Select Committee on European Union Thirty-Seventh Report


18th REPORT: TOO MUCH OR TOO LITTLE? CHANGES TO THE EU SUGAR REGIME

Department for Environment, Food and Rural Affairs Response

INTRODUCTION

  The Government welcomes this considered and constructive examination of the issues relating to reform of the EU sugar regime.

  As the Committee's report notes, agreement on a revised regime was reached at the November 2005 Agriculture Council on the basis of a Presidency compromise which was supported by an overwhelming majority of member states. The formal legislative aspects of the dossier are expected to be completed in February 2006, now that the European Parliament's Opinion has been received. Secondary legislation implementing various aspects of the new regime remains to be put in place by the Commission through the Management Committee procedure, before entry into force of new arrangements from 1 July 2006. In addition Member States need to reach their own decisions on certain discretionary elements, notably in respect of compensation for growers and the operation of the voluntary restructuring scheme.

  Decisions are also still outstanding on adjustment aid for ACP Sugar Protocol countries for the period 2007-13, following agreement on an initial tranche of 40 million euros for the balance of 2006. Adjustment aid was not a matter for the Agriculture Council and negotiations continue on this aspect of sugar reform in the General Affairs and Development Councils. It is very much the Government's intention that this should be concluded as soon as possible.

  Notwithstanding the work still to be done on this and on transitional and implementing measures in general, the overall framework and duration of the new regime is nevertheless now clear. Much of this reflects the Committee's conclusions. The Government believes the agreement on reform to be a very good outcome, which marks a major step change in a regime hardly touched by all previous CAP reforms since its inception nearly 40 years ago.

  When fully implemented, the reformed regime should bring significant economic benefits to the EU and greatly reduce the market and trade distortions that have characterised the present arrangements. The new regime should also enable the EU to comply in full with its WTO and other international obligations and to advance its more general trade and development objectives.

  The final package endorsed by the Council is very closely based on the proposals considered by the Committee in its report, namely a substantial cut in institutional-prices, abolition of permanent intervention, the introduction of a voluntary restructuring scheme to reduce production and a new decoupled direct aid for growers. Although certain changes have been made, the Government believes these are entirely consistent with the aims of the reform and in some instances help to address specific concerns raised by the Committee, notably in respect of possible discrimination against the UK as a result of the current deficit area status of UK beet production and the balance between the beet and cane sectors. A final Regulatory Impact Assessment incorporating these elements is in preparation, but is expected to confirm the broad efficiency and welfare gains resulting from the earlier analysis.

  The main points of difference between the final compromise and the original proposals can be summarised as follows:

    —  the price cut will now be 36% instead of 39%, the initial reduction in 2006-07 being the same as proposed, but with new interim steps in 2007-08 and 2008-09 leading to the final cut in 2009-10;

    —  the budgetary provision for the decoupled grower compensation will remain as before, but, in Member States such as the UK where the level of existing prices has reflected their deficit status, additional compensation will be provided in the first four years of the reform;

    —  as a consequence of the re-phasing of the price cuts, ACP and LDC suppliers will have longer to adjust, and more money will be raised through the processor levy (thereby allowing the rate of restructuring aid to be maintained at €730 per tonne, in 2007-08);

    —  a minimum of 10% of the restructuring aid is now reserved for sugar beet growers and machinery contractors to compensate them for the loss of their specialised machinery when production is abandoned, and the fund will now provide greater flexibility as regards the partial closure or re-use of buildings: also, Member States in which more than 50% of the quota is being given up can qualify for an additional diversification aid reflecting the extent to which their industry is closing, as well as some time-limited adjustment aid for remaining growers;

    —  there will be a limited safety net intervention scheme for four years, with a ceiling of 600,000 tonnes a year, set at 80% of the reference level for the following year;

    —  traditional cane refiners will receive a new transitional aid, totalling €150 million in the period to 2009-10, to adjust to new market conditions;

    —  10 Member States not included in the earlier allocation key for C sugar will receive additional quota, and three will receive additional isoglucose quota;

    —  there will be a 50% reduction in the levy contribution payable by the isoglucose sector;

    —  new assurances have been given about the availability of sugar at competitive prices for non-food uses, and on the possibility of exports within the revised limits set by the WTO;

    —  the circumstances in which the existing safeguard provisions under the Everything But Arms Agreement might be invoked where fraud is suspected have been clarified.

