Leaving a bitter taste? The EU Sugar Regime - European Union Committee Contents

CHAPTER 3: Future reform—internal policy

What is proposed?

22.  In October 2011, the European Commission published a set of proposals to reform the Common Agricultural Policy (CAP). For the purposes of the sugar regime, the key proposal related to the Common Organisation of the Markets. It was not proposed to extend the system of production quotas beyond September 2015. Other measures—which are mostly linked to the quota system—that would also end at that point include: a minimum price for the purchase of beet; the charge on producers of quota sugar; withdrawal of quota sugar;[17] production refunds; and import licences for refiners.

23.  A number of aspects would remain in place: tariffs; additional tariffs; tariff quotas; export refunds (rarely used any more); aid for private storage;[18] and a reference price (triggering private storage). The existing system of tariffs and tariff quotas for imports is set out below in Box 3. Rules are proposed to regulate sugar sector agreements, which we explore in paras 44-45.

24.  Other aspects of the CAP reform are also salient. First, the general subsidy regime, offering a Single Farm Payment to farmers regardless of commodity produced. In exceptional circumstances, a payment may be granted specifically for the production of sugar and, in Finland, sugar beet growers may receive €350 per hectare each year. That is a legacy of the Finnish accession negotiations, during which it was argued that the measures were needed to support agriculture in difficult climatic and geographic circumstances. Second, the rural development regulation, which contains a range of measures, many of which could prove helpful to sugar growers. These include the risk management toolkit, the idea of which is to assist producers in managing their activities against the risks of weather and price volatility.


Tariffs and tariff quotas

Tariffs on imports are set within the framework of the internationally agreed General Agreement on Tariffs and Trade.[19] Those applied to imports into the EU are collected by Member States, which keep 25 per cent of the value of the tariffs to cover administrative costs and the remainder form part of the EU's own resources. The Commission estimates that the value to the EU budget of tariffs on imports of sugar in 2013 will be €123.4 million.[20] Additional tariffs may be imposed, and exceptions may also be granted. The EU has several sugar tariff quotas (allowing a quota of imports at a rate lower than the standard tariff or at a zero rate) and has introduced more in the last two years in order to allow more supply on to the EU market. It also allows tariff-free imports from certain developing countries-see Chapter 4. The standard tariffs charged on imports are: €339 per tonne for raw cane sugar and €419 per tonne for refined white sugar and raw sugar that is not for refining.[21]

Production quota abolition

25.  ACP and LDC producers and the beet production sector (farmers and processors) argued for an extension of EU beet production quotas until 2020.[22] Barry Newton, Chairman, EPA/EBA[23] London Sugar Group, asserted that this would allow ACP and LDC producers "more time and more investment to achieve the improvements in productivity ... that would allow us to be competing more openly in world markets after that period".[24] The prospect of extending production quotas until 2020 in order to assure improved competitiveness was shared by other advocates of quota extension. The National Farmers Union (NFU) told us that, by 2020, there was a very good prospect of having a competitive industry.[25] British Sugar was concerned that the scrapping of policy arrangements in 2015 would discourage the further investment that was needed to make the sector "fully internationally competitive by 2020".[26] They confirmed that current uncertainty was causing delays in their investment programme.[27] From a UK perspective, British Sugar warned that the UK industry had rationalised more than elsewhere before the 2006 reform but had nevertheless had no choice but to rationalise yet more after 2006. This meant that those countries that had only rationalised after the reform had spare capacity which could be brought into operation relatively quickly if production quotas were abolished,[28] although the NFU observed that processing elsewhere was not as efficient as in the UK, precisely because of the excess capacity.[29]

26.  We were keen to assess whether those advocating an extension of the production quota system were simply asking for an extension that would then be repeated in several years' time. The NFU assured the Committee that the industry was not just looking to postpone by yet another five years and acknowledged that, if the industry was unable to improve productivity by 2020, it was "probably time to think about something different".[30] British Sugar appeared to imply that they would favour an extension beyond 2020 but confirmed that "we are not expecting and not asking for the quota system to be continued forever".[31]

