APPENDIX 5
Memorandum submitted by the National Farmers
Union
THE EU SUGAR REGIME
GENERAL COMMENTS
ON THE
UK SUGAR SECTOR
AND GOVERNMENT
POLICY
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.
THE CURRENT
EU SUGAR REGIME
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.
TIMETABLE
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.
DURATION OF
THE REFORM
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.
PRICES
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.
DEFICIT AREA
PREMIUM
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.
QUOTAS
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.
STORAGE AID
AND LEVY
SYSTEM
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.
CANE REFINING
AID ACP
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
ENVIRONMENTAL MEASURES
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.
REVIEWS
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.
THE EBA INITIATIVE
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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