  In the light of these developments the Government has the following responses to the Committee's conclusions.

  Paragraph 118.  We welcome the Council of Ministers' decision to reform the EU sugar regime. To have left the regime unchanged would have signalled a distorted and wasteful use of resource within EU agriculture (paragraph 17)

  The Government is grateful for the Committee's support and for the broad consensus among UK stakeholders in favour of early decisions to bring sugar into line with other aspects of CAP reform. Conclusion of these negotiations under the UK Presidency represents a significant achievement and demonstrates the EU's commitment to continued progress towards its wider trade and development objectives.

  Paragraph 119.  We understand the anxieties expressed to us by witnesses that a price cut of almost 40% is too large. However, we believe that a substantial price cut is necessary in order to reduce EU sugar production and eliminate the need for the subsidised exports of surpluses. The Council of Ministers did not agree the originally proposed cut of 39% but we believe a cut of 36% will provide a clear and appropriate signal to the industry about its future pattern of investment. We are, however, concerned about the impact of the cut on growers in certain ACP countries. (paragraph 26)

  The Government agrees with this analysis and strongly supported the Commission in resisting calls for a different approach or for a less radical series of price reductions. The final compromise does provide for a longer period of adaptation and slightly smaller final cuts. But the Government shares the Commission view that this will not materially affect the expected benefits of reform or the prospects of achieving the necessary degree of rationalisation and restructuring within the EU sugar sector.

  The Government shares the Committee's concerns regarding the impact on ACP states but believes that, overall, the effect of reforming the EU sugar regime will be beneficial for developing countries, as it will reduce the market distortions caused by the existing regime. We do however recognise that reform will have a negative effect on some of the ACP Sugar Protocol countries. This is why the UK Government is working hard to secure adequate and timely transitional assistance to help ACP Sugar Protocol countries adjust to reform. We want the Commission to find at least €250 million per annum for transitional assistance for ACP sugar producers, preferably through an extra budget line in the new Development Cooperation and Economic Cooperation Instrument. This is a matter to which the Government continues to attach great importance.

  Paragraph 120.  The transitional measures will continue coupled aid for some remaining beet growers. This will sustain high cost production, preventing the sugar industry from becoming fully competitive and weakening the EU's ability to respond to the requirements of the WTO and developing countries, (paragraph 34)

  The Government is pleased that the final agreement provides for mandatory full decoupling, with only a minor exception in the case of those countries giving up at least 50% of their quota, who will have the possibility of an additional coupled payment of 30% of the income loss for a maximum of five years.

  Paragraph 121.  We consider that the compensation being offered to growers is now too generous and we note that there is no similar treatment for workers who lose their jobs on farms or in the processing factories. (paragraph 35)

  The Government notes these comments, but believes that the final deal addresses much of the Committee's concern in respect of grower compensation. One of the conditions attached to the payment of the Restructuring Aid in respect of any processing factories which close is that a social plan must be submitted detailing the actions planned with respect to re-training, redeployment and early retirement of the workforce. This includes provision for similar measures on farms. In addition, there is an Aid for Diversification which is intended to ensure national restructuring programmes are in place in regions affected by factory closures and loss of rural employment.

  Paragraph 122.  We share the concerns of witnesses that direct payments might not be immediately completely decoupled in all Member States. If that were the case, sugar growers and processing companies in the United Kingdom would be placed at an unjustified competitive disadvantage. The strategy of the Commission in responding to the requirements of WTO would be undermined and within the EU there would be a substantial continuing distortion in the use of resources. (paragraph 39)

  The final agreement is clear that grower compensation is, with the exception covered by the Committee's paragraph 120, to be fully decoupled and has to be incorporated into the Single Payment Scheme model that Member States have already adopted. This still provides for an element of discretion on the details and the Government agrees that there are a number of issues that need to be considered carefully before decisions are taken on how that discretion will be used. The Government will be conducting a consultation exercise on this issue shortly.

