Sugar producers have given a qualified welcome to recently announced changes to the EU sugar reforms, originally unveiled last year. Alan Osborn reports on the restructuring of the restructuring.

The recent announcement by Ebro Puleva, Spain's largest food company, of a "substantial decline" in business volumes at its Azucarera Ebro affiliate resulting from last year's EU reforms, provided a further sharp reminder of the impact changes in EU sugar policy is having on sugar producers throughout Europe.

Conceived as a solution to over-production and a means of lowering artificially high European sugar prices, the scheme has, however, failed to meet expectations. The EU Council of Agriculture Ministers recently formally approved a plan drawn up by the European Commission making fairly drastic changes to the scheme.

The scheme was primarily designed to reduce guaranteed sugar prices, which at that time were three times higher than global prices, to a more competitive level by phasing in a price reduction of 36% over four years. The main sugar-using industries like bakery, confectionery and biscuit manufacture, were delighted - for some companies sugar represents up to a quarter of all production costs. Sugar producers who might be uncompetitive at the lower price levels were offered financial inducements to leave the industry.

But it was quickly apparent that the plan wasn't working as it should, with far fewer producers leaving than predicted. Brussels has now acted to sweeten the opt-out terms and believes this should allow the renunciation of about 3.8m tonnes of sugar quota in addition to the 2.2m metric tons given up so far. This should hit the required production cut of 6m tons, though Brussels warns that if insufficient quota has been renounced by 2010 it will make compulsory cuts.

So what went wrong? According to Cliff Luckhoo, trade policy director at the UK's Biscuit Cake Chocolate and Confectionery Association (BCCCA), "the Commission's arithmetic came unstuck".

Luckhoo explains: "They'd made an assumption that somebody who was not very good at the business would leave early in the scheme but the reality was that they were doing far better and making far more money than anybody had ever thought and so they held on. After the first year sugar producers and refiners seemed to be saying "I have good profit margins now and although I'll get less money if I leave in years two, three or four, my sums suggest to me that I'm better off holding on.

"It's all very well saying you will artificially reduce the price over four years but of course you need to do something about the over-supply situation," Luckhoo adds.

Members of the BCCCA were not convinced that the Commission's approach was the right one. "We believe that frankly the Commission would be better off going for a supply/demand situation, and we think that would in itself force prices down," Luckhoo says.

David Zimmer, secretary general of the Association of Chocolate, Biscuits and Confectionery Industries of the European Union (CAOBISCO) says that European sugar users "do not see the need for further reform of the sugar regime right now". But he adds: "We do, however, see the need to ensure that the reform is carried through effectively." A huge restructuring fund had been built up, and relatively little had been used "which would indicate that profit margins in sugar production remain substantial," Zimmer explains.

Zimmer says members of the European Sugar Users Group (CIUS) believed that the planned reference prices were good indicators of where market prices were likely to be, so that "farmers and processors should take their decisions re restructuring or not on the basis of the assumption that prices will fall in line with reference prices".

On balance then, the outlook for sugar prices seems favourable where users are concerned, while refiners like Tate & Lyle will probably have more pressing factors to contend with. Ironically, the beleaguered UK-based sugar and ingredients group, which recently announced a stark profit warning, does not blame the sugar reforms for its current tale of woe which it attributes to rising raw material prices, a glut of corn gluten feed in the US, the weak dollar and higher taxes.

Tate & Lyle says the changes announced by Brussels "will be of little direct benefit to our sugar refineries, which are not part of the restructuring fund, though we believe that in the long term, a balanced and stable market is good for the whole industry".

Meanwhile, British Sugar says it is pleased with the EU changes "which should bring the sugar reform programme back on track and enable it to meet its original objectives".

Noting that growers will be able to force processors to renounce quota, British Sugar says it plans to renounce at least 13.5% of its sugar production quota in the UK and Poland, equating to the permanent loss of 165,000 and 26,000 tons respectively.