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ASI

Association of Sweets Industries of the EU

“REFORMING THE EU SUGAR REGIME”


Massimo Geloso Grosso
Master’s Project
Commercial Diplomacy
 

  This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone. Names of people, corporations, businesses and governments are used only as examples in fictitious sample correspondence, statements, etc. in order to depict a realistic, albeit fictional, scenario.  This does not represent any knowledge of these examples, nor does it in any way represent an endorsement by an individual, corporation, business or government

For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org


CONTENTS

A. INTRODUCTION

B. EXECUTIVE SUMMARY

C. BACKGROUND

D. COMMERCIAL ISSUES

E. ECONOMIC ISSUES

F. POLICY RECOMMENDATIONS

G. POLITICAL ISSUES

H. OVERALL STRATEGY .

    ITALIAN STRATEGY

    BRUSSELS STRATEGY

    NEGOTIATING STRATEGY

I.  CONCLUSION

J.  EXHIBITS

K. BIBLIOGRAPHY

 



INTRODUCTION

Issue

Thirty years ago, the European Community was a net importer of sugar. Now, thanks to Europe’s Common Agricultural Policy (CAP), the European Union is the world’s second largest sugar exporter; only Brazil ships more sugar abroad.[1]

The CAP clearly has been a boon to Europe’s sugar industry. Yet the so-called sugar regime also has had a severe negative impact on the European economy. As a result of the regime, EU sugar prices are up to three times higher than world sugar prices.

·        The regime hurts consumers by raising prices for sugar and processed food products.

·        The regime puts the European Union’s fast-growing food processing industry at a significant disadvantage in world markets. The food-processing industries are increasingly reliant on foreign markets for revenues, and sugar is a major input for many of these industries.

·        The regime, more than any other subsidy program, constrains the European Union’s limited leverage to negotiate robust foreign market access commitments in food and processed-food products.

·        Extension of the current EU sugar regime to EU applicant countries in Central and Eastern Europe will only lead to further and substantial economic losses for the European Union.

 

The European Commission and the European Union’s agricultural ministers must be persuaded to overhaul Europe’s sugar subsidy program.
   

Scenario

For the purpose of this project, I assume the fictitious role of trade consultant to a fictitious industry association, the Association of Sweets Industries (ASI), which represents national associations from each of the 15 EU member states.

Given that sugar is a major input to ASI products, the association’s trade division has decided to design a strategy aimed at persuading European Union officials to reform the sugar regime.

The attached proposal will be presented to ASI’s board of directors for approval.

 

Structure of the Document

The background section of this document presents the key features of the EU sugar regime, the key elements of the European Union’s sugar manufacturing industry, and current issues related to the regime. The commercial and economic analyses respectively outline the interests of the confectionery industry and the interests of the EU economy as a whole. The project also includes an analysis of the political environment in Europe and the stakeholders that have an interest in the sugar regime, and it lays out both recommendations for action and a dual-track strategy for carrying out the recommended actions.



EXECUTIVE SUMMARY

Issue

The European Union’s price support system for sugar is putting its food processors in an increasingly difficult competitive position in the world market. As a result of this support system, EU food processors pay two to three times the world market price for sugar—one of their most important inputs.  Although processors receive some export refunds, these subsidies do not cover the difference between the European Union’s internal price of sugar and the world market price. Even if they did now, they are subject to Uruguay Round reduction commitments and will soon be phased out. EU officials need to recognize and rectify the detrimental impact of sugar subsidies on the European food business’ ability to compete in world markets.
   

Background 

The EU’s sugar regime consists of a price support system, a quota system, and a separate system for selling sugar to “third” (non-EU) countries. Under the price support system, intervention boards buy up all the sugar offered to them by EU producers at an annually set price. The minimum price for sugar beets is also set annually, and both prices are higher than the world market price.

Anti-competitive behavior on the part of sugar processors pushes the price still higher. Indeed, the EU produces five million tons more sugar annually than is required to meet domestic demand. If the EU market were allowed to function properly, this over-production would lead to downward pressure on prices and production. In the EU sugar market, however, the opposite phenomenon occurs. The only possible explanation for this is that sugar processors keep the supply to local markets tight by off-loading sugar on the world market and thereby creating an artificial shortage of sugar within the EU. As a result, EU sugar prices are on average two to three times higher than the government-set price.

