Select Committee on European Scrutiny Appendices to the Minutes of Evidence


Memorandum submitted by UKiSUG



  1.1  UKiSUG is the organisation which represents the collective interests of the major industrial users of sugar in the UK, comprising confectionery, chocolate, cakes, biscuits, soft drinks and ice cream. These sectors represent combined employment of 90,000 people and are worth £15 billion in consumer sales per annum. Manufacturers using sugar in processed products account for about 70 per cent of usage in the UK or nearly 1.2 million tonnes. UKiSUG Members therefore have a direct and vital interest in the EU's sugar regime.

  1.2  UKiSUG has long campaigned for the reform of the EU sugar regime which artificially maintains internal prices at levels well above world price levels. Given the EU's current WTO commitments to reduce export refunds, further pressure to liberalise trade under the forthcoming GATT Round and the impetus to open tariff-free access for sugar from Least-Developed Countries, the sugar regime cannot be sustained without reform if EU manufacturers, processors and producers are to remain competitive.

  1.3  UKiSUG welcomes the Court of Auditors latest Special Report No 20/2000 on the regime which is an indictment of the regime's lack of transparency, anti-competitiveness and its management by the Commission. UKiSUG believes that its own arguments in favour of reform are fully vindicated by this Report and urges the Commission and Council of Ministers to act upon the recommendations.

  1.4  Indeed, such is the ludicrousness of the regime that sugar users are obliged to resort to the cumbersome mechanics of Inward Processing Relief to obtain imported sugar for processing into exports when EU in-quota supplies are unavailable even though excess EU sugar is available for export in the form of "C" Quota.

  1.5  EU Governments acknowledged the importance for agricultural competitiveness of reforming the CAP when the Agenda 2000 package of measures was agreed in 1999. However, the sugar regime was ignored leaving manufacturers of sugar-containing food and drinks vulnerable to increasing competition from manufacturers in countries where the price of sugar is much lower. UKiSUG members are not afraid of competition but they must be able to compete under fair conditions. It is high time that the EU addressed the lack of transparency and competitiveness in the regime. On several occasions sugar processors have been found guilty of anti-competitive practices but no action has been taken to introduce more competitiveness into the regime and create even an internal EU market for sugar.


  2.1  UKiSUG's long term objective would be the elimination of the EU sugar regime so that it is market led and the EU's dual pricing system can be dismantled. This would enable the EU to enlarge and participate effectively in world trade negotiations without damaging its own food and drink manufacturing industries. Indeed, the competitiveness of the food and drink manufacturing industry is of direct interest to sugar producers and processors. Maintaining a regime which damages competitiveness and reduces outlets for EU sugar, combined with increasing restrictions on sugar exports, cannot be to the longer-term advantage of sugar suppliers.

  2.2  As a basis for pursuing reform, the following policy is recommended:

    —  a progressive reduction in support prices;

    —  the elimination of the storage levy;

    —  the freeing up of quotas;

    —  where export refunds are concerned, the immediate abolition of the 3 Euro FoB costs for Non-Annex 1 exports.



  3.1  UKiSUG is aware that UK producers have seen prices fall because of the strength of the pound sterling against the Euro. This contrasts, of course, with previous periods where the weak currency has raised prices for farmers and processors. Exchange rate fluctuations should not be allowed to distract attention from the important principle of introducing competition into the regime.

  3.2  Measured against UKiSUG's objectives, the Commission's proposals are a first step towards realistic pricing.

  3.3  The proposed price freeze should help to keep prices down in real terms.

  3.4  The abolition of the storage payment system would have a twofold effect:

    (a)  it will help to make sugar sales' prices more competitive as the system of storage payments adds 20 Euros to each tonne of sugar. Of course, processors will still have storage costs to bear and this will have an effect on prices. However, the system will in principle be more open to competition and this is an objective which UKiSUG fully encourages.

    (b)  The system of providing aid for storage means that processors can afford to hold stocks back from the market and release them in line with their own commercial policy rather than market demand. This has the effect of manipulating supply and prices which is not compatible with a free market.

