Eu Sugar Cmo

EU Markets for the main Agricultural Commodities: Problems and solutions facing the Sugar Commodity Regime and its Reform

Prepared for Module CB9015 “Policy and Reform in OECD Countries” by Carlos Ferreira

Submitted on the 19th March, 2009 1

Sugar production in the EU has been a highly subsidised activity since the inception of the Sugar Common Market Organisation (CMO), in 1968. As a result, the EU is the world's second largest sugar producer without enjoying any comparative advantage (European Commission Agriculture Directorate General, 2004; Elbehri, Umstaetter & Kelch, 2008). The EU's weight on the world sugar market is also disproportionately high: in 2004, the EU was the world's third largest sugar importer and the second largest exporter. The Sugar CMO has been frequently singled out as the largest responsible for the depressed prices in the world market, hurting other producers (mostly Less Developed Countries) (Delegation of the European Commission to Thailand, Cambodia, Laos and Burma/Myanmar, 2004; Tiscani, 2005). The objectives established at the time of the creation of the Sugar CMO, were to ensure a fair income to EU producers, and to achieve self supply of the European market (European Commission Agriculture Directorate General, 2004). Until 2005, this regime was kept out of all reforms of the Common Agricultural Policies – so objectives such as an increase in competitiveness of the EU sugar producing and refining sector and the move towards compensation payments decoupled from production were absent.

As usual in the Common Agricultural Policy, the Sugar CMO could only achieve its objectives by means of a combination of instruments (European Commission Agriculture Directorate General, 2004; Elbehri, Umstaetter, & Kelch, 2008; Mitchell, 2009). The first of these instruments is product price support – an intervention price at which EU-mandated agencies step into the market to buy eligible supplies, assuring a floor 2

on the market price. Rarely did the agencies have to intervene; other mechanisms assured prices in the market did not drop below the trigger value. The second mechanism was the imposition of production quotas. These quotas were distributed for individual Member States, not for all the EU. At the onset of the CMO, two types of quotas were established: quota A, to be cover the market demand, and quota B, which would be exportable. The expansion of production quickly resulted in the need to create a new quota (C): quota A responding to internal demand, quota B being exportable with export restitutions (a subsidy on each unit exported) and quota C being exportable without any kind of support, and stopped from entering the European market (which would constitute an expansion of supply and depress market prices). Quota C is that it may be carried over to the next marketing year, and considered in either quota A and B, therefore attracting subsidies. The third mechanism was border protection: heavy tariffs were put in place in order to erode the cost advantage of importers. However, not all imports were subject to tariffs: as a result of the UK's admission in 1975, the EU “inherited” set of preferential import agreements, which allow some countries to export a set amount of sugar to the European market free of tariffs. These imports can be re-exported, using the fact that the EU buys them below the prevailing price in the world market, and so helping make up some of the expenditure in export subsidies. The last mechanism used by the Sugar CMO were export refunds. Because of the large surpluses, the decision was made to subsidise the export into the world market. Since prices inside the European market are much higher than prices prevailing in the 3

world market (from double in 1968 to the triple in 2004), exports of B quota sugar were subsidised, in order to allow them to compete in the world market, with the EU refunding the difference. Export refunds are still the largest expenditure of the program. Since the Sugar CMO strived to be self-financed, the EU imposed levies on producers and refiners (smaller levies for A quota, heavier levies for B quota). These levies are adjusted yearly, making the process revenue-neutral inside the EU. The results of this CMO are wide: first, the EU became a net exporter of sugar, because the supply expanded well beyond the demand. By driving a wedge between world market prices and prices prevailing inside the EU, the Sugar CMO originates a transfer of wealth from consumers to producers and refiners. Also, since the excess production is exported with refunds, producers get the same as they would if selling the sugar inside the EU market. Such subsidised exports depress world market prices, making other producers worse off. While being revenue-neutral, the Sugar CMO results in a massive wealth transfer from European consumers and overseas producers to European producers and refiners of sugar.