27.  Others argued for a more liberal approach. UKISUG observed that: "enough is enough" and "we no longer need quotas and we should be away from them sooner rather than later".[32] If isoglucose production quotas[33] were lifted, the UKISUG observed, there was potential in the market to move to around 20 per cent of sweetener consumption coming from isoglucose.[34] Sheila Page, Senior Research Associate, Overseas Development Institute (ODI), argued that further postponement of quota abolition would be costly to ACP and LDC producers, to the EU and to the rest of the world.[35] The Government confirmed that they were opposed to production quotas as a matter of principle. They offered two main arguments, observing first that British producers were already highly competitive and, second, that quotas have an artificially inflationary impact on prices.[36]

28.  The inflationary impact of a restrictive regulatory environment was also recognised by Tate & Lyle Sugars, who commented that the price paid by consumers would fall substantially if production quotas and tariffs were removed.[37] We observe that the average UK consumer price of 1kg of granulated sugar has risen from 74p to 99p between June 2006 and June 2012, an increase of one third. This is in line with a very similar increase in the prices of confectionery goods.[38] We are very concerned that the 16 per cent net increase in the EU price for sugar since 2006 has not been reflected in consumer prices for sugar and related goods, which have risen by over one third in the UK. We find the argument that the consumer price could fall if production quotas and tariffs are removed compelling but this requires monitoring by the European Commission. It is disappointing that the recent evaluation by the Commission of Common Agricultural Policy measures applied to the sugar sector assesses the impact on all groups except consumers. In line with the objectives of the Common Agricultural Policy as set out in the Treaty, we urge the Commission to put the consumer much closer to the heart of its sugar policy and, specifically, to put in place a mechanism to assess not only the market price of sugar but the price paid by consumers.

29.  We are aware of strong views from the health sector that sugar is a health hazard for consumers, particularly for children. Whilst accepting the concerns we consider that control of sugar consumption on health grounds should be achieved via Member State taxation and regulation policies rather than justifying EU level continuation of market distortion.

30.  Despite the potential impact on price of a restrictive regulatory environment, Tate & Lyle Sugars could accept regulation as long as cane refiners were protected in a similar manner to beet producers and processors. If production quotas were abolished, they contended, so restrictive tariffs on imports of raw cane should be lifted. On the other hand, if beet production quotas were to remain, then cane refining quotas should be reintroduced.[39] They warned that the abolition of production quotas, thus liberalising the beet production market, without abolition of tariffs "would swamp the cane refiners in a very short time"[40] The Government agreed that there was a need to remove import tariffs on raw cane sugar.[41]

31.  We conclude that neither the beet nor the cane sectors should continue to be protected. We therefore agree with the UK Government both that production quotas should be abolished in 2015 as proposed by the Commission and that import tariffs on raw cane sugar should be eased as appropriate in response to the world market. The easing of tariffs should, in our view, be extended to the import of refined cane sugar, bearing in mind the need to provide some security of supply, world trade discussions and support measures applied by other countries to support their sugar markets. The current restrictions on exports from the EU should be lifted to allow the EU to compete on the world market and to provide balance in the EU market if imports were to increase further.

32.  The political reality according to the Minister of State for Agriculture and Food, the Rt Hon Jim Paice MP, was that the UK and Commission position had very little support in the Council and European Parliament, with some Member States which would even like to see production quotas prolonged beyond 2020. Michel Dantin MEP's draft European Parliament amendments to the Commission's proposal suggest a report in 2018 on progress and a decision at that point in 2018 on whether to abolish production quotas in 2020 or extend them further.[42] While we urge the Government to continue to advocate a more liberalised approach as early as possible in negotiations, we recognise the political reality of the agricultural reform negotiation. However, we would consider a simple continuation of the status quo to be unacceptable.

33.  In the event that a compromise should be necessary, we would recommend the following elements:

  • a clear date for the ending of production quotas between 2015 and 2020. We would resist any promise of a future review in order to establish a final date as this fails to give the industry the certainty that they claim to require in order to make appropriate investment;
  • an immediate recalibration between Member States of production quotas to recognise changes made both pre-2006 and since 2006; and
  • support to remove inefficient production.

34.  In the milk sector, a soft-landing has been introduced in order to assist the market to prepare for the abolition of production quotas in that sector. The soft landing has included an increase in production quota each year, so that it becomes less and less restrictive and therefore more responsive to the market. From the consumer's perspective, though, funding has already been used to dismantle some of the sugar quota capacity and we therefore recognise the lack of consistency in any move to increase sugar quota gradually. We would not recommend an increase in sugar quota as a form of compromise.

