2205 final report.pdf - Agra CEAS Consulting

IMPACT OF THE 

EU SUGAR REGIME ON BCCCA 

MEMBER COMPANIES 

Agri-food economic and policy analysis

IMPACT OF THE EU SUGAR REGIME ON BCCCA MEMBER COMPANIES 

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IMPACT OF THE 

EU SUGAR REGIME ON BCCCA 

MEMBER COMPANIES 

Report for 

Biscuit Cake Chocolate and 

Confectionery Association 

Submitted by 

Agra CEAS Consulting Ltd. 

Centre for European Agricultural Studies 

Imperial College at Wye 

Wye, Ashford 

Kent. TN25 5AH 

Telephone: *44 (0)1233 812181 

Fax: *44 (0)1233 813309 

E-mail: info@ceasc.com 

http://www.ceasc.com/ 

2205/CC/June 2005


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Acknowledgements 

This report was prepared by Conrad Caspari and Dr Edward Oliver of Agra CEAS Consulting 1 at the 

Centre for European Agricultural Studies, Imperial College London (Wye Campus), UK and at the 

Bureau Européen de Recherches in Brussels, Belgium. We would like to thank all those who 

provided valuable background information and support in the preparation of this document. 

1 

Agra CEAS Consulting is a joint venture between Imperial College London (University of London) and Agra Informa ltd (part of T&F 

Informa plc), and was established at the Bureau Européen de Recherches in Brussels in 1973 and at Imperial College London’s Centre for 

European Agricultural Studies in Wye in 1986. It has now been providing specialist advice and analysis for companies and institutions in the 

fields of agriculture, food and drink, rural development, environment and trade for over thirty years. 

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Contents 

S1. EXECUTIVE SUMMARY............................................................................................................................V 

1. INTRODUCTION AND OBJECTIVES......................................................................................................... 1 

1.1. INTRODUCTION............................................................................................................................................. 1 

1.2. OBJECTIVE.................................................................................................................................................... 1 

1.3. STRUCTURE OF THE REPORT ......................................................................................................................... 1 

PART A: IMPACT OF THE EU SUGAR REGIME ON THE UK BISCUIT, CAKE, CHOCOLATE 

AND CONFECTIONERY MANUFACTURING SECTOR............................................................................. 3 

2. OVERVIEW OF THE CURRENT EU SUGAR REGIME........................................................................... 5 

3. IMPACT OF THE EU SUGAR REGIME ON THE UK BCCC SECTOR................................................. 9 

3.1. IMPACT OF THE CMO FOR SUGAR ON THE EU AND UK INDUSTRIAL USER SUGAR PRICES............................ 9 

3.1.1. Impact of the CMO for sugar on the EU sugar price for industrial users............................................ 9 

3.1.2. Impact of the CMO for sugar on the sugar price for UK industrial users ......................................... 11 

3.2. IMPACT OF THE CMO FOR SUGAR ON UK BCCC PRODUCTION, CONSUMPTION AND TRADE...................... 17 

3.3. IMPACT OF THE CMO FOR SUGAR ON UK BCCC EMPLOYMENT................................................................ 23 

3.4. CONCLUSIONS ............................................................................................................................................ 27 

PART B: LIKELY FUTURE IMPACT OF THE EU SUGAR REGIME ON THE UK BISCUIT, CAKE, 

CHOCOLATE AND CONFECTIONERY MANUFACTURING SECTOR ................................................ 29 

4. REFORM OF THE EU SUGAR REGIME.................................................................................................. 31 

4.1. OPTIONS FOR THE REFORM OF THE CMO FOR SUGAR................................................................................. 31 

4.2. TIMETABLE FOR REFORM............................................................................................................................ 32 

5. IMPACT OF THE REFORM OPTIONS ON THE UK BCCC SECTOR ................................................ 33 

5.1. IMPACT OF THE REFORM OPTIONS ON THE EU SUGAR SECTOR AND ITS IMPLICATIONS FOR THE UK BCCC 

SECTOR.............................................................................................................................................................. 33 

5.1.1. Impact of the ‘status quo’ reform option............................................................................................ 34 

5.1.2. Impact of the ‘fixed quota’ reform option .......................................................................................... 37 

5.1.3. Impact of the ‘price reduction’ reform option.................................................................................... 39 

5.1.4. Impact of the ‘liberalisation’ reform option....................................................................................... 42 

5.2. CONCLUSIONS ............................................................................................................................................ 45 

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iv


S1. Executive Summary 

S1.1. Objective of the research 

The current EU sugar regime, which has remained largely unchanged since its inception in 1968, 

expires in June 2006. The European Commission is currently in the process of preparing a new 

proposal to reform the EU sugar regime, which is due to be published in June 2005. This research 

provides an objective analysis of the impact of the current EU sugar regime on one of the UK 

industrial sugar using sectors (namely biscuit, cake, chocolate and confectionery (BCCC) 

manufacturing companies) and assesses the likely impact of a number of possible reform options on 

the commercial viability of the sector. 