To date, the EU sugar regime has escaped every reform of Europe’s Common Agricultural Policy (CAP), and it was left virtually untouched by the Uruguay Round Agreement on Agricultural. One of the primary reasons for this is that the regime is self-financing so it does not impact any EU or individual state budgets. The costs involved in off-loading sugar surpluses are born by EU sugar beet and refined sugar producers, who pay a levy for this purpose.

 

Commercial Issues

Sugar currently accounts for up to 40 percent of the cost of the ASI industries’ products; it has a large impact on the industries’ profitability. The EU must reform its sugar regime in order to ensure that its exports of processed products do not become a loss-making business. Indeed, if food processors decide to move their businesses overseas where sugar and other production factors are cheaper, the EU would undoubtedly lose not only jobs in this sector but also sugar beet cultivation and processing jobs. Together, the industries represented by ASI are the EU’s largest consumer of refined sugar, accounting for 25 percent of total consumption (3 million tons).

 

Economic Issues

The EU sugar regime has several impacts on Europe’s economy:

·        It hurts European consumers, who pay up to three times the world market price for their sugar—an annual “sugar bill” of seven billion Euros.

·        It is increasingly placing the EU’s fast-growing food processing industry at a competitive disadvantage in the world market, which in turn jeopardizes the 1.5 million jobs supported by the industry.

·        It encourages excessive and intensive sugar beet cultivation, which in turn encourages environmentally damaging pesticide and fertilizer use.  

·        It limits the EU’s leverage to negotiate robust market access commitments in food and processed-food products.

 

Moreover, extension of the current EU sugar regime to the applicant countries of Central and Eastern Europe would lead to tremendous economic losses for the EU and would be a significant blow to these countries economic reform efforts.

Political Issues

The need for reform of Europe’s sugar regime is becoming more urgent in light of EU enlargement and the impending start of the Millennium Round of trade negotiations. However, achieving sufficient support for such a change will not be easy. Past attempts to reform the EU sugar regime have all failed for lack of political support. Subsidy reforms for other products such as cereals and dairy products have succeeded primarily because of their large burden on the EU budget. Because the sugar regime is self-financed, there is no budgetary pressure for reform. Sugar production has also not been a focus of concern for Europe’s politically powerful environmental groups. Although sugar price supports encourage intensive agriculture, but sugar beets are usually grown in mixed farming enterprises and therefore have not been among environmentalists major agricultural concerns.

 

Recommendation 

EU negotiations concerning reform of the EU sugar regime are set to start next January. In order to ensure a desirable outcome from these negotiations, ASI should form a broad-based coalition of consumer, business, and environmental interests to put pressure on the European Commission to reduce support prices by a percentage similar to past (and future) export subsidy reductions. A measure to decrease incentives for sugar producers’ anti-competitive behavior should also be sought.

 

Strategy

In an effort to persuade the EU to reform the sugar regime, ASI has formulated a dual-track strategy: a strategy to be carried out in each of the fifteen EU member states, and a strategy to be carried out in Brussels. The member state strategy aims at influencing member states’ agriculture ministers, who together make up the EU Council. The Brussels strategy is designed to put pressure on the Council, the Commission, and the various interest groups and processes that participate in EU policymaking.

Together, the two strategies have the potential to push the Council to actually look beyond the narrow interests of sugar producers and beet farmers and undertake meaningful reform of the sugar regime.


BACKGROUND INFORMATION

1.      The Common Agricultural Policy for Sugar[2]

The European Union’s sugar regime was established in 1968 and has been left virtually untouched since then. It is designed to support the production of sugar within the Community, in order to “maintain employment and standards of living for EU growers of beet sugar.”[3] The last revision of the sugar regime was completed in May 1995, when the Council decided to extend the regime until the 2000/2001 marketing year.

Under the regime—which is essentially a price support system—each member state is allocated two quotas, an “A” quota and a “B” quota. The total A quota equals, in principle, the Community’s annual sugar consumption. The B quota is intended to provide a surplus, so that demand can be met even in the event of crop failure. Any sugar production above the A and B quotas is referred to as “C” sugar, which must be either sold on the world market or stored and used as part of the following year’s A and B quotas. The Council determines what portion of the total A and B quotas will be assigned to each member state. The quotas allocated to each country are then divided among national sugar producers by individual country governments.

The Council is responsible for managing the price support system for A and B sugar. Each year the Council fixes an “intervention price,” which is the price at which any manufacturer may sell A and B sugar to national intervention boards. In practice, however, intervention boards pay not the intervention price but rather an “effective support price,” which is the intervention price plus 1) a storage levy that covers annual storage expenses; 2) an allowance for transportation costs; and 3) regional premiums for high-cost countries. The intervention price is set with the aim of making sugar beets sell at a price known as the “target price,” which is also set by the Council and regarded as the “optimum price a farmer should receive.” The Council also fixes minimum prices that processors must pay to beet growers for A and B beets (two separate prices).