  3.5  UKiSUG is nevertheless concerned that the sugar regime must be addressed coherently and not just as a budget cost-cutting exercise. UKiSUG fully supports a cut in the intervention price for sugar but is concerned that, should market prices remain high, export refunds could then fail to bridge the essential gap between EU and world prices. The result would be very damaging to the competitiveness of EU exports. Accordingly, UKiSUG strongly recommends that export refunds are calculated in future on actual EU market prices which will enable the intervention price to be cut without affecting exporters of non-Annex I products.

  3.6  Unless either the CAP is reformed to bring internal prices closer to world prices or a satisfactory replacement is found to compensate for the insufficiency in the budget for non-Annex I export refunds, many EU jobs will be threatened and demand for EU agriculture materials will be reduced and surpluses will increase.


  3.7  The Commission proposes to cut production quotas in order to resolve the constraints on subsidised exports imposed by the Uruguay Round GATT Agreement.

  3.8  This measure takes no account of the competitive position of sugar users. Reducing production will restrict supply and thereby artificially prop up prices. If EU prices are high and export refunds limited or unavailable, manufacturers will be unable to compete internationally.

  3.9  Given that reducing quotas is likely to raise prices and that the export constraints would be alleviated by lowering prices, the Commission's prescription is therefore one which will compound rather than solve the problem for exporters of manufactured products.

  3.10  UKiSUG is accordingly disappointed that the Commission is not tackling the reform of the regime by relaxing one of its key distortive mechanisms, namely quotas. Indeed, the proposals to cut quotas are retrograde and inhibit the evolution of a market-led policy. As quota cuts would apply equally to alternative sweeteners such as isoglucose or inulin, the market will remain in a competitive straitjacket. This restriction on access to alternative nutritive sweeteners is criticised by the Court of Auditors in its Special Report which concludes that "the EU's production restrictions are . . . constraining rational economic development" (paragraph 84).

  3.11  The quota system, which allocates quotas on a national and non-transferable basis, does not even permit a single market for sugar within the EU. Quotas hold production in line with consumption which means that there is very little to trade between Member States and thereby stimulate price competition. In its Special Report (paragraph 83) the Court of Auditors states that the quota system means that "normal competitive forces do not operate and in several cases sugar companies have been fined for abuses of competition". In addition, the Report concludes that the allocation of quotas "has had the effect of preserving sugar production in regions which are not well-suited to it and which in some cases have required national aids to support production. Conversely the most efficient production regions have not been able to obtain increased quotas". (paragraph 89)


  UKiSUG is very concerned that there should be a rational and coherent approach to reform of the regime. In this respect it strongly recommends that the setting of support prices is reviewed to ensure that the calculation process is transparent and based on up-to-date data which reflect actual production costs and current material yields. It also urges that action on support measures should be consistent so that measures to reduce CAP expenditure do not disadvantage sugar users.


  The Commission's proposals acknowledge that further reform will be considered in 2002 and UKiSUG would urge that this is done through price cuts and freeing up of production quotas. The current proposals are a first step in tackling the constraints of price support but it is critical that restraints on production imposed by quotas are relaxed so that the regime can become market-led.

21 November 2000

Competition and price inflation in the soft drinks industry

  The fall in the price of sugar over the last four years has been passed on to consumers by users of sugar such as manufacturers of soft drinks. Suggestions to the contrary are incorrect.

  Two points need to be made clear:

    —  consumer prices for soft drinks are set by retailers in a highly competitive marketplace;

    —  sugar represents only 5 per cent of the cost of manufacturing soft drinks, the rest being other materials, labour, energy, transport, packaging, etc.

  One would therefore not expect the price of soft drinks to mirror that of sugar exactly. Figures from National Statistics give the following picture:

  The fall in the price of sugar has been reflected in both the producer and retail prices for soft drinks. They have risen by less than the rate of inflation, as one might expect in a highly competitive market where the price of one ingredient has fallen. A fall of 33.7 per cent in the cost of 5 per cent of the ingredients (ie sugar) should result in a reduction of 1-2 per cent in the final cost: in real terms, the actual fall has been greater than this. The suggestion that a reduction in the price of sugar has not been passed on to consumers is therefore shown to be false.

  It is also worth noting that the biggest mismatch between changes in the sale and purchase prices of sugar lies at the processing stage: this is the stage where competition is virtually absent because minimum prices are fixed and production is controlled by quotas.

12 December 2000

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