Impact of the current EU sugar regime 

The Common Market Organisation (CMO) for sugar has had an important impact on the price of 

sugar for industrial use. As a result of the CMO, sugar using industries in the EU have to buy sugar 

at a relatively high price compared to prices on the world market. The CMO for sugar largely 

isolates the EU sugar market via high import duties on sugar. 

As a result of the generally higher internal EU price for sugar, a system of export refunds maintains a 

reasonably level playing field for EU industrial sugar users when exporting onto the world market by 

compensating them for the higher sugar procurement price vis-à-vis non-EU manufacturers. 

However, for EU exporters of Non-Annex 1 (i.e. further processed) sugar containing products, it is 

acknowledged that these export refunds do not entirely cover the difference between EU market 

and world market prices. For these industrial sugar users, the CMO for sugar is more likely to be 

perceived as creating distortions between EU and non-EU manufacturers, with regard to the price of 

sugar. 

Similarly, within the EU the CMO for sugar has not resulted in a level playing field between Member 

States, with regard to the price of sugar. In a single (common) sugar market, it would be expected 

that prices would converge between Member States. However, analysis of price data demonstrates 

that the UK ex-factory delivered price for sugar for use in the production of chocolate, biscuits and 

confectionery is higher than in any other EU Member State. From a market clearing perspective, this 

finding is difficult to explain, particularly given that sugar is typically in surplus in the UK, and this 

therefore calls into question the assumption of a competitive environment. 

While there is insufficient information to draw an unequivocal conclusion as to why the UK sugar 

price for industrial use in the UK is higher than in any other Member State, it is clear that along with 

production quotas, the high sugar price has tended to accelerate and amplify the process of 

structural change within the BCCC sector. This has resulted in a series of merger and acquisition 

activities and divestment of production facilities out of the UK. These divestments have resulted in 

reduced production and export of BCCC products and for the first time in 2002 a negative trade 

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balance of sugar product exports. Analysis of industry employment data reveals that this induced 

concentration has resulted in a loss of up to 16,278 jobs (22%) in the entire biscuit, cake, chocolate 

and confectionery sector between 1998 and 2002. 

S1.2. Likely future impact of a reformed EU sugar regime 

The European Commission’s Communication to the Council of Ministers and the European 

Parliament in September 2003 on the future prospects of the EU sugar regime identified four sets of 

options for reform. The first two reform options (the so-called ‘status quo’ and ‘fixed quota’ 

options) provide for an extension of the present regime beyond 2006. Both these options are 

characterised by the fact that they effectively maintain high prices through continued border 

protection and the regulation of supply by means of production quotas. The third reform option 

(the so-called ‘price reduction’ option) foresees the maintenance of a lower EU internal price and the 

phasing out of production quotas once the levels of imports and production at this lower price have 

stabilised. Finally, the fourth reform option (the so-called ‘liberalisation’ option) envisages complete 

market ‘liberalisation’ via the abolition of both the price support system and production quotas. 

Looking at the impact on the supply of industrial sugar for the sugar using industry, only the fourth 

reform option (i.e. complete market ‘liberalisation’) would lead to a significant and rapid change in EU 

sugar supply conditions. Analysis suggests that ‘liberalisation’ would lead to a reduction in EU 

production to around one third of present levels and, depending on the access conditions agreed 

with third countries, the EU would become a net importer of sugar from countries with a 

competitive advantage for sugar production. This would potentially have important considerations 

for the sugar-using sector, as the regularity and consistency of supply could be affected by weatherinduced 

production fluctuations as well as potential economic and political problems in these 

countries. 

Nevertheless, the complete market ‘liberalisation’ option is expected to provide industrial sugar 

users with the ‘lowest’ price for industrial sugar, as the internal market price would be allowed to adjust 

to the price of non-preferential imports. This would create a level playing field in terms of the sugar 

price between the UK and both the EU and non-EU industrial users. However, under the 

‘liberalisation’ option, there would be a greater risk of price volatility for industrial sugar users as the 

market will no longer be ‘protected’. 

Under the ‘price reduction’ option, the UK sugar using sector will also benefit from a reduced price 

for industrial sugar as tariff protection would diminish and the gap between the internal EU price and 

the world price would reduce. However, unlike the ‘liberalisation’ option, the EU market would 

retain some protection from the volatility of industrial sugar prices on the world market. 