Most imports of sugar into the European Union are subject to a tariff, which ensures that imported sugar is more expensive than domestically produced sugar. An exception is made for sugar imported from former British and French colonies. These countries receive their own quotas and are treated in a manner parallel to EU sugar producers.

In reality, the A and B quotas plus preferential imports always exceed domestic demand. This “C” sugar is not eligible for price support assistance, but the European Union does offer export subsidies to enable sugar producers to sell “C” sugar on the world market. These subsidies, set by tendering with producers, make up the difference between the world price and the intervention price. C sugar receives no export refunds.

Export subsidies are paid for by a production levy on sugar producers. The levy is limited to two percent of the intervention price for A quota sugar, but it fluctuates with exports up to 37.5 percent of the intervention price for B quota sugar. Because production levies cannot be fixed until the end of the marketing year, producers pay an estimated levy at the beginning of each production year. If in a particular year total subsidy expenses are not fully covered by the estimated levies, an additional levy is charged to fully cover expenses.

 

2.      Structure, Competition, and Profitability within the European Sugar Processing Industry

2.1 Structure of the European sugar processing industry

The E.U. sugar processing industry is characterized by an oligopolistic structure. In some countries, the industry is even monopolistic. Ten companies control about 70 percent of the E.U. sugar market, and just four (Südzucker, Eridania Béghin-Say, Saint-Louis Sucre/ Eurosucre, British Sugar) control approximately 50 percent of the market. [4]

The largest companies mostly operate in just one or two markets:

§         Südzucker and British Sugar respectively sell 70 and 80 percent of their overall sugar volume in their home markets.

§         Eridania Béghin-Say sells percent of its volume in France and Italy.

§         Saint-Louis Sucre / Eurosucre sells 96 percent of its volume in France.

§         Danisco sells nearly 90 percent of its volume in Denmark and Sweden.

 

2.2 Competition

Although official policy states that processors of beet sugar may sell A and B sugar freely throughout the Community, the institutional structure of the regime prevents competition in the sector. Since national A quotas (set by individual governments) equal national consumption, there is limited competition at best (B quota), and manufacturers only have significant market positions in countries where they have production. There is competition for C sugar sales, but these only occur outside the E.U. market.

Given this market structure, sugar processors are able to keep sugar supplies in their own markets artificially tight and thereby create an upward pressure on prices—pressure that pushes prices an estimated 10 to 15 percent higher than the already high target prices.[5] Indeed, the European Union produces five million tons more sugar than is needed to meet internal demand every year.[6] In properly functioning markets, this over-production would lead to downward pressure on prices. In the EU sugar market, however, the contrary phenomenon occurs, even in areas where supply is 50 percent greater than demand. The only possible explanation for this phenomenon is that sugar processors create an artificial shortage of sugar in their own markets by off-loading excess sugar on the world market, and in fact, in the past five years, several sugar-processing corporations have been heavily fined by the Commission for creating cartels designed to extract high prices from shoppers.[7]

At the beet growers level there is no competition either. Because each farmer’s production allotment and price guarantee is linked to a specific sugar-producing factory, individual farmers have no choice but to deliver their crops to their pre-assigned processors.

 

2.3 Profitability

With input and output prices fixed and production volumes guaranteed, it follows that gross margins are guaranteed. According to a report produced by the ABN-AMRO bank in November 1995, the theoretical gross margin for sugar manufacturers is 28 percent.[8] However, this measure allocates the sugar beet cost over sugar sales only. It does not take into account by-products from sugar production, such as beet pulp and molasses. The sales from these by-products (usually for animal feed or alcohol) are treated more or less as a credit that boosts the gross margin considerably. In addition, this theoretical model does not take into account the fact that EU sugar prices are in reality well above the intervention price. The study concludes that these two factors “could well lead to more than doubling of actual gross margin over theoretical gross margin.”

 

2.4 E.U. exports to the world market

As seen above, the profitability of the E.U. sugar processing industry is generated by the high sales volumes and high margins in its protected domestic market (A quota) and the partially protected market (B quota). Exports to the world market (B and C sugar) generate substantially lower prices. These are often about a third of the domestic market price.

