Select Committee on European Scrutiny Appendices to the Minutes of Evidence


Memorandum submitted by the National Farmers Union



  The UK has a long tradition of growing and processing sugar beet. 23,000 people are employed in the industry and 9000 arable farmers rely on the crop as a key part of their crop rotation. It contributes significantly to the farming economy of East Anglia, East Midlands, the North East and parts of the West Midlands. A large amount of highly specific, capital investment has been undertaken to enable the crop to achieve this position of economic importance, but its viability has been seriously damaged by the appreciation of sterling in recent years, which has reduced growers' prices by in excess of 30 per cent. This currency linked reduction has occurred only in the UK and is over and above the 36 per cent reduction in real prices that has occurred across the EU because of the freeze in ecu/euro denominated institutional prices since 1984-85. UK beet growers have been subject to relentless price deflation over a number of years.

  The future of sugar beet production in the UK is already hanging in the balance as a consequence of these price cuts. For the reasons set out below, the Commission's proposals will tend to worsen this position.


  We believe that the current EU regime is a robust and highly successful mechanism, which provides a stable framework for the production, processing and consumption of sugar in the EU. The establishment of the minimum beet price by the Council of Ministers, coupled with the requirement for sugar processors to enter into an inter-professional agreement with sugar beet growers, is intended to give growers a fair and sustainable return for the beet they produce. The existence of the sugar intervention mechanism and the system of import levies and export subsidies means that processors can sell the sugar produced from this beet at a price which reflects the raw material cost and builds in a profit margin. Afro-Caribbean and Pacific countries also benefit by being given access to the European sugar market to sell just over 1 million tonnes of their own production.

  Market management costs are financed from levies paid by producers and processors, while the system of national quotas controls the overall level of production. The regime therefore operates at little or no direct cost to the taxpayer and, to date, with almost no recourse being made to intervention.

  The regime does have a significant impact on EU consumers. They benefit from a continuous and stable supply of sugar, but pay a price above that ruling on the world market. However, in the highly developed economies of the EU, where food purchases are a small and shrinking part of total household costs, the practical burden that this imposes on consumers is extremely small. Sugar consumed in all its forms accounts for less than 2 per cent of total food expenditure in the EU.

  It is also significant the 75 per cent of all sugar consumed in the EU is now bought by food processing companies and sold on to the final consumer in processed form. All of the available evidence suggests that cuts in producer prices would not be passed on to the final consumer, but would be absorbed by these processing companies. In part this is because the contribution of sugar to the total cost of the product is negligible compared to marketing and distribution costs. In a chocolate bar priced at 40 pence, the total sugar cost is less than 3 pence. But overwhelmingly it is because the, entirely legitimate, commercial response of those companies would be to keep the benefit of price cuts for themselves. In the period during which producer prices have crashed by more than 30 per cent the UK, prices of food products containing sugar have continued to trend upwards without any significant deviation.

  Taking all of the above into account, it becomes clear that the major effect of a price cut would be to effect a transfer from hard-pressed primary producers to large, frequently multi-national, food processing companies. If taxpayers were asked to compensate producers for some element of this loss, then there would be a net transfer from them to food processing companies as well.


  It is important that the Council of Ministers take a decision on the reform of the regime in good time, so that producers can take properly informed business decisions.


  We strongly oppose the proposed reduction in the life of the new regime from five years to two years. If agreed, this would foster uncertainty in a capital intensive and already hard-pressed sector.


  We support the proposed freeze in institutional prices and strongly support the Commission's basic approach of using quota rather than price cuts to meet WTO obligations. A quota cut acts directly to reduce surplus production. However, a price cut depresses the value of sugar sold on the EU market as well as acting to reduce the level of subsidies required to export onto the world market. Its impact on the revenue and profitability of sugar beet producers is therefore much greater.


  We are concerned over the proposal to set deficit area prices annually in the EU Management Committee. It would seem to place at risk the UK's deficit area premium, which is currently worth over £1.00 per contract tonne to producers, equivalent in total to around £11 million per year. The deficit area premium compensates the UK for the fact that our A and B quotas only account for around half of our total sugar consumption, leaving us dependant on imports for the balance. We believe strongly that deficit area prices should be treated in the same way as other prices and frozen for the duration of the new regime. It is in any case inappropriate for the Commission to seek to usurp the powers of the Council of Ministers in this area.


