Select Committee on Environment, Food and Rural Affairs Appendices to the Minutes of Evidence


Memorandum submitted by the UK Industrial Sugar Users Group (UKiSUG) (A6)




  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 £15.5 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 progressive reform of the EU sugar regime which artificially maintains internal prices at an average price level in the EU which in the last 10 years has been between two to four times higher than the world price. Given the EU's current WTO commitments to reduce export refunds, further pressure to liberalise trade under the forthcoming GATT Round, the impending accession of sugar-producing countries in Eastern Europe and the prospective opening of 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 small first step taken by the Agriculture Council in May 2001 to introduce a theoretical element of competition into the regime by abolishing the storage aid system. However, in practice, the sugar processors have not passed on the Euro 20 reduction through elimination of the storage levy.

  1.4  This demonstrates that the sugar regime is far from competitive or transparent. In reviewing the regime, UKiSUG would urge the Commission to focus on these two principles.

  1.5  In this respect, UKiSUG draws attention to the Court of Auditors' Special Report No. 20/2000 on the regime, which criticises the regime's lack of transparency, anti-competitiveness and its management. UKiSUG urges that the Report's conclusions be taken into account when the regime is reviewed.

  1.6  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.


  2.1  EU exports of biscuits, cakes, chocolate and confectionery in 2000 were valued at 3.15 billion Euro (10 per cent of the export of the EU food industry). Exports have doubled over the last 10 years reaching a level of 1,040,000 tonnes in 1996 with the sugar content of these products approaching 400,000 tonnes.

  2.2  In budget year 2000-01, despite the Commission removing a range of products from eligibility for Non-Annex I refunds, the WTO limit was insufficient for requirements and some manufacturers were forced to export at a loss rather than lose the export business. This budget year, there appears to be sufficient funds, mainly because of lower refund rates on milk products as a result of a narrowed difference between EU and world prices. This situation is unlikely to continue and such a climate of uncertainty over refunds is detrimental to growing export markets.

  2.3  The launch of the GATT Doha Round adds to pressure for the EU to adapt its sugar pricing regime to meet the challenges of further world trade liberalisation. The Round will no doubt include further cuts in import tariffs and export refunds which means that EU food and drink manufacturers will be at a severe competitive disadvantage in comparison to manufacturers in third countries unless CAP support prices are reduced. Indeed, producers and processors will also have to confront the fact that outlets for EU sugar will diminish and they will be forced to accept contractions in the industry.

  2.4  UKiSUG members fully support the principle of progressive world trade liberalisation through a multilateral agreement which reduces tariffs, eliminates non-tariff barriers and opens access to competitively priced raw materials. However, EU sugar users will be put at a competitive disadvantage and will be unable to benefit from freer world trade if the EU's sugar price support remains intact. Such reform would enable the EU to participate effectively in world trade negotiations without damaging its own food and drink manufacturing industries.

  2.5  UKiSUG wishes to see import tariffs and export refunds progressively dismantled but they will remain necessary for as long as the EU supports sugar prices above world levels. It is vital that in order to permit and develop export businesses, export refunds are maintained to compensate for the difference between EU and world prices.

  2.6  It is very important that arrangements agreed under the GATT in relation to agricultural products also take account of the value-added foodstuffs which contain them as ingredients. This means that reductions in tariffs must apply equally to raw materials and to processed products so that manufacturers can benefit from cheaper raw material imports and not just be exposed to unfair competition from lower-priced manufactured imports. Similarly, commitments to reduce export refunds must not result in discrimination against processed products to the advantage of agricultural products.


  3.1  The NEI Report of September 2000 on the Evaluation of the Common Organisation of Markets in the Sugar Sector provided an analysis of how the COM had affected the trading and pricing of sugar and generally concluded that this was symptomatic of any uncompetitive system.

  UKiSUG proposes that the following aspects of the regime should be further analysed:

    —  The lack of cross-border trade in sugar despite the fact that EU sugar production is in surplus;

    —  The significant divergence of trade and retail prices between Member States which results from the lack of trade between Member States;

    —  The levels of border protection required against imports and the need to provide refunds to EU exports. The impact of the regime on export businesses and on world trade need critical review. This should include an assessment of how much export business could be developed by EU sugar users if they were not constrained by the declining availability of essential export refunds;

    —  High profit margins for processors which indicate a lack of competition but are also attributable to the level at which support prices are fixed. The processors' margin should be calculated on a transparent basis of actual cost.

  3.2  The role of quotas in controlling supply must be addressed as they have a fundamental impact on prices. Not only are they used to maintain prices artificially and prevent market forces prevailing, they also oblige exporters of sugar-containing foodstuffs to resort in theory to the cumbersome mechanism of IPR even though "C" quota sugar is available.

  3.3  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. The system constrains supply which means that there is very little to trade between Member States and thereby stimulate price competition despite the quantities of B and C Quota Sugar which are exported. In its Special Report (para 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" (para 89).

  3.4  The liberalisation of quotas for alternative nutritive sweeteners would inject a degree of competition into the market place. This requires study together with the actual potential for sales of sweeteners such as isoglucose or inulin. It is likely that production costs and limited suitability for use in foodstuffs would militate against any significant substitution for sugar.

  3.5  There are legitimate concerns about farmers' incomes if the price support mechanism is dismantled. However, this ignores the ability of a free market to achieve reasonable prices through a balance between supply and demand. It should also be considered whether farmers could be more vulnerable to imports if the regime were not reformed to take account of the EU's trade commitments. If there is insufficient competition to align and stabilise prices, then imports will easily be able to undercut EU prices. The food and drink manufacturing sector would have the same difficulties if processed products could enter at world prices.

  3.6  UKiSUG's goal is to achieve competitive sugar prices in an international trading system which provides a fair deal to all participants from farmers to consumers. If raw material prices fall, UKiSUG companies are likely to pass on any cost-savings as they are doing business on a highly competitive market place. The attached graph shows that the fall in the UK price of sugar due to the weakness of the Euro has resulted in lower manufacturing prices for soft drinks and confectionery.

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