Risk management and other aspects of CAP reform

35.  The measures within the Common Market Organisation are not the only aspects of the CAP reform proposals and broader EU funding arrangements that are relevant to sugar. In order to ensure more efficient deployment of EU funding, the European Commission has proposed that, in the period 2014-2020, Member States ensure that their plans for rural development, regional development, European social fund and fisheries fund are complementary. In our recent report on The Multiannual Financial Framework 2014-2020, we supported the simplification and improved synergies offered by this Common Strategic Framework.[43] We remind the Council and the European Parliament that the reform of the sugar sector must be seen in the broader context not only of Common Agricultural Policy reform but also of the future cohesion policy. The potentially large-scale alternative use of beet sugar in bio ethanol production—rather than for human food or animal feed—is another important consideration on which we would welcome the Government's response in the UK context. When designing future rural development plans and operational programmes for structural funds, the nature of Member States' sugar sectors might usefully be borne in mind.

36.  Commenting specifically on the application of the proposed new rural development regulation to the sugar sector, the Government confirmed that there was some scope for using rural development funding to help farms and groups of farms manage their own risk, making use of private sector insurance mechanisms.[44] These would allow farmers to be financially supported in order to purchase appropriate insurance against the risks arising from weather and price volatility. In correspondence with the Minister and EU institutions on reform of the Common Agricultural Policy, we have supported this concept, although on a time-limited basis until such mechanisms have become well established. One justification for continued protection of the sugar beet industry is the difficulty of facing the volatility of the world market, a danger that could be mitigated by greater use of risk management tools, such as insurance but extending also to future pricing. We understand that such tools are under developed in the sugar sector and we therefore recommend that the European Commission submit a report, with recommendations, on the use and development of private sector risk management tools in the sugar sector.

Market management instruments

37.  For the moment at least, the European Commission has a key role in managing the volatility of the EU market. In considering future sugar policy, it is necessary to take into account the regular management of the market by the Commission. Even if production quotas were abolished from 2015, UKISUG acknowledged that the Commission had a role to play in a managed transition and that a safety net of some description may be required for food security purposes.[45]


Market management measures adopted by the Commission
The European Commission has adopted a range of measures over the last two marketing years to stabilise the market. In essence, these include tariff reductions through a tendering process, quotas to import at zero tariff[46] and the incorporation into quota production of excess sugar produced (so-called "out of quota" sugar).

Since December 2011, measures to increase imports have included:

  • The opening of a standing invitation to tender for sugar imports at a reduced tariff[47]—191,000 tonnes over seven tenders, three of which were cancelled as the EU had enough sugar. Tariffs ranged from €252 to €270 per tonne, all for raw sugar; and
  • Three Regulations fixing minimum tariffs for a further three tenders, permitting another 200,000 tonnes on to the market. Reduced tariffs ranged from €289.36 to €312.6 for raw (unrefined) sugar and from €320 to €345 for white (already refined) sugar.[48]

During the same period, measures to release out-of-quota sugar were taken in December 2011 (400,000 tonnes) and May 2012 (250,000 tonnes).[49]

38.  There was some questioning among our witnesses of the European Commission's performance in responding to the shortage of sugar on the EU market (see Box 4). The NFU stated that the Commission needed to use the tools available to it rather better than it had thus far.[50] Tate & Lyle Sugars asserted that their warnings of weaknesses in the market had been ignored until it was too late: "the Commission should have acted earlier". In particular, they considered, more imports of tariff-free sugar should have been allowed. Looking to the future, Tate & Lyle Sugars argued that market management measures should not be left for the Commission to operate. Rather, they would like to see the correction to address the lack of imports at zero tariff to be automatic, enshrined in legislation, rather than for the Commission to decide.[51]

39.  On 2 July 2012, the Commission responded to criticisms that its exceptional measures have been unfair to cane refiners. It acknowledged that it has had to relieve pressure on the EU market and considered this market pressure "normal ... as the EU market competes with others to obtain the necessary raw material, including from LDC countries which are free to choose to whom they supply". The Commission argued that it has used the measures of facilitating imports and releasing out of quota production of beet onto the market "in broadly equal measure over the past two years".[52]

40.  Whilst the market remains regulated at EU level, there is clearly a role for market management measures, including tariffs and import quotas. There is dissatisfaction with the manner in which the Commission has discharged its responsibilities. We observe that the Commission has at least attempted to balance the interests of the beet production and cane refining industries. It must continue to do so and to ensure that its decisions are taken in a timely and transparent manner. Transparency is important as tariffs form part of the EU's budget and therefore substantial reductions in tariffs have wider implications for the financing of the EU budget.