  Paragraph 123.  We are very concerned that the November agreement raises the possibility that, in those countries giving up at least 50% of their quota, farmers could receive an additional coupled payment of 30% of the income loss for a maximum of five years, plus national aid. This contradicts the strategy of bringing production into line with market opportunities through price cuts and the restructuring programme. (paragraph 40)

  Paragraph 124.  Given that the EU must reduce production by approximately 8 million tonnes, the effect of this coupled payment would be that producers who are more efficient would be forced to reduce production to accommodate those who are high cost. We call on the Council and Member State national governments to ensure that all direct payments to sugar producers are fully decoupled. Failure to comply should result in a penalty being imposed by the Commission, such as the withholding of future compensation payment. (paragraph 41)

  The Government notes the comments in these two paragraphs. As it has pointed out in response to paragraph 120 above, this is only a minor exception to the principle of fully-decoupled grower compensation. Coupled payments are only available after a member state has already lost more than 50% of its beet industry. The payments are intended not to prop up inefficient beet production but rather to help manage the decline and eventual disappearance of that inefficient production.

  Paragraph 125.  We recognise that job losses will result from the reform. However, we agree with the Government that these losses are unavoidable if a competitive EU sugar industry is to be built. As in other sectors, it will be the responsibility of Member State governments to mitigate the impact on displaced workers. (paragraph 47)

  The Government agrees with the Committee's conclusions which reflect the findings in the European Commission's own analysis, that without reform around 15,000 jobs would be lost in the European sugar industry by 2012. This is in addition to the 16,000 jobs lost in the UK food manufacturing industry alone over the last five years as set out by the UK Industrial Sugar Users Group in their evidence to the Committee. This point has been covered in the Government's partial Regulatory Impact Assessment (RIA) which will now be updated to take account of the final reform deal. As noted in response to the Committee's conclusion at paragraph 121 above, measures to mitigate the effects of restructuring are explicitly provided for in the conditions for aid, those these remain the responsibility of the member states and companies concerned.

  Paragraph 126.  The arrangements for the setting of quotas per Member State and the prevention of quotas being traded across frontiers is at the heart of the distortion of competition within the EU. (paragraph 49)

  The Government agrees that quotas hamper competition, but it expects cross-border trade in sugar to increase once reform is fully implemented. Over time the role of quotas in regulating production is expected to diminish as the market adjusts to a new balance of supply and demand.

  Paragraph 127.  It is disappointing that the failure of the reform to remove quota or to make it transferable between Member States seems likely to continue this distortion of competition across Member States. (paragraph 51)

  The Government notes the Committee's comments. The purpose of quota transfer would have been to facilitate the redistribution of production within the EU on the basis of efficiency and comparative advantage. But it would not have reduced total production. The voluntary restructuring scheme is designed to achieve a similar market-driven rationalisation, combined with lower output. The possibility of purchasing additional quota (within defined limits) also allows the most competitive to increase their quota share at a price which effectively limits the option to those with the most sustainable basis for future operation.

  It remains to be seen how the market will actually respond to what is a fairly radical set of reforms. If there is evidence of unfair practice on the part of commercial undertakings, the Government is confident that the UK and European competition authorities will act as appropriate.

  Paragraph 128.   The Committee notes that the need for a transitional aid payment for full time refiners arises because the market is both regulated and, at the processing level, monopolistic. We believe it is the responsibility of the Commission to monitor the working of the market and ensure continued and robust competition between the cane and beet sectors. (paragraph 54)

  The Government notes the Committee's comments and agrees with its conclusion. In the final Presidency compromise an additional amount of 150 million euros is to be made available during the transition period (up to and including 2009-10) to assist full-time cane refiners to adapt to the new regime. These funds will be distributed proportionately between EU refiners, on which 94.3 million euros would be available for the UK refiner. Distribution of funds will be subject to the provision of a business plan to be approved by the government of the member state concerned. But this support will cease at the end of the transition period.

