments about quota cuts. The committee recommends a cut in the overall Community quota of up to 20 per cent. However, as the report notes, and as the noble Lord, Lord Mackie, will doubtless be pleased to hear, quota cuts are not our preferred method either for adjusting the regime to meet GATT commitments or as an instrument of reform. The Government believe that action on prices is a better means of discouraging surpluses and of directing production towards the more efficient producers and member states. Mechanisms for distributing quota cuts among member states tend to be arbitrary and based on criteria which disadvantage the UK. However, if there have to be quota cuts, we share the Committee's view that they should be based on member states' past performance and levels of self-sufficiency, which supports our argument in Brussels that cuts in the UK quota are unjustified.

The committee suggests that consideration should be given to the idea of a right of quota ownership for growers and then making that quota transferable. That point was raised especially by the noble Lord, Lord Carter, and by my noble friends Lord Reay and Lord Marlesford. Certainly it has theoretical attractions as a means of facilitating a more efficient allocation of production. However, I have to say that we have doubts whether such changes would really be practicable or lead to lower costs and thus lower prices. It would require fundamental changes to the regime and add yet another layer of rules and regulations. As my noble friend Lord Reay pointed out, it would imbue quota with capital value, and would make simplifying and dismantling the regime at a later date even more difficult.

If the object is to move production towards the more efficient, the Government believe that the most effective means is to bear down on support levels and allow the market to operate. It is high prices and the quota system as such which allow inefficient production to continue. I should tell my noble friends Lord Marlesford and Lord Reay that the alternative is for the contract arrangements between processors and growers to be modified to allow more flexibility. That could be done under current rules with the agreement of both parties. I see that my noble friend wishes to intervene. I give way.

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