  As noted above, the UK is a net importer of sugar while the majority of other member states produce an exportable surplus from their within quota production. We believe that, in principle, the UK should not be subject to quota cuts while this imbalance remains. Certainly there is no case for us to be subject to quota cuts until B quotas are restored across the EU to their proper function of providing a small buffer over and above a member state's A quota. At the very worst, and recognising the difficulty of negotiating this position in the Council of Ministers, we ask the government to ensure that the co-efficient used to share out quota cuts remain as proposed in Article 10 of the draft Council regulation. Given that the mechanism for within year quota cuts exists, we also question the need for a permanent quota cut as presently proposed.


  Contrary to the Commission's view, we believe that the storage aid and levy system continues to play an important in evening out the supply of sugar onto the EU market over the marketing year. Without it there is a danger either that sugar sales would become more concentrated in the early part of the year, possibly with use being made of the intervention mechanism, or that processors would take other action to try and protect their cashflow. We believe that the present system should be retained, and that C sugar should continue to benefit from it as at present.


  Producers are important beneficiaries of the regime and the cane refining aid as presently calculated is an important mechanism to maintain the balance of the regime. The mechanism should be maintained unchanged


  The Commission's proposal to force growers to adopt environmentally friendly production methods is heavy-handed and misguided. UK growers are already taking positive action to produce beet in an efficient and environmentally friendly manner and are funding R&D programmes, which impact directly on this area. Given this, we do not accept that there is any need or justification for the Commission to seek to intervene in this area. Aside from anything else, It is illogical and unreasonable in the extreme for the Commission to be making this proposal at the same time that it is bringing forward its "Everything But Arms" proposal, which would open up the EU market to competition from third country producers who will certainly not be subject to the same environmental controls.


  The NFU welcomes the proposal to undertake studies into a number of key areas affecting the sugar regime, particularly the structure of competition in key food sectors and the extent to which cuts in support prices are passed through to consumers. It would be absolutely astounding for policy makers to proceed with reform proposals without testing their assumptions and prejudices in this way. These studies should be based on experience gained over the period to 2006, coinciding with a 5-year life for the new regime.


  It is wholly appropriate that the European Scrutiny Committee should consider the reform of the EU sugar regime and the EBA initiative together. The NFU has been urging, along with other sugar interests in the UK, that this approach be adopted in Brussels to allow logical cohesion between the two issues. However, to date, the regime discussions and the EBA debate have taken place in isolation from one another.

  The "Everything But Arms" (EBA) initiative, put forward by Commissioner Lamy, poses a major threat to UK sugar beet growers. The initiative as it stands would give 48 Least Developed Countries tariff and quota free access to the EU market for all products, apart from arms. In principle this initiative is to be applauded, but there are a limited range of highly sensitive products where it threatens the very existence of the corresponding EU production sector and has the potential to de-stabilise the EU market to the extent that the value of the concessions would themselves be undermined. Sugar is one of these:

    —  Every tonne of sugar imported into the EU under the EBA initiative will displace a tonne of domestic or African, Caribbean and Pacific (ACP) sugar from domestic consumption. As EU quota exports are limited under WTO rules to a maximum of 1.273 million tonnes, this will lead inevitably to a corresponding reduction in EU production quotas.

    —  These imports could reach between 2 and 5mt in three or four years, compared with a total EU sugar quota of 14.25mt. The regime would quickly become unviable if this happened. Varying estimates of anticipated imports from LDCs only serves to reiterate the importance of a comprehensive study carried out over a sensible time period.

    —  As well as undermining domestic production, this initiative would damage those ACP countries currently benefiting from preferential access to the EU market under the Cotonou Agreement. Guarantees have been given in this agreement until 2008, which will be meaningless, if the EBA proceeds as planned.

    —  It is important that sugar is excluded from the EBA whilst a thorough survey of the likely impact of the initiative is undertaken. This should be appropriately integrated with other reports already proposed, and supported by the NFU, in the context of the reform of the EU sugar regime.

    —  The NFU understands that a Commission impact study has been recently completed under Lamy's instruction. This was carried out over a three-week period and is woefully inadequate. However, even this study is understood to highlight significant impacts of the EBA on sugar. The Commission should be called upon to release this study immediately for public consideration

    —  The lack of consultation on the EBA initiative is a particular cause for concern. Although the initiative emanates from DG Trade, there are clear implications for agricultural primary production sectors. As such the EBA should be fully considered by Agriculture Ministers and the European Parliament. At present, we understand that the General Affairs Council alone is to consider the ratification or otherwise of this significant initiative.

    —  The transitional arrangements have not been adequately considered and are key to any initiative of this nature.

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