  Paragraph 129.  We note the concern of witnesses about potential threats to the environment and the risk that habitats valuable for some species of wild life might be lost. It will be important that these issues are addressed by specific environmental policies, where appropriate, during implementation of the new regime. (paragraph 58)

  The Government notes the Committee's concern that with the implementation of a new sugar regime there may be potential threats to the environment and the risk that habitats valuable for some species of wildlife might be lost. The Government believes that the best way of addressing this is through agri-environment schemes rather than the continuation of an unsustainable level of price support. Indeed, building on the successes of previous agri-environment schemes, the Government launched the Environmental Stewardship Scheme in March 2005 which aims to secure widespread biodiversity and other environmental benefits. With Entry Level Stewardship (ELS), which is open to all eligible farmers and land managers in England, the aim is to cover 70% of farmland within the next three years and, thus, to tackle countrywide problems such as general biodiversity loss and diffuse water pollution. Higher Level Stewardship. (HLS) aims to deliver significant biodiversity and other environmental benefits in high priority situations and areas. There are arable options in both ELS and HLS to provide a range of habitat features such as winter seed and diverse cereal stubbles for farmland birds and for Pink-footed Geese. In addition, monitoring is either in place or under development that will allow us to assess the effectiveness of the schemes in offsetting any biodiversity losses due to changing farm practice.

  Paragraph 130.  There is a strong case for exploring the possibility further of establishing a biofuel industry, but in establishing such an industry, it is important that sugar should be seen as only one potential source of raw material and be used only where it could compete and could do so without specific subsidy. (paragraph 60)

  The Government agrees with the Committee's recommendation concerning the development of a biofuel industry. As part of the overall strategy for improving sustainability and reducing the impact of climate change, the Government supports the production of transport biofuels. However, the Government's climate change programme emphasises the need for cost-effective measures to tackle climate change. A cost-effective and viable biofuels industry is about creating an industry independent of excessive levels of subsidy and support must take account of the cost to the taxpayer. Current support is not targeted at one particular biofuel feedstock. The forthcoming incentives which will allow sugar beet for biofuel use to be grown on set-aside and to be eligible for the €45/ha Energy Aid payment on non set-aside land, currently apply to other biofuel crops. The duty rate cuts for biodiesel and bioethanol apply to biofuels derived from crops and from other sources such as waste vegetable oils and animal fats. As part of the Renewable Transport Fuels Obligation, the Government proposes to develop a carbon and sustainability assurance scheme to ensure that the best biofuels are used.

  Paragraph 131.  We support the Commission's approach of implementing country-specific Action Plans in order to mitigate the impact on ACP Sugar Protocol countries of the reduction in the EU sugar price. (paragraph 71)

  Paragraph 132.  The gap between the sum of money being offered and the estimated assistance required is vast. An offering of €40 million without firm commitments on further funding justifiably fuels the fears of ACP countries that the funding required to adapt their sugar industries may fail to be provided. (paragraph 76)

  Paragraph 133.  Witnesses from the ACP countries were understandably anxious about the precise sources of support money. We recommend that the Commission provides clarification as soon as possible to the ACP countries of which Directorate will have overall budgetary responsibility for the Action Plans. (paragraph 77)

  Paragraph 134.  Implementation of the proposals will create an immediate crisis of reduced revenue for the ACP countries but the Action Plans can only offer solutions for the long term. This makes it essential that assurance of funding beyond 2006 is given by the Council of Ministers now in order that ACP governments can begin the process of transition. (paragraph 78)

  Paragraph 135.  The Committee shares concerns that continuing uncertainty impedes the necessary process of adjustment to lower prices in the Sugar Protocol countries. It is imperative that agreement is reached on the Financial Perspective soon in order that firm commitments can be made on the future funding to ACP countries. The uncertainty over the financing is a key contributor to the anxiety the ACP countries are experiencing as they prepare for reform. (paragraph 81)

  Paragraph 136.   The reform will be introduced over a more gradual timeframe than the two years originally proposed. It is important that this should not delay the action that is needed to adjust ACP sugar industries to the longer term level of price cut. (paragraph 83)

  Paragraph 137.  Ultimately the process of adjustment cannot be escaped. For the ACP countries concerned, the greatest benefit would come from aid to a longer term development strategy rather than sustaining a high cost sugar industry. (paragraph 86)

  Paragraph 138.  We accept the need for assistance to be tailored to the needs of each country and designed to facilitate each country's long-term economic development. However, the funding provision remains totally unsatisfactory. We strongly recommend action by the Commission's DG Agriculture and DG Development should be co-ordinated to ensure that funds are available on a scale and at a time that reflects the scale of the problem the ACP countries face. (paragraph 87)