41.  During our short inquiry, we had some debate among witnesses about the apparently monopolistic nature of the UK's sugar market, a debate which extended to the oligopolistic nature of the EU's market. Sugar users, represented by UKISUG, were not concerned about the nature of market and pointed to the possibility to import supplies from elsewhere.[53] Similarly, British Sugar, the sole sugar beet processor in the UK, contended that it has completely open competition from Tate & Lyle Sugars and from processors in France, the Netherlands, Germany and Belgium.[54]

42.  While Tate & Lyle Sugars, the EU's largest cane refiner and the UK's only devoted sugar cane refiner,[55] denied that they are in a monopolistic position, they observed that there is concern about competition in the EU market as a result of the small number of beet processors: only six companies account for almost 80 per cent of sugar production quotas.[56] In commenting on a recent merger referred to it,[57] the Commission noted, "the current high price and scarcity of sugar across the EU make it all the more important to maintain competition on the already concentrated European sugar markets" and added that, "at the production level the degree of concentration and entry barriers in several Member States are high".[58] We were also made aware of a recent report by the European Competition Network—a network of national competition authorities and the European Commission. This noted that it is a highly concentrated industry, with external competition largely prevented by import tariffs and that competition is very much influenced by the EU's regulatory framework.[59] It is important therefore that any inquiry into the market structure should be based on the EU wide sugar market, not simply the UK.

43.  We observe, as have others, that the nature of the sugar market is unusual and that the EU's sugar regime is a contributory factor. As already highlighted in this report, the prices paid by consumers for sugar and related goods have not, at least in the UK, followed the trends in the EU market price for white sugar. We accept, as do the Court of Auditors, that pricing in a market such as sugar with a complex supply chain is far from easy to disentangle. It is our view that greater clarity and transparency is required. We therefore recommend that the Competition Authorities at EU and national level, namely the Office of Fair Trading in the UK, in collaboration with Competition Regulators in other EU Member States, investigate the market as it applies to UK and EU consumers, to assess the extent to which the consumer gets a fair deal.

Contractual arrangements

44.  We heard some concerns that the Commission's recent proposal could potentially disrupt contractual arrangements in the sugar beet sector between growers and processors. In the UK, the NFU negotiates, on behalf of all 3,500 UK sugar beet growers, an Interprofessional Agreement with the sole UK processor, British Sugar. The benefits of the agreement were stated to be that it ensures a fair balance of interests, that it helps joint working on research and knowledge transfer, that processing capacity could be expanded given the certainty that it brings and that it enables mechanisms to be put in place to overcome weather difficulties. The UK sector's agreement, for example, includes a frost insurance scheme.[60] We heard that the industry works similarly in some Member States, whereas others operate through co-operatives.

45.  The specific concern set out by the NFU related to Article 101 of the Commission's Common Market Organisation proposal. This requires the terms for buying sugar beet and cane to be governed by written agreements. Unlike the text in place at the moment,[61] the proposed wording is imprecise in what should be covered by such an agreement, no longer explicitly stating that this should include the purchase and payment of beet. The Commission proposes that such detail be established at a later date through secondary (delegated) legislation. From the perspective of the NFU, they fear that this change undermines their position and would like to see the legislative protection reinforced.[62] We consider it unlikely that the Commission desires to undermine the position of growers in this type of relationship but we think it essential that the Commission communicates its intentions. It would be helpful to amend the text of the new Regulation to include the same specificity as is reflected in the current legislation, which might also remove the need to confer the power on the Commission to adopt a delegated act.

