Memorandum by the Biscuit Cake Chocolate
and Confectionary Association
INTRODUCTION
1. The Biscuit, Cake, Chocolate and Confectionery
Association (BCCCA) represents all the leading and many smaller
manufacturers of biscuits, cakes, chocolate and confectionery
in the UK. In all, the Association represents more than 70 British
businesses. The sector as a whole employs some 56,000 people (though
this number is falling—see below) and has annual consumer
sales of around £7 billion.
2. We have used the "specific issues"
headings in the call for evidence, dated 30 April 2007.
OVERVIEW3. We
support the objectives of the 2003 reform of the CAP:
— to promote more market orientated
and sustainable agriculture;
— to strengthen rural development;
and
— to enhance the competitiveness
of EU agriculture.
4. We continue to favour supply driven by
demand; the shift from product to producer support through decoupled
single farm payments; and clear rules regarding environment, animal
welfare and food safety in accordance with consumers' expectations
for a sustainable model for agriculture.
5. With regard to rural development, the
strengthening of Pillar 2 (Rural Development) has reinforced EU
credibility in the context of WTO negotiations. Premiums for farmers
who commit themselves to quality assurance programmes and to meeting
standards (for environment; public, animal and plant health; animal
welfare; occupational safety) are very useful in the promotion
of a new culture of consumers' expectations.
6. We support the scaling back of intervention
measures in the general drive for competitiveness of EU agriculture.
The intervention price must be seen as a safety net to be used
exceptionally and should not cover the full cost nor ensure a
profit margin; its clear role is to prevent a complete loss.
THE REFORMED
CAP
7. Our experience of the reformed CAP has
been mixed, but overall generally disappointing.
8. Dairy reform was not sufficiently radical
in that the support price reduction programme was too little and
too slow, whereas the possible phase-out of quotas has been far
too long.
9. The sugar reform package, although not
part of the 2003 CAP reform package, has proved disappointing
since its adoption in July 2006. The most significant obstacle
to competition has been the retention of national quotas, whereas
the attempts to reduce the hugely over-supplied domestic market
have failed through the implementation of an insufficiently rigorous
restructuring programme, compounded by preventive withdrawals
of quota which merely exacerbate existing impediments to a competitive
supply chain.
10. Measures to reform the cereals CMO were
initially successful, but latterly the Commission has hindered
the good work by allowing "biofuels policy" to intrude.
For example, a proposal last year by the Commission to authorise
the sale of cereals intervention stocks to the biofuels industry
at prices significantly discounted to market prices for cereals
raised a potential huge problem for cereals users such as our
sector. Fortunately, the Commission has only passed enabling legislation
and will not allow such sales without significant justification.
However, this is a prime example of how the Commission is allowing
the in vogue attraction of biofuels to impact on the availability
of raw materials for the food manufacturing sector.
MARKET MECHANISMS
11. The European Commission has long employed
market mechanisms so as to manage the various CAP commodity regimes,
but with only limited success.
12. Quotas must be abolished as soon as
possible in that they distort markets and the supply chain. Real
market forces mean that prices will find their true level, but
quotas prevent this from happening.
13. Intervention is no longer necessary,
but if retained, stocks must be available to principal users,
who have been subject to the regime's support price levels eg
the food industry before being released (often at discounted prices)
to the non-food industry eg chemicals and biofuels.
14. The requirement for set-aside is no
longer appropriate, given the increased demand for agricultural
land triggered by the promotion of biofuels.
15. The EU has already called time within
the context of the WTO Doha agriculture negotiations on export
refunds, but they must be retained so long as differentials exist
between EU and world raw material prices. They are essential to
allowing the EU food manufacturing industry to remain competitive
in third country export markets. However, export refunds should
only be preserved to bridge the differential between EU and world
raw material prices and should not be used as a market management
tool by the Commission on the domestic raw material supply chain.
Milk Products
16. As already stated, there is virtually
universal acceptance that quotas restrict supply and should be
abolished. However, the Commission does not want to bring forward
the scheduled end date of milk quotas from 2015, but sees the
need to work towards this date with a phased soft landing transition.
We do not think that the market can wait for such proposals under
the CAP Health Check in 2008. Action must be taken now to increase
quotas so as to generate more liquid milk, which will reward efficient
producers and help ease the extreme tightness in the current supply
market.
17. The 2003 CAP reform package included
a combination of small increases to milk quotas, coupled with
progressive cuts to support prices (butter and skimmed milk powder),
but the programme of quota expansion has been too small, whilst
the phased cuts in support prices have been implemented too slowly.