  The Government notes the comments on transitional assistance for ACP countries contained in paragraphs 131 to 138. It agrees that it is unfortunate that the EU's budgetary timetables and the timetable of reform are such that agreement on the sugar reforms was reached in Council before the budgets from which assistance is to be funded were agreed. This has led to the current situation of uncertainty for the ACP Sugar Protocol countries. It should be emphasised that the €40 million of assistance that has so far been confirmed is only for 2006. Further and more significant assistance will be provided between 2007-13. Since the next Financial Perspective is still being negotiated it is not possible to give any figures on what levels of funding are likely to be however, The Government agrees that it is necessary to provide certainty to the ACP by deciding on these levels as soon as possible, and would like to assure the Committee that the UK will be pressing for adequate funding for sugar transitional assistance as part of this process.

  The Commission have proposed that funding for 2007-13 should come from the Development Cooperation and Economic Cooperation Instrument in the External Relations budget in the next Financial Perspective. No decisions have yet been taken on this and discussions are ongoing. The new Financial Framework agreed in December was a major step forward as it set the overall EC budget limit, including individual Heading ceilings. The Austrian Presidency will now take forward the consideration of detailed allocations within each budget Heading, including the financial costs of sugar transitional assistance to ACP sugar producers.

  The longer phase-in period for price cuts for the ACP under the terms agreed in November 2005 will give the Sugar Protocol countries more time to implement adjustment programmes before reform is fully implemented. It is important that assistance is delivered as soon as possible to take full advantage of this extended period. The UK Government has been working with the European Commission and the ACP to make this happen—commissioning studies of the likely impact of reform on the ACP and the LDCs to inform debate about the need for transitional assistance, providing £260,000 to fund the development of the country plans in the Caribbean, and funding a workshop that initiated the process of preparing these plans. As Presidency, the UK worked to facilitate agreement on the Regulation that underpins the provision of assistance in 2006. The Government has been strongly engaged in helping to make effective EU transitional assistance a reality, and will continue to do this.

  Paragraph 139.  It is important that the EBA safeguard procedure only applies to triangular trade and is not interpreted as the EU backtracking on its commitments to EBA countries. (paragraph 90)

  The Government agrees with the Committee. Least Developed Country exports are important not just for their economies, but also to maximise competition in the EU sugar market and ensure that EU market prices are brought down to the new reference levels. On 1 December Commissioner Fischer-Boel issued a letter to Dr Ali Yousef Ahmed, Chairman of the LDC Sugar Group to clarify the interpretations of the declaration, underlining that it is not a retreat from commitments to EBA countries.

  The Commission confirmed that the reform declaration does not substantially depart from the GSP Declaration, except that it does apply on a country specific basis. The Commission also confirmed that the 25% threshold is only a trigger for opening of procedures to decide whether safeguard measures need to be applied, and not a threshold for the adoption of such measures. The new regime is conceived in a way that the EU can cope with these quantities without using these safeguard measures. Even if the assumed quantities are reached or exceeded, it does not automatically mean safeguard measures would be applied: an in-depth analysis has to take place ensuring the necessary balance between impacts on LDCs and Community producers.

  Paragraph 140.  The Committee notes the concerns of witnesses worried by possible environmental implications of changes in world production brought about by reform of the EU sugar regime. However, we conclude that significant changes in the global environment are unlikely to result from the EU reform. (paragraph 100)

  The Government notes the Committee's concerns and confirms that environmental issues were considered as part of the reform process, the principle objective of which was to provide a sustainable framework for sugar production in the EU and for ACP and LDC suppliers The Government has reached the same conclusion as the Committee, as set out in the partial Regulatory Impact Assessment.

  Paragraph 141.  Although the transitional arrangements for coupled payments would only become effective when a Member States reduces its quota by 50%, coupled payments sustain high cost production. The transitional arrangements are therefore in conflict with the underlying policy objective of creating a competitive EU sugar industry. Furthermore, the allocation of an additional 1.1 million tonnes of "c" sugar appears to dilute the impact of the original proposal, whilst the decision to allow Finland to provide a national aid of up to €350/ha to its sugar producers provides a further conflicting signal. This causes us considerable concern. (paragraph 102)

  The Government notes the Committee's concerns. It welcomes the decision to allow additional quota reflecting former C-sugar production. This will help to dilute the influence of production quotas and will help to bring down prices an the internal market as discussed in the comment alongside the Committee's paragraph 127.

