You can never please everybody when you make “radical” changes in a long-established policy but it looks as though the food processing industry has come out of the new proposed European Union (EU) deal on sugar better than might have been expected, and certainly better than most of the other principals involved, reports Alan Osborn.

The early word from industry on the newly tabled reforms is “encouraging”, though processors say they want to see some tangible mechanisms in place before rejoicing too loudly.

What the food industry seeks as much as anything is the introduction of genuine competition and a consequent lowering of what the Committee of Industrial Users of Sugar (CIUS) calls the “extraordinarily high” market price of sugar. Absence of competition, institutionalised by the rigid system of national production quotas, has led to sugar processing companies maintaining national monopolies right across the EU and led to European prices which are currently three times the world market price, it says.

The part played by the price of sugar as a cost factor in food manufacturing is kept pretty secret for commercial reasons but you do not need to be an industry expert to see that this is “clearly to the detriment of the competitiveness of sugar using industries within the EU” to quote CIUS. Similarly the Association of the Chocolate, Biscuit & Confectionery Industries of the EU (CAOBISCO) says that “lack of competition in the sugar industry is severely harming the competitiveness of other parts of the European economy, in particular food manufacturing.”

Closing the price gap as demand rises to meet supply

If the Brussels sugar reform plans go through we may now be at least on the way to closing the price gap between the EU and the rest of the world – partly through lower internal prices in Europe and partly through higher world prices as subsidised EU exports to fall back sharply. This would obviously make it at least a little easier for EU confectionery and other sugar-using firms to compete in global markets.

Indeed, expectations that the world supply of sugar may actually be overtaken by demand in the next two years have already pushed the world price up by 27% this year. This seems likely to continue for market reasons such as increased demand from China. But it may not be wise to bet on too dramatic a fall in EU exports. The ferocious early reaction to the EU plan from European sugar beet growers suggests that agriculture ministers of the 25 member states will not find agreement at all easy in the next few months.

Change to EU sugar regime long overdue?

The EU sugar regime has remained virtually unchanged since it was set up in 1968 even though drastic reforms have taken place in other agricultural sectors. Its main features at present are export refunds to cover the difference between world and EU prices (accounting for 75% of the total EU sugar budget), the setting of a minimum price for processed sugar and sugar beet, the fixing of production quotas and other forms of financial aid for sugar producers.

The regime has come under heavy and increasing criticism on the grounds that it is over-protective to EU farmers and sugar manufacturers, that it keeps prices artificially high and that it leads to EU dumping on world markets. Developing countries and NGOs say the system has led to many poorer countries being unfairly shut out of markets.

Decoupling subsidies from production levels

Under the Brussels plan, the EU will “decouple” subsidies to sugar beet farmers from actual levels of production so that in future there will be no incentive to over-produce. The price at which the EU intervenes to prop up European sugar producers would drop from €632 (US$782.7) a tonne to €421, in two phases over three years while the minimum price that sugar beet producers are guaranteed would fall from €43.6 per tonne to €27.4, again in two steps over three years.

Farmers, faced with a forecast 60% drop in income, will benefit through direct payments under the new decoupled payment system. Subsidised exports are to be reduced by two million tonnes – from 2.4 to 0.4 million. The total EU quota for sugar would be reduced by 2.8 million tonnes to 14.6 million over four years but individual countries will be allowed to trade quotas with others. Farmers will be given four years to adjust but a review will take place in 2008 to take account of “the uncertainties in the international field”.

Tough outlook for sugar producers

In all, the reforms would mean a fall of about 40% in internal market prices and end the existing “safety net” system for growers. It spells a tougher future for sugar companies and there were predictable falls in the share prices of Associated British Foods (Silver Spoon) and Tate and Lyle immediately after the reform plan was announced earlier this month.

For sugar users however, CIUS said it supported quota transfers for beet production “as the first essential step towards building a sustainable European sugar market that offers competitive prices and security of supplies.” But it went on to say that while the basis of the quota system was maintained, and the tacit collusion existing between processors remained unchallenged, certain mechanisms had to be implemented, “including reducing import tariffs and ending the export of excess sugar production.” CIUS expects consultations “to ensure that the proposals are strengthened and are not subjected to any dilution which would threaten the early introduction of competition into the sugar market.”

CAOBISCO said the proposed one-third cut in the institutional sugar price over three years starting from the 2005-6 campaign was “the minimum acceptable reduction and should not be compromised in the negotiations with the EU member states.”

Enough has been said here to indicate that while the changes look good for the food processing industry on paper there are fears that the big sugar producing countries like France and Germany will seek smaller changes and delays when ministers negotiate the necessary legislation. Already France has said it will oppose the July 2005 implementation deadline laid down by the Commission. For food processors it looks like a good start has been made but it will be surprising if the Brussels plan is eventually incorporated into law without significant change.