 

2.5 Conclusions

Although the CAP was intended to support farmers, it is helping sugar processors make profits that would be unattainable in a competitive market. Because these profits are a drag on the food processing industry, which uses large quantities of sugar, the CAP should be modified.

 

3.      Current Trends

3.1    Sugar under past CAP reforms[9]

The sugar regime has been bypassed by every CAP reform to date. In 1992, the MacSharry agricultural reforms were instituted in response to deregulation pressures and budgetary constraints, but sugar was not affected. The Agenda 2000 reform package repeated this pattern; dairy, cereals and beef were included, but sugar was excluded.
 

3.2    Sugar under the Uruguay Round (UR) Agreements[10] 

The Uruguay Round Agreement on Agriculture (AoA) disciplined agriculture via three main mechanisms: market access, domestic support and export subsidies. Nonetheless, it left the fundamentals of the sugar regime unchanged.

 

·        The AoA requires the EU to cut its tariffs on white and raw sugar, but only by 20 percent[11] at a rate of just 3.3 percent per year—the lowest UR rate for all CAP commodities. Although the official line is that the EU is removing variable tariffs, the EU has been able to circumvent the bound tariff for sugar through the use of special safeguard provisions.[12]

·        The AoA requires the EU to reduce its expenditure on export subsidies for sugar, and the EU has made provisions to cut member states’ sugar quotas on an annual basis if it looks like the EU will be in danger of breaching the UR ceiling on such expenditures. (In a regulation published in February 2000, the Commission said that a 500,000-ton quota cut is not far away.) However, the enlargement of the EU to include the Scandinavian countries, which previously imported sugar, has enabled the EU to circumvent the 21 percent UR export subsidy cut.

 

3.3    EU enlargement and the sugar regime

A report published in December 1997 by the UK-based economic consulting firm NERA (National Economic Research Associates) argues that the EU’s planned enlargement to the East makes rapid reform of the sugar regime imperative because the prospect of extending the current regime to the applicant countries of Central and Eastern Europe (CEECs) is hindering those countries’ efforts to liberalize their sugar industries. [13]

The problem is particularly acute in Poland and Hungary, which are both major sugar producers.[14] During the early reform years, states the report, these countries began dismantling their state-run sugar monopolies. Since they began making moves toward joining the EU, however, they have been reversing their liberalization policies.

The NERA report finds that the CEEC’s combination of low average incomes and huge unsatisfied demand for goods and services makes their economies particularly unsuited to the price fixing provisions of the EU sugar regime. The regime would aggravate overproduction problems, and the inevitable price increases that accompany the sugar regime would seriously delay the development and structural adjustment of the CEEC sugar sector. The report estimates that bringing the applicant countries into the EU sugar regime will cost Europe three million Euros.

The essential message of the NERA report is that waiting to reform the sugar regime will only complicate and increase the price of market liberalization in the applicant countries.



[1][1] For details on the leading sugar trading nations and largest sugar producers, see Exhibit 17.

[2] For details on the key features of the EU sugar regime, see Exhibit 26.

[3] Council Regulations (EEC) 1785/81 and subsequent legislation based thereupon.

[4] For details on the structure of the EU sugar industry, see Exhibit 14.

[5] Committee of Industrial Users of Sugar, “Sugar and the Single Market: The Differential in Prices and Availability within the Union,” 1998.

[6] See Exhibit 15 for details on the European sugar market 1998/1999.

[7] These include British Sugar, Tate & Lyle and Irish Sugar. In addition, anti-trust regulators are investigating Südzucker and Danisco for abusing their dominant positions to raise the price of sugar.

[8] ABN-AMRO HOARE GOVETT, “The Reinvestment Dilemma: A Comparison of the European Sugar Manufacturers,” 1995.

[9] For details on the recent reforms of the CAP, see Exhibit 2.

[10] For details on the Uruguay Round Agreement on Agriculture, see Exhibit 1.

[11] The maximum cut for any commodity is 36 percent and the minimum 15 percent.

[12] The EU has a price safeguard on white sugar of Euros 531/ton. At the current exchange rate (Euro/Dollar=1.133), this price translates into a white sugar price of $601.92/ton. Below this price (i.e. always), the EU is able to enact special safeguard measures.

[13] NERA, “The Economic Costs of Extending the EU Sugar Regime to Central and Eastern European Countries,” 1997.

[14] After the collapse of Communism, producer and consumer subsidies to the sugar industry in Hungary ceased. In 1991, for the first time, no minimum sugar prices or production quotas were set. See OECD (1994) Review of Agricultural Policies in Hungary.

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