  Paragraph 142.  We are concerned that the price cut may not be severe enough to reduce overall production. In that situation, the Commission should implement a further price cut rather than a flat rate quota cut. (paragraph 107)

  The Government notes the Committee's comments. The Commission will be reporting on the progress in reducing production through the restructuring scheme by the end of 2008. Our own analysis suggests that if prices fall to the new levels, it will be sufficient to bring the EU market into balance. The Government agrees that price reductions are more effective than quota cuts. Nevertheless, it is clear that there will be a very large sugar surplus on the EU market in the first year of the reforms and the Commission have made clear that they will use all of the mechanisms for market management that are open to them in order to limit this surplus.

  Paragraph 143.  We recognise the widespread resistance to the removal of quotas among Member States but believe that if the price cuts and restructuring process are successful, quota will become redundant and should be removed. in that context the requirement to leave the new regime unchanged until 2014 is inappropriate. (paragraph 111)

  The Government notes the Committee's views. The UK has consistently argued in favour of phasing-out all production quotas in a reformed CAP. The difference between the agreed reforms and some of the Commission's earlier ideas is that the reduction in EU production capacity will be a voluntary process. By radically cutting prices, in order to discourage production in high cost regions and by facilitating increased quota production in more efficient regions as well as in alternative sweeteners, the agreed reform moves decisively towards a situation where quotas would no longer be necessary. Monitoring and evaluation will be important over the coming years in order to form the basis for further change as appropriate.

  Paragraph 144.  As stated in our earlier report, we strongly support the need for the WTO to provide practical and effective means for agricultural liberalisation. The EU can no longer postpone action on difficult issues. Every effort should be made to reach agreement within the Doha Round. (paragraph 115)

  Since the Committee's report was published last year, the 6th Ministerial meeting of the World Trade Organisation (the WTO) took place in Hong Kong (13-18 December 2005). The outcome at Hong Kong might not have been as ambitious as many had hoped, but it did take some significant steps forward.

  The main achievements at Hong Kong were:

    —  Agreement to end all export subsidies by 2013 and a substantial part to be realised by the end of the first half of the implementation period.

    —  Extending duty-free and quota free market access to 97% of products originating from Less Developed Countries.

    —  An agreed date to end cotton export subsidies by 2006.

    —  New commitments were pledged from the EU, US and Japan on aid for trade beyond the ambition of Gleneagles.

  People had lowered expectations for Hong Kong but a key part of what we did achieve was down to the EU—in particular, on agreeing to an end-date on export subsidies. There is much significance in the EU signing up to this, showing that they are prepared to face up to difficult issues in order to secure a deal.

  The Hong Kong text has set the end of April 2006 for agreement on modalities (the final architecture of a deal) in agriculture and NAMA (Non Agricultural Market Access) and substantive conclusion of the Round by the end of 2006. The UK and the EU are committed to achieving this deadline.

  Having agreed to the elimination of all export subsidies by 2013, WTO members can now concentrate their efforts on coming to an agreement on other aspects of the negotiations, including a tariff reduction formula to provide substantial increase in market access. The EU put forward a proposal, including this formula, on 28 October 2005 and a number of other parties have also put forward their own proposals. Further negotiation from all WTO members is now urgently needed in agriculture and in other areas of the Round, such as NAMA, in order for the Round to move forward. The UK Government continues to seek to persuade other WTO members of this need for constructive engagement. We agree that every effort should be made to reach agreement within the Doha Round.

  Paragraph 145.  While we welcome this reform, it must be seen as only a step towards a sugar industry that is able to compete in a world market without the need for levels of protection substantially greater than those given to other sectors of the EU economy. (paragraph 117)

  The Government agrees with the Committee's analysis. Defra's Regulatory Impact Assessment sets out clearly the very substantial economic welfare and consumer costs of the existing regime. It also analyses what a fully-liberalised EU sugar market would look like. The agreed reforms reduce the costs by roughly half. That in itself represents a very significant achievement, particularly as all previous attempts at reform in this area have not succeeded. The Committee will however be aware of the Government's Vision paper for CAP reform which sets out its ideas on the way forward for the CAP more generally.



 
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