Research and knowledge transfer

46.  As set out above, one benefit of the Interprofessional Agreement is to support research and knowledge transfer. In our report, Innovation in EU Agriculture,[63] we placed a great deal of emphasis on the importance of basic and applied research and the transfer of that knowledge. We heard that the UK beet industry is continuing to invest around £1.5 million per year in research in order to boost yield, with a yield increase target of four per cent annually.[64] This "4x4 Yield Initiative" is being coordinated by the British Beet Research Organisation (BBRO).[65] Underpinning its overall objective, BBRO research, largely taking place at Rothamsted Research's Broom's Barn Centre, includes projects on crop production and crop protection. There is also a sophisticated Grower Support programme, including four well-attended open days annually at which growers can meet research teams and see demonstration work. The NFU confirmed the value of these open days and emphasised how important the rapid uptake of improved techniques was to yield improvements.[66]

47.  We heard from the NFU about the French Aker sugar beet research project, where plant-breeding activity is underway to try to decode the sugar beet genome.[67] This is based on the overriding objectives of the French beet sector: to increase competitiveness by 30 per cent by 2020 in order to face the world market and, if possible, to reduce dependence on inputs such as plant protection products, nitrogen fertiliser, water and energy.

48.  In our view, basic and applied research in the sugar sector, supported by knowledge transfer, are a key component to driving forward a sugar sector throughout the EU that can stand on its own. We believe that industry must invest in order to boost both research and its competitive position. We therefore recommend that the Government assess whether research efforts in this industry are in line with the needs of consumers.

17   Until the end of the marketing year in order to address over-supply of sugar on the market Back

18   Permits the granting of aid when the Union sugar price falls below a certain percentage of the reference price for a certain period of time Back

19   The precise levels of tariff are set each year by the Commission Back

20   Draft General Budget 2013 Back

21   Pp 140-141 Commission Regulation (EU) No 1006/2011 amending Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff Back

22   QQ 63, 72, 88 Back

23   Economic Partnership Agreement (EPA) Back

24   Q 64 Back

25   QQ 72-73 Back

26   Q 89 Back

27   Q 91 Back

28   Q 97 Back

29   Q 81 Back

30   Q 74 Back

31   QQ 92, 103 Back

32   QQ 134, 143 Back

33   Liquid in form, isoglucose is a sweetener that is used as a sugar substitute mainly in the production of drinks. It is obtained from starch, which in turn is extracted from wheat or maize. Isoglucose quotas represent around 5 per cent of the overall production quota. Back

34   Q 138 Back

35   Q 13 Back

36   Q 203 Back

37   QQ 168-169 Back

38   Office of National Statistics, Consumer Price Index, June 2012 Back

39   QQ 165, 166, 171 Back

40   Q 186 Back

41   Q 204 Back

42   European Parliament, Committee on Agriculture and Rural Development, Draft Report on the proposal for a regulation of the European Parliament and of the Council establishing a common organisation of the markets in agricultural products. Rapporteur: Michel Dantin Back

43   European Union Committee, 34th Report (2010-12): The Multiannual Financial Framework 2014-2020 (HL Paper 297)  Back

44   Q 215 Back

45   QQ 142-143 Back

46   Commission Implementing Regulations 302/2011 and 589/2011, in March and June 2011, covering 500,000 tonnes  Back

47   Commission Implementing Regulation 1239/2011 Back

48   Commission Implementing Regulations 382/2012, 444/2012 and 485/2012 Back

49   Commission Implementing Regulations 1240/2011 and 362/2012 Back

50   Q 82 Back

51   Q 178 Back

52   Commission replies to refiners on sugar market woes, Agra-Europe, 2 July 2012 Back

53   Q 132 Back

54   Q 94 Back

55   Tate & Lyle Sugars have over 25 per cent of the EU's cane refinery capacity. British Sugar refines a small amount of cane Back

56   QQ 167, 190, 195 Back

57   Case M.6286 Acquisition by Sudzucker (largest EU sugar producer and quota holder) of ED&F Man Back

58   IP/12/486 Back

59   "ECN activities in the food sector", May 2012 Back

60   QQ 75, 76, 105 Back

61   Article 50, Regulation 1234/2007 Back

62   QQ 75, 82 Back

63   European Union Committee, 19th Report (2010-12): Innovation in EU Agriculture (HL Paper 171) Back

64   QQ 73, 105 Back

65   http://www.bbro.co.uk/sites/default/files/BBROprogrammesummary12-13.pdf  Back

66   Q 74 Back

67   Aker 2012-2019 French Research Initiative for a Sustainable Beet Improvement: Innovative breeding, strategies based on allelic variation mining and novel -omnic tools Back

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