The UK industrial sugar using sector would have most protection against price volatility on the world 

market in the two policy options with quotas (i.e. ‘status quo’ and ‘fixed quota’ options). But this 

would come at a high cost to the sugar using sector as the industrial sugar price would be maintained 

vi


at a relatively high price level, vis-à-vis the world market price, and production quotas will limit the 

UK’s ability to expand production, despite being one of the most cost competitive producers of 

sugar beet in the EU. With the continuation of production quotas, barriers to entry for new sugar 

refining companies would effectively be maintained, thereby reaffirming any hold that the refining 

sector may have on industry prices. The current differential in, and volatility of, the price for 

industrial sugar between the UK and EU markets would be likely to remain. As such, the current 

rate of mergers and acquisitions in the UK sugar using sector would tend to continue at a similar rate 

as has been the case in recent years and further divestments are likely to move production outside 

the UK. This continued process of concentration would be likely to result in a further significant 

reduction of employment in the sector. 

Consequently, the only reform options which allow an improvement in the competitive nature of the 

sugar supply chain are those that result in the elimination of production quotas. If the level of 

merger, acquisition and divestment activity is to be reduced, then the ‘price reduction’ and 

‘liberalisation’ policy options would appear most suitable. 

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viii


1. Introduction and objectives 

1.1. Introduction 

The EU CMO for sugar has remained largely unchanged since its inception in 1968. With the current 

regulation expiring in June 2006, the European Commission has focussed discussions on a series of 

possible reform options, acknowledging that there is considerable pressure for a new regime to 

encourage and enable change in the sugar sector. 

The Biscuit, Cake, Chocolate and Confectionery Association (BCCCA) represents all the leading and 

many smaller manufacturers of biscuits, cakes, chocolate and confectionery (BCCC) in the UK. In all, 

the Association represents more than 90 British businesses. The sector as a whole employs some 

60,000 people and has annual consumer sales of around £8 billion (with companies contributing 

around £1 billion in respect of these products in VAT receipts to the UK Exchequer). 

However, there has been a steady decline in production and trade of BCCC products and 

employment levels within the UK sector as a result of industry restructuring from a series of merger 

and acquisition activities and the divestment of production facilities out of the UK. The reform of 

the CMO for sugar therefore provides an opportunity to consider the options for reform and to 

assess the impact of these options on the BCCC manufacturing sector. 

1.2. Objective 

The objective of this research is therefore to analyse: 

‘the impact of the EU sugar regime on the commercial viability of BCCCA member companies 

over a time scale of the last five years and the consequences for the future.’ 

The purpose of this analysis is to assist BCCCA to refine its case supporting a sugar price cutting 

reform of the EU sugar regime on which a Commission proposal is currently under discussion in the 

EU Council of Ministers. In particular, the study reviews the impact the regime has had and is likely 

to have on employment and the trade balance in the sector since arguments on these points are 

frequently put forward by those advocating a more limited and slow reform. 

1.3. Structure of the report 

This report is divided into two Parts, in line with the objective of the research as set out above 

(Section 1.2). Part A assesses the impact that the current EU sugar regime has had on the UK 

biscuit, cake, chocolate and confectionery (BCCC) manufacturing sector in recent years. An 

overview of the current EU Sugar Regime is initially presented (Section 2) and then the impact of the 

EU Sugar Regime on the UK BCCC sector is analysed in terms of its impact on the sugar price for 

EU industrial users (Section 3.1.1) and UK industrial users (Section 3.1.2), its impact on UK BCCC 

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production, consumption and trade (Section 3.2) and its impact on UK BCCC employment (Section 

3.3). 

Part B goes on to assess the likely future impact of a reformed EU sugar regime on the UK biscuit, 

cake, chocolate and confectionery manufacturing sector. An overview of the options for reforming 

the CMO for sugar and the timetable for reform is presented in Section 4. Section 5 analyses the 

impact of each of the reform options (‘status quo’ (Section 5.1.1), ‘fixed quota’ (Section 5.1.2), ‘price 

reduction’ (Section 5.1.3) and ‘liberalisation’ (Section 5.1.4)) on the EU sugar sector and assesses the 

implication of each option for the UK BCCC sector. 

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Part A: 

Impact of the EU sugar regime on the UK biscuit, cake, chocolate 

and confectionery manufacturing sector 

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4


2. Overview of the current EU sugar regime 

The Common Market Organisation (CMO) in the sugar sector was set up in 1968 aiming to ensure a 

fair income to European Union (EU) producers and self-sufficiency of the EU market. Since then it 

has received very few modifications and it is the only sector that has so far stayed out of the 1992 

Common Agriculture Policy (CAP) reform process, which have essentially increased EU producers’ 

and processors’ competitiveness by introducing institutional price cuts and compensating for these by 

means of direct income payments. 