Nevertheless, combined with the introduction of a ceiling on butter
intervention, overall intervention stocks have fallen rapidly
in recent times. Indeed, EU intervention stocks for milk powders
and butter are currently at zero, whilst private storage is well
below normal levels. There is a supply shortfall at world level
of 20%. These pressures have pushed milk product prices through
the roof ie doubling in the last six months.
18. Whilst it may be argued that market
mechanisms have been justified in the current milk products regime,
this perception owes more to the impact of climate throughout
the world as reflected in milk product supply shortages and the
inexorable rise of prices at world level. Quotas distort the supply
chain, giving rise to bottlenecks in some parts of the chain,
which are not incentivised because real market prices do not move
along the whole chain ie prices are artificially held up/forced
down in certain parts of the chain. It is perverse that in such
a current tight supply market UK dairy farmers are exiting and
not even fulfilling the UK dairy quota. Bottlenecks in the distribution
chain do not allow for the current demand for dairy products to
be satisfactorily met. It is only in very recent weeks that UK
farmers have been offered a price for liquid milk to encourage
and incentivise them to meet quota. However, there is the possibility
of a two tier system developing ie liquid milk and industrial
use. Quotas will not work in such a system as farmers will seek
to maximize their production (quota) to the higher price areas
(liquid milk), but leave food manufacturers short of milk products.
19. Over the past years export refunds and
the reduced price butter scheme have been used as the lesser of
evils in EU taxpayers' expenditure as a way of easing the previously
over-supplied milk products sector. These measures are no longer
necessary and have been virtually phased out, but they are merely
indicative of an inappropriate supply chain market.
20. The inadequacies of the market can by
and large be laid at the door of national quotas. If the Commission
is not prepared to bring forward the end date of milk quotas from
2015, then at the very least quota trading between member states
must be introduced during the transition period. This would help
to match supply with demand and would be particularly valuable
to the UK so that farmers could fulfil quota and meet the demands
of the food manufacturing industry for dairy products.
Sugar
21. The EU sugar reform package, which was
introduced in July 2006, retained the national quota system, which
will remain in place until 2015. We reiterate that the quota system
stifles competition by isolating each national sugar market, thus
allowing the few large processing companies that dominate to collude
and raise prices.
22. The BCCCA commissioned a report by Agra
CEAS Consulting in 2005 and the report pinpointed that the national
quota system was responsible for the reduction in manufacturing
of biscuits, cakes, chocolate and confectionery in the UK. The
report highlighted the loss of jobs; reduction in volume of production;
movement of production out of the UK; and the erosion in the balance
of trade situation over a five-year period to 2004. The report
found that in that five-year period up to 16,000 jobs were lost
in the BCCCA sector (a fall in employment of more than 20%), whilst
there was a fall in production of BCCCA products in the UK (sugar
confectionery -11.6%; biscuits -6%; chocolate -4.5%).
23. The fall in the level of production
has continued (currently running at a rate of 5% per annum), whilst
the trend towards concentration in the BCCCA sector through merger
and acquisition and towards divestment of production facilities
out of the UK persists. BCCCA member companies are more readily
able to produce for the UK market in another EU member state where
it is more economic to do so (eg where the costs of sugar for
industrial use is cheaper). This has led to a series of divestments
with production being moved outside the UK, further reducing employment
in the sector.
24. The Agra CEAS Consulting report identified
the existence of the production quota system as one of the key
contributory factors to this deteriorating situation ("...the
only reform options which allow an improvement in the competitive
nature of the sugar supply chain are those that result in the
elimination of production quotas."). The House of Commons
EFRA Select Committee identified the iniquities of the quota system
in its 12th Report of 2003-04: Competition will be increased
more by abolishing quotas than through any other policy change.
25. The Commission's communication of July
2004 on sugar reform proposals suggested that quota transfer should
be permitted across member state boundaries as a reasonable second
best to outright abolition, but this modest proposal was not included
in the finalised reform package. We maintain that quota transfer
would help to halt the flight of manufacturing jobs out of the
EU.
26. On implementation of the reformed EU
sugar regime in July 2006, the Commission recognised that the
market was hugely over-supplied and, as such, there was a need
to remove four million tonnes. The reform package included a restructuring
programme, which offered a juicy carrot for inefficient sugar
beet processors/growers to leave the sector. However, although
the financial incentive was very generous, the take-up has been
very slow (just over two million tonnes in two years).
27. There are various theories as to why
this financial inducement has proved insufficient, but it is almost
certainly the case that the Commission underestimated the profit
margins being made by sugar processors, who have preferred to
remain in the game, even though the support price has been reduced.