This state of affairs was unsustainable: the situation in the sugar market was frequently raised in GATT/WTO negotiations, and pressure mounted on EU officials (Mitchell, 2009). Unsurprisingly, attempts at reforming the EU Sugar CMO met with staunch resistance from producers and refiners. A reform proposal originated on the Commission, was discussed in the Council of Ministers, wrestled through Parliament (with amends) and finally approved by the Council of Ministers again. The process took close to 4

two years, from the Commission's first proposal to the Council's final approval Elbehri, Umstaetter, & Kelch, 2008). The resulting reform is a temporary affair: most of the policies have a deadline of 4 years (to finish in July, 2009), with the explicit objective of promoting the restructuring of the sugar sector. The objectives of the sugar CMO reform are to encourage the reductions in domestic sugar output (especially in areas with high costs of low sugar beet productivity), to bring export subsidies in line with WTO commitments, and to dampen incentives to imports from countries included in the “Everything But Arms” initiative (Elbehri, Umstaetter, & Kelch, 2008); Mitchell, 2009). In terms of the mechanisms used, the first important change was the merger of quotas A and B and the introduction of quota buyouts. All exports must come from this A+B quota pool, exports from former quota C being forbidden. As a result, quota C production will have to be carried on for the following marketing year (and the expenses of storing it are now responsibility of producers). A heavy levy has been put in place to penalise quota C overproduction. There was also a 36% cut of the intervention price, and a phase-out of intervention buying in 4 years. Compensation was offered for farmers as a result of lowering the intervention price: up to 64.2% of the price cut will be included in the Single Farm Payment, partially decoupling production from support for the first time since the inception of the Sugar CMO. However, the border regime remains almost unchanged, with only a small reduction of export subsidies to comply with WTO rules. Tariffs against imports from non-preferential 5

countries remain.

Predicted results of the reform (cuts in prices and in production quotas) are lower EU sugar production, lower prices for consumers and higher consumption. The EU sugar exports are predicted to decline as a result of lower production, lower export subsidies and restrictions to the export of non-quota sugar. World sugar prices are expected to shift upward (Elbehri, Umstaetter & Kelch, 2008) Overall, the results so far are mixed. The reduction of production is within the limits anticipated (13.3 million tons), the number of countries where production occurs has dropped from 23 to 18, and 70% of beet production now occurs in the 7 Member States with the best yields of beet production. Domestic prices have dropped. The sector has become more competitive (European Commission Agriculture Directorate General, 2009). Studies (Elbehri, Umstaetter, & Kelch, 2008) suggest that the greatest impact of the reform will come from consolidation of the sector, not from cutting the intervention price. A reform that would include lower import barriers, interstate quota tradability and greater market opportunities would result in a leaner, more competitive sector.

Looking ahead, it is not clear the present reforms have been enough. From 2009 a large amount of countries will have unrestricted access to EU market, under EBA agreements, and preferential agreements will also remain in place, which will effectively open the European sugar market to lower cost producers (Mitchell, 2009). Under WTO agreements export subsidies will be further negated, so the restructuring is bound to 6

continue, as producers are more extensively exposed to market forces. Important as these developments are, other market forces could act to sustain or increase market prices, potentially benefiting European growers. Specifically, the growing importance of biofuels on the price of agricultural commodities could be especially felt in the sugar market (United Stated Department of Agriculture, 2006; Mitchell, 2009). Sugar is a prefered commodity to transform into ethanol, and although the current comparatively low price of fossil fuels negates part of that impact (along with the backlash against biofuels that resulted from 2008's food price spike), the usage of such sources of energy could gain importance again in the near future. Also, since 2006, sugar beet growers have been able to qualify for energy crop subsidies which, since they are not considered agricultural in nature by WTO, are not subject to the same kind of restrictions. As the usage of biofuels increases, demand for ethanol will necessarily have an upward effect over sugar prices.

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References

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Delegation of the European Commission to Thailand, Cambodia, Laos and Burma/ Myanmar (2004). EU sugar sector: Facts and figures. <www.deltha.ec.europa.eu /bic/news/newsfile/sugar _figures .pdf>

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Elbehri, A, Umstaetter, J. & Kelch, D. (2008). The EU Sugar Policy Regime and

Implications of Reform . Economic Research Report, 59. USDA ●

European Commission Agriculture Directorate General (2004). A Description of the

Common Organisation of the Market in Sugar. ●

European Commission Agriculture Directorate General (2009). CAP reform:

Commission welcomes success of EU sugar reform as restructuring process concludes. Unpublished news brief. ●

Mitchell, D. (2009). Sugar Policies: Opportunity for Change. World Bank Policy Research Working Paper, 3222.

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Tiscani, A. (2005). EU Sugar Reform Revisited: the Need for Action. <www.delbrb.ec.europa.eu /en/press_and_info/articles/Article_Sugar 2(Final)_Marc h05.pdf>. Delegation of the European Commission in Barbados and the Eastern Caribbean/Research Report.

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United Stated Department of Agriculture (2006). The Economic Feasibility of

Ethanol Production in the United States. Research Report.

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