Currently the CMO for sugar is governed by Council Regulation (EC) No 1260/2001 2 . Its main 

features are institutional price arrangements, production control and arrangements for trade with 

third countries. A brief description of the CMO for sugar is provided below 3 : 

• Institutional price arrangements. Intervention is conceived as a ‘safety net’ guaranteeing a 

minimum price for sugar and is a mechanism available to the industry all year round. The 

intervention price at which intervention agencies are obliged to buy-in eligible sugar offered to 

them has been frozen since 1993/94 at €631.90 per tonne for white sugar and €523.70 per tonne 

for raw sugar. Import duties and the restriction of available quantities by means of production 

quotas, which are the other tools of the CMO, keep market prices above the level of 

intervention. Although this tool was used in the early years of the CMO, its subsequent use has 

been limited; until 2005, there had been no sales into intervention since 1986. 

The minimum price for sugar beet is the price at which sugar manufacturers are required to buy 

beet from growers. This price guarantee applies only to specific quantities (quotas) of sugar per 

EU Member State. It has been set by the Council at €46.72 per tonne for the A-beet used to 

produce A-quota sugar and €32.42 per tonne for the B-beet used to produce B-quota sugar. 

The present prices, unchanged since the 1993/94 marketing year, are in force up to the end of 

2005/2006. The EU prices are guaranteed only for production within quota. 

• Production control. Production control by means of production quotas is fixed by country and 

by company. There are two types of quota: A and B. The major difference between A and B 

quota sugar is the level of the levies. Production quotas (A and B) were set to distribute the 

production of sugar amongst the Member States and keep the overall production within certain 

limits. They were fixed at the level of Member State and refer only to the maximum quantity of 

sugar eligible for price support (intervention purchases). Member States are free to produce 

more, but that surplus production has to be sold outside the EU. Thus the purpose of the quota 

system was three-fold, namely: 

− 

to limit the total quantity of sugar that could potentially be brought in the EU sugar market; 

2 

Published in the Official Journal L178, 30 June 2001 

3 

For a more detailed description of the CMO for sugar, see http://europa.eu.int/comm/agriculture/markets/sugar/reports/descri_en.pdf 

5


− 

− 

to limit the potential costs of intervention purchases; and, 

to guarantee each Member State a certain share of the EU sugar market. 

The total quota amount is 17.4 million tonnes for EU 25 and is divided into A-quota (82%) and B- 

quota (18%) set per Member State (Table 2.1). These A and B quota correspond in principle to 

the demand on the internal market, and to the ‘normal’ volume of exports in excess of A quota 

sugar with export refunds, respectively. 

Table 2.1: EU production quotas, by Member State (regions) 

A quota B quota Total 

Czech Republic 441,209.00 13,653.00 454,862.00 

Denmark 325,000.00 95,745.50 420,745.50 

Germany 2,612,913.30 803,982.20 3,416,895.50 

Greece 288,638.00 28,863.80 317,501.80 

Spain 957,082.40 39,878.50 996,960.90 

France (continental) 2,536,487.40 752,259.50 3,288,746.90 

France overseas departments 433,872.00 46,372.50 480,244.50 

Ireland 181,145.20 18,114.50 199,259.70 

Italy 1,310,903.90 246,539.30 1,557,443.20 

Latvia 66,400.00 105 66,505.00 

Lithuania 103,010.00 0 103,010.00 

Hungary 400,454.00 1,230.00 401,684.00 

Netherlands 684,112.40 180,447.10 864,559.50 

Austria 314,028.90 73,297.50 387,326.40 

Poland 1,580,000.00 91,926.00 1,671,926.00 

Portugal (mainland) 63,380.20 6,338.00 69,718.20 

Autonomous region of the Azores 9,048.20 904.8 9,953.00 

Slovakia 189,760.00 17,672.00 207,432.00 

Slovenia 48,157.00 4,816.00 52,973.00 

Finland 132,806.30 13,280.40 146,086.70 

Sweden 334,784.20 33,478.00 368,262.20 

BLEU 674,905.50 144,906.10 819,811.60 

United Kingdom 1,035,115.40 103,511.50 1,138,626.90 

EU-25 14,723,213.30 2,717,321.20 17,440,534.50 

Source: European Commission 

For sugar produced outside the quota there is no direct support, nor can it be freely marketed 

within the EU. This so-called C-sugar is declassified and must be exported without refund at the 

expense of the sugar industry and beet producers. To soften up the impact of declassification, a 

carry over mechanism is available, which involves storage of the surplus production for a minimum 

period of 12 months, for the sugar plant that produced beyond its quota. After this period this 

surplus is treated as A-sugar produced by the plant as part of that year’s production. The extra 

quantities must be 'carried over' to the next marketing year or exported as they are without 

refund. Additionally, quotas are set for isoglucose (0.5 million tonnes) and inulin syrup (0.3 million 

tonnes). 