Equally, national governments have undoubtedly put pressure on
sugar processors to remain in business by threatening to cut back
on the theoretical proportion of compensation (90%) for the processor.
(In the case of Ireland and Finland, some 34% and around 20% respectively
of the compensation package have been directed to farmers and
other stakeholders.) These uncertainties have meant that some
sugar beet processors, who would have opted to leave the business,
have not done so.
28. The Commission is currently changing
the provisions of the restructuring plan so as to encourage further
leavers. This may happen, but overall we have a situation whereby
a levy has been imposed on the price of sugar for use in manufacture
since July 2006 that has fallen on food manufacturers, but no
benefit has been derived through a restructured/improved supply
market. Indeed, in the event that sugar processors do not take
up the restructuring programme this year, the Commission should
withdraw the requirement to pay the restructuring levy next year.
29. Owing to the inadequacies of the restructuring
programme, the Commission has attempted further to reduce the
over-supply by withdrawals from national quota, but this is virtually
an across the board quota cut, which merely holds up market prices
and therefore conveys no benefit to sugar users, upon whom the
restructuring levy has fallen. The Commission is also looking
at the method of quota withdrawal, but seems to be obsessed with
merely driving down the production volume and has lost sight of
the original reform package intention of developing a streamlined,
smaller, efficient, competitive supply chain ie having shaken
out inefficient processors/growers.
30. We maintain that restructuring will
be driven most effectively by price reduction. The reform package
is designed to cut support prices by 36% in four years, but this
programme is proving to be insufficiently radical. Market prices
have not fallen so there is no price pressure on sugar producers.
Price pressure is needed for farmers and sugar processors to review
the future validity of whether to stay in the sugar supply market.
We can only conclude that the reformed regime has set the reference
prices too high, because in an over-supplied market and with a
juicy carrot to leave the sector farmers and less competitive
processors ("inefficients") are not moving out.
31. The Commission's attempts at market
management within the new regime are far from satisfactory. Export
refunds have been retained, but are used as a tool to manage supply
and price levels, rather than as true compensation for exporters
to meet the differential between EU and world prices. The Commission
has also introduced a system of price reporting, but whilst the
first published price is currently awaited (June 2007), it is
unlikely that a single EU price (based on data several months
old) published every six months will prove of much value. Even
if the price shows a significant discrepancy to the EU reference
price, it is unlikely that any action by the Commission, even
taken immediately, such as the opening of a limited tariff-free
quota to non-EU imports, would have much effect on either the
retrospective or current market situation.
RURAL DEVELOPMENT
32. Compulsory modulation is preferable
to voluntary in that it maintains a level playing field across
all member states.
WORLD TRADE
33. The benefits of the WTO obligations/negotiations
are more likely to be seen for the EU economy as a whole rather
than agriculture. However, for the food manufacturing industry
and our sector in particular, we seriously value the potential
for increased market access to raw materials and increased export
opportunities for finished products, although the latter is becoming
increasingly harder competitively to fulfil.
ENVIRONMENTAL PROTECTION
AND CLIMATE
CHANGE
34. Measures such as cross compliance are
good in theory, but we are not qualified to judge how successful
they have been in practice.
35. At EU Council/Summit level (and probably
WTO level) there is a need to decide the order of priority between
the troika of factors impacting on climate change policy viz environment
protection; fuel security; food security. Only when this debate
has been resolved can the EU determine how the CAP should be appropriately
framed. Biofuels policy will be very important in this context,
but the specific nature of biofuels policy must be dependent on
the previous decision.
FINANCING
36. Given that there are concerns that the
current budget for the CAP may prove insufficient, co-financing
does appear attractive as a way forward. However, whilst it is
not possible to gauge at the present time, co-financing could
give rise to future distortions for EU member states' internal
competition.
ENLARGEMENT
37. The new entrants under the 2004 and
2007 enlargements have been heavily biased towards agriculture
and this trend is likely to continue in the future. This means
that the EU supply base for agricultural raw materials has been
significantly increased, although the domestic market, by and
large, is already saturated. Until EU raw material prices align
with world prices, there will continue to be a financial strain
on the CAP.
SIMPLIFICATION OF
THE CAP
38. The proposed single CMO may seem good
in principle on the grounds that simplification of the CAP is
desirable. However, there are concerns that the adoption of a
Single Management Committee could give rise to the loss of both
Commission and member state administration expertise. This could
result in slower and possibly poorer quality decisions.
11 June 2007
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