Sugar proposals sweet enough?

Although trade talks in Cancun collapsed this month the pressure remains on the European Union to shake up its heavily subsidised sugar regime. At a time when the sugar industry continues to struggle as fears grow over a worldwide surplus, EU farm commissioner Franz Fischler this week tabled three key options for change to the sugar sector.

The EU's 35-year-old sugar system - not included in this year's CAP reform - has been long criticised by onlookers, principally because it helps keep internal sugar prices at more than three times those on the world market. A fact recognised by Fischler this week when he said: "The time has come to consider how we can make the present EU sugar sector more market orientated and economically, environmentally and socially more sustainable."​

The Commission this week tabled three possible reform scenarios for the EU's sugar sector.

The first option extends the present regime - based on flexible quotas and price intervention - beyond 2006 and would keep intact the current common market organisation. The EU market would be opened to various import quantities already agreed or agreed in the future under the EBA or other international agreements, reducing custom duties and then adapting production quotas in the light of market evolution.

The second scenario looks at the impact of reducing internal EU prices - undoubtedly severe on Europe's key sugar producers among them British Sugar, Danisco and Tate & Lyle. To soften the blow, the Commission looked at the possibility of introducing the single farm payment - the backbone of recent CAP reform - into the sugar sector.

The third option goes the whole way and embraces full liberalisation. This would mean abolishing the current domestic EU price support system, abandoning production quotas and totally removing import tariffs and quantitative restrictions on imports. Again, a single payment system has been proposed to cushion the effect on sugar producers.

At present the common market organisation (CMO) for sugar, set up in 1968, is governed by Council Regulation (EC) No 1260/2001. Its essential features are price arrangements, production quotas, trade with third countries and self-financing. Its primary provisions are applicable only up to 30 June 2006.

The intervention price at which intervention agencies are obliged to buy in eligible sugar offered to them has been frozen since 1984/85 at €631.90 per ton for white sugar and €523.70 per ton for raw sugar. Import duties and restriction of available quantities, which are the other tools of the CMO, keep market prices above the level of intervention.

Consequently, changes to the current artificially buoyant internal market would cut heavily into the margins and revenues of key sugar companies in Europe today.

In an analysts' report of the impact of sugar reform on European sugar companies, Goldman Sachs estimated that Associated British Foods - the owner of British Sugar - makes at least an 18 per cent margin at its sugar business, Danisco makes a 14 per cent margin and Tate & Lyle an estimated 10 per cent margin.

In the report they highlight the fact that sugar accounted for 40 per cent of ABF's EBITA in 2002 and 47 per cent of Danisco's. 'For Tate & Lyle, the impact of change on their sugar business is likely to be lower as operating margins for their EU sugar operations are only around the 10 per cent level,'​ commented Goldman Sachs.

Global sugar prices are currently pretty flat due to a surplus on the market. According to British Sugar world prices are low mainly because of the ten-fold increase in exports from Brazil (to over 10 million tons) in the last 10 years. This trend is continuing, adds the company, with Brazil aiming to expand its production even further to take a target 50 per cent of the world sugar market.

"Brazil has been able to expand its exports of sugar to the world market only because of repeated massive devaluations of its currency which have artificially reduced its production costs. The Brazilian sugar industry has also been supported by cross subsidy from their heavily government-supported bioethanol industry,"​ added a defensive British Sugar.

The European beet growers' association CIBE hit back against Fischler's sugar proposals this week claiming that 500,000 jobs in the EU depended on the current COM sugar system and a further 500,000 jobs in poor exporting countries with preferential access to the EU market also relied on the sugar regime.

"The COM supports the income of numerous farmers, guarantees numerous jobs in rural circles thanks to 135 factories,"​ the CIBE said in statement.

On average for 1999/2000 to 2001/02, sugar exports from the EU amounted to 5.3 million tonnes versus 1.8 million tons for imports. Net exports represent on average 20 per cent of sugar production and 2 to 3.5 per cent of the EU-15 exports of agri-food products, according to the Uruguay Round definition.

The EU is a key player on world sugar markets but remains far behind Brazil which now dominates exports. The EU-15's share of the world market amounts to 13 per cent for production, 12 per cent for consumption, 15 per cent for exports and 5 per cent for imports. Its share in world production, consumption and exports has declined, whereas Southern Hemisphere countries have steadily gained importance. Australia, for instance, exports 85 per cent of its crop.

The Commission proposals will now go for discussion to EU member states at the European Council. EU farm ministers will have their first opportunity to discuss the sugar reform at a meeting on 29 September.