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The CMO provides additional aids to the sugar industry namely refining aid which is granted to 

the refining industry and covers certain costs of raw sugar, and production refunds granted for 

sugar used by the pharmaceutical and chemical industries, allowing them to buy sugar at world 

market prices to which shipping costs are added. 

• Trade regime. In terms of the management of external trade, the current CMO provides two 

instruments, namely border protection and export refunds 4 . Border protection is in the form of a 

combination of two duties, one fixed and another resulting from the application of the special 

safeguard clause justified by the volatility of the world market price for sugar. Protection for 

sugar (CN 1701) comprises a fixed duty of €419 per tonne, except in the case of raw sugar for 

refining to which a duty of only €339 per tonne applies. On average the additional duty was €115 

per tonne in 2003 (€87 per tonne in 2002). 

Export refunds are intended to cover the difference between the EU price and the world price for 

sugar, allowing it to be sold on the world market. The average export price for white EU sugar 

was €280 per tonne for the 2001/2002 marketing year and €223 per tonne for 2002/03. Refunds 

are paid for sugar obtained from beet or cane harvested in the EU and sugar imported under the 

ACP Protocol/Agreement with India 5 . For the marketing year 2001/02 refunds were €443 per 

tonne and for 2002/03 €485 per tonne. 

4 

In preparation for EU enlargement, a number of ‘double zero’ agreements were established between the EU and accession countries 

aimed at further liberalising trade on agricultural products and providing for reciprocal elimination of export refunds and the elimination of 

import tariffs 

5 

The ACP Protocol/Agreement with India establishes close links with a number of sugar-producing ACP States and India. This peculiarity 

originated in the Commonwealth Agreements governing the import of raw cane sugar into the UK for refining and marketing. This sugar 

covered two thirds of UK consumption. The Agreements were taken over by the European Community and adjusted to suit its needs 

when the UK first joined the EEC. The Protocol on sugar attached to the 1975 Lomé Agreement between the ACP countries and the 

Community sets out a commitment from both parties, a commitment by the Community to buy certain quantities of sugar at guaranteed 

prices and a commitment by the 16 ACP signatory countries to supply that sugar. Under the Protocol on sugar, the signatory ACP 

countries benefit from a total exemption from import duties on sugar, whether cane, raw or white. Sugar is marketed in the Community 

at a price freely negotiated between buyers and sellers but the Community undertakes to buy at a guaranteed price any sugar that cannot 

be marketed at a price equal to or higher than the guaranteed price. An identical agreement was concluded at the same time with India. 

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3. Impact of the EU sugar regime on the UK BCCC sector 

As presented in Section 2, the rationale for setting up the CMO for sugar in 1968 was to ensure a 

fair income to EU producers and self-sufficiency in sugar in the EU market. However, as the 

European Commission noted in its Communication to the Council and the European Parliament in 

July 2003 to reform the sugar sector 6 : 

“the present sugar regime is often subject to fierce criticism for a lack of competition, distortions 

in the market, high prices for the consumers and users….” 

This Section of the report assesses the impact that the EU sugar regime (and competitive nature of 

the sugar supply chain) has had on the UK price of sugar for the BCCC sector (i.e. one of the 

industrial users of sugar) and its subsequent impact on production, consumption and trade of BCCC 

products and the level of employment within the sector. 

3.1. Impact of the CMO for sugar on the EU and UK industrial user sugar prices 

3.1.1. Impact of the CMO for sugar on the EU sugar price for industrial users 

The CMO for sugar has had a significant impact on the formation of sugar prices for industrial users. 

This is because high import duties on sugar and a guaranteed minimum sugar price on the domestic 

EU market, as described in Section 2, effectively isolate the EU sugar market from the world sugar 

market. These measures have resulted in higher ex-factory price levels within the EU than would 

otherwise have been the case. Since 1984, ex-factory sugar prices in the EU have been two to three 

times higher than on the world market. 

Accordingly, EU industrial users of sugar have to buy sugar produced in the EU under the current 

CMO for sugar at a higher price compared to prices on the world market and in many other 

developed countries. However, buying sugar cheaply on the world market is not a realistic 

alternative for industrial sugar users because, as described in Section 2, high import duties under the 

CMO make imported sugar even more expensive than sugar produced in the EU 7 . Thus, although 

the price of industrial sugar is relatively high in the EU, arguably the users of industrial sugar are not 

specifically disadvantaged by the CMO and these higher prices. This is because: 

• all EU sugar using industries have to pay the same high price for industrial sugar, so in theory no 

one company within the EU is at a competitive disadvantage vis-à-vis any other sugar using 

company; 

• manufacturers of sugar containing Non-Annex I products are protected against cheaper imports 

through an import duty on the sugar incorporated in imported Non-Annex I products (this 

6 

see http://europa.eu.int/comm/agriculture/capreform/sugarprop_en.pdf 

7 

The only exception being Inward Processing Relief (IPR) which is granted on an ad hoc and sparse basis. 

9


import duty makes the sugar incorporated in the imported products more expensive than EU 

sugar); and, 

• EU exporters of sugar containing Non-Annex I products receive export refunds for the sugar 

incorporated in those products. 

However, the export refund system is criticised by the exporters of Non-Annex I products on two 

grounds. 

• Firstly, the sugar using industry has to buy sugar in the EU at the actual market price, which is 

higher than the minimum guaranteed sugar price on which the calculation of the export refund is 

based. This means that exporters of Non-Annex I products are disadvantaged in that they are 

not compensated in full for the difference between the actual EU market prices and the minimum 

guaranteed price in the EU. 

• Secondly, the export refund is based on the weight of the sugar incorporated in the product and 

the export refund for sugar as determined by the weekly tenders for export refunds. In fact the 

lowest bid of the weekly tender for export refunds is taken, minus €30 per tonne. Exporters of 

Non-Annex 1 products argue that this deduction of €30 per tonne is not justified by any cost 

price consideration and thus puts the exporters at a disadvantage compared to non-EU 

competitors. 

If these criticisms of the export refund system are considered fair, this would imply that exporters of 

Non-Annex I products cannot compete on an entirely ‘level playing field’ with non-EU manufacturers, 

as far as the cost of sugar is concerned. This is particularly a disadvantage for the sugar using 

industries in Member States, which like the UK, have relatively high industrial sugar prices vis-à-vis 

other Member States (Section 3.1.2) and for products with a high sugar content, particularly 

chocolates and sugar confectionery. 

Results from the industry survey of those companies that export to third countries tend to 

collaborate this. The majority of companies that have reduced extra-EU exports over the last five 

years tend to rate the cost of sugar as more important than those companies that have increased 

extra-EU exports (Figure 3.1). Furthermore, those companies that have been reducing extra-EU 

exports over the last five years are generally those that produce BCCC products containing a 

relatively high content of sugar, namely chocolates and sugar confectionery. 

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100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

limited or none 

Level of importance placed on 'cost of sugar' 

critical or very 

Increase in extra-EU exports 1998-2003 Decrease in extra-EU exports 1998-2003 

Figure 3.1: Significance attached to the ‘cost of sugar’ according to trend in the volume 

of extra-EU exports 

Source: Industry survey 

3.1.2. Impact of the CMO for sugar on the sugar price for UK industrial users 

Despite the criticisms raised in Section 3.1.1, the sugar CMO in theory compensates EU industrial 

sugar users for the difference between the EU and the world market price for industrial sugar. It 

creates a more or less, but not perfectly, level playing field between the EU sugar using industries and 

those outside the EU. However, within the EU the CMO for sugar has not resulted in a level playing 

field with respect to the price of sugar for industrial use and the UK is particularly disadvantaged in 

this respect. 

In the EU, sugar is usually sold on the basis of individual contracts between sugar processing 

companies and industrial users through a process of direct bargaining. Although sugar is sold to 

industrial users at a delivered price and not at an ex-factory price, the delivered price is generally 

based on an ex-sugar factory price (depending on quality) plus a mark-up for transport costs, 

handling costs, delivery schedules and other required services 8 . The exact price will depend on, 

amongst other things, the CMO for sugar as discussed in Section 2 and Section 3.1.1 and on the 

respective market power of the supplier and purchaser concerned. 

8 

Sometimes the wholesale price is used which is defined as the ex-factory price plus an allowance for transport to the 

wholesale markets. 

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A major factor limiting a more detailed analysis of the impact of the CMO for sugar (and competitive 

structure of sugar supply chain) on the UK industrial user sugar price is the lack of an official price 

series of sugar for industrial users. An unofficial industrial sugar price series does however exist 

based on a CAOBISCO 9 ad-hoc survey of industrial sugar users. This ad-hoc survey reports the exfactory 

delivered price of sugar for use by industrial users for the production of chocolate, biscuits 

and confectionery. Table 3.1 presents the results of a number of these ad-hoc price surveys in € per 

100kg between February 1990 and September 2002 10 . 

9 

CAOBISCO is the Association of chocolate, biscuit and confectionery industries of the European Union, representing almost 1,900 

companies manufacturing chocolate, biscuits and confectionery. 

10 

To allow for price comparisons before and after the introduction of the Euro as well as between Member States, all prices before 1 

January 2002 have been converted into Euros using the official Euro conversion rates on 1 January 2002. For those countries outside the 

Euro-zone (namely Denmark, Sweden and the UK), all prices have been converted into Euros using the average exchange rate for 1 January 

2002. 

12


Table 3.1: Ex-factory delivered price for sugar for use in the production of chocolate, biscuits and confectionery (€ per 100kg) 

Austria 

Belgium 

Germany 

Denmark 

Spain 

France 

Greece 

Italy 

Ireland 

Netherlands 

UK 

Sweden 

Portugal 

Feb-90 - 68.62 71.07 71.60 67.13 70.20 31.11 51.36 68.57 71.15 67.11 - - 

Jul-90 - 68.62 71.07 71.19 67.73 70.20 35.22 57.42 70.98 68.97 80.56 - - 

Feb-91 - 68.99 69.54 71.60 67.73 71.09 38.74 57.42 71.36 69.43 75.97 - - 

Sep-91 - 68.99 69.54 71.60 68.52 71.35 45.78 57.21 72.38 69.43 77.24 - - 

Mar-92 - 69.66 69.54 69.85 68.52 71.96 49.89 57.21 71.11 70.34 77.24 - - 

Jul-92 - 69.66 69.54 71.73 66.71 71.96 - 57.21 71.11 70.34 77.24 - - 

Dec-92 - 69.66 69.54 71.73 66.71 72.60 56.64 57.21 71.11 70.34 85.94 - - 

May-93 - 70.40 70.30 71.73 66.71 72.60 60.16 66.62 74.91 71.02 94.97 - - 

Sep-93 - 70.40 70.30 75.41 73.92 73.79 - 68.69 - 71.40 90.22 50.96 - 

Feb-94 - 71.84 69.54 75.41 74.53 73.79 63.68 71.27 77.45 72.24 90.22 - 74.52 

Aug-94 - 71.84 69.54 74.80 74.53 73.79 66.03 72.51 76.82 72.15 92.27 50.96 72.70 

Oct-95 73.40 70.28 70.30 72.63 78.13 77.73 69.85 - 78.72 69.88 95.60 80.07 74.82 

Feb-96 72.67 - - 72.49 78.13 77.73 - - 78.72 - - 74.85 - 

Sep-98 74.13 - 72.60 71.40 77.53 77.93 71.61 73.85 75.55 73.06 84.84 73.58 76.32 

Dec-98 - - 72.60 71.40 - 77.93 71.61 73.85 75.17 73.17 87.05 - - 

May-99 - - 72.09 70.29 77.53 77.19 70.43 72.56 - 73.15 85.15 73.04 - 

Sep-99 - - 72.09 70.32 77.53 77.19 - 72.56 75.55 73.15 87.05 - - 

Mar-00 - - 72.09 70.32 - 77.58 - 72.56 75.55 73.15 82.30 76.22 76.47 

May-00 - - 72.09 70.46 77.53 77.58 - 72.30 75.55 73.15 77.55 - 77.46 

Oct-00 - - 72.09 70.46 77.53 77.96 73.07 72.82 75.55 73.15 77.55 - 76.47 

Jan-01 - - 73.37 71.53 77.53 77.96 73.07 74.63 75.55 74.11 78.66 - 78.56 

May-01 - - 73.37 71.53 77.53 74.83 - 74.89 - - 81.99 - 78.56 

Oct-01 - - 70.50 - 77.60 75.55 73.51 74.89 - 73.51 83.33 - 78.56 

Jan-02 - - 70.50 - 77.00 - - 74.89 - - - - 79.56 

May-02 - - 70.50 - 77.00 - - 74.85 - - - - 79.56 

Sep-02 - - 70.50 - 77.00 - - 74.50 - - - - 79.56 

Source: CAOBISCO 

13


Using the available CAOBISCO price series (Table 3.1), the data has been analysed and the results 

are presented in Figure 3.2 and Table 3.2. Despite the limitations of this data 11 , this analysis reveals 

that: 

• Ex-factory delivered price for sugar for industrial use varies considerably between Member State. 

Over the period, there was a 17.7% difference between the highest and lowest average sugar 

price within the Member States with Denmark having the lowest average price at €71.17 per 

100kg and the UK having the highest price at €83.73 per 100kg. 

• Ex-factory delivered price for sugar for industrial use has generally remained relatively stable 

over time. The main exception is the UK where prices fluctuated by up to 7.38% below and 

14.17% above the average of €83.73 per 100kg between 1995 and 2002 12 . 

In summary, the analysis has demonstrated that the UK ex-factory delivered price for sugar for use in 

the production of chocolate, biscuits and confectionery is higher (and more volatile) than in any 

other Member State. From a market clearing perspective, this finding is difficult to explain, particularly 

given that there seems to be no correlation between the CAOBISCO prices for industrial sugar and 

the supply and demand situation in each Member State. For example, although prices tend to be 

relatively high in Spain, Sweden and Portugal where sugar is typically in deficit, prices are also 

relatively high in France and the UK 13 where sugar is typically in surplus. In contrast, prices are 

relatively low in Greece where sugar tends to be in deficit (Figure 3.2). 

11 

The CAOBISCO ad-hoc survey of ex-factory delivered prices for sugar for industrial use is an unofficial price series and has its limitations; 

it is not clear whether or not the CAOBISCO list is based on a representative sample of industrial sugar users. It should also be noted 

that the series is neither complete nor does it have price information for the same periods for each year. According to the sugar 

processing industry, as reported by NEI in its 2000 report to the European Commission (Evaluation of the Common Organisation of the 

Markets in the Sugar Sector), the prices collected by CAOBISCO cannot be considered as representative of the average industrial user 

price in the Member States concerned, which they believe are much lower. 

12 

Although the extent of this fluctuation changes according to the time period selected for analysis. 

13 

Although demand for sugar in the UK exceeds that supplied from UK beet production, imports of cane sugar into the UK under the 

ACP Protocol/Agreement means that sugar is effectively in surplus in the UK. 

14


120.00 

100.00 

Ex-factory delivered price (€ per 100kg) 

80.00 

60.00 

40.00 

20.00 

0.00 

Austria Germany Denmark Spain France Greece Italy Ireland Netherlands UK Sweden Portugal 

Surplus in white sugar production 

Deficit in white sugar production 

Figure 3.2: Average and, deviation from the average, sugar price for industrial users, 

1995-2002 


Table 3.2: Analysis of ex-factory delivered prices for sugar for industrial use, 1995-2002 

(€ per 100kg) 

Average 

price 

Minimum 

price over 

period 

Deviation in minimum 

price from average 

Maximum 

price over 

period 

Deviation in maximum 

price from average 

(€ per 100kg) (€ per 100kg) (€ per 100kg) (%) (€ per 100kg) (€ per 100kg) (%) 

Austria 73.40 72.67 0.73 0.99% 74.13 0.73 0.99% 

Germany 71.76 70.30 1.46 2.04% 73.37 1.61 2.24% 

Denmark 71.17 70.29 0.88 1.23% 72.63 1.46 2.06% 

Spain 77.51 77.00 0.51 0.65% 78.13 0.62 0.81% 

France 77.26 74.83 2.43 3.15% 77.96 0.70 0.90% 

Greece 71.88 69.85 2.03 2.82% 73.51 1.63 2.27% 

Italy 73.78 72.30 1.48 2.01% 74.89 1.11 1.50% 

Ireland 76.21 75.17 1.04 1.37% 78.72 2.51 3.29% 

Netherlands 72.95 69.88 3.07 4.21% 74.11 1.16 1.59% 

UK 83.73 77.55 6.18 7.38% 95.60 11.87 14.17% 

Sweden 75.55 73.04 2.51 3.32% 80.07 4.52 5.98% 

Portugal 77.81 74.82 2.99 3.84% 79.56 1.75 2.25% 

Source: Agra CEAS calculations based on CAOBISCO data 

From an economic perspective, in a competitive environment theory suggests that prevailing market 

prices would not be (much) higher than the minimum guaranteed price plus the costs of additional 

15


quality requirements and services (e.g. transport, timely and regular delivery). This is particularly the 

case given that there is an overall surplus of quota sugar on the EU sugar market. Thus, assuming 

effective competition, prices in sugar surplus countries should be close to the sum of the minimum 

guaranteed price plus the aforementioned costs of additional quality requirements and services. In 

sugar deficit countries prices should be higher reflecting the transport costs between the surplus and 

deficit areas. 

This is clearly not the case, with the UK having the highest and most volatile price despite having an 

overall sugar surplus. Based on the CAOBISCO price data, in September 1999 the ex-factory 

delivered prices for sugar for industrial use was 24.2% higher than the minimum guaranteed sugar 

price. This large differential, relative to other Member States, might call into question the 

assumption of a competitive environment, particularly given: 

• The EU sugar market is not fully integrated at the EU level, but consists of a number of national 

markets. In most national markets, including the UK, the sugar processing industry is highly 

concentrated, which sells sugar to a more fragmented sector (the industrial users). In essence, 

the sugar processing sector tends to be oligopolistic in nature and along with limited intra-EU 

trade in sugar, the relative homogeneous nature of sugar and high barriers for firms wanting to 

enter the sugar processing sector (in terms of the economies of scale associated with sugar 

processing), economic theory suggests that this is not conducive for effective competition. In 

fact, theory suggests that such conditions often have an (upward) effect on prices. 

• Industrial sugar users report that they have difficulty finding alternative sugar suppliers willing to 

deliver sugar at a viable and competitive price, which might suggest collusive activities among 

sugar processors (Box 3.1). Similarly, discussions held between Agra CEAS Consulting and UK 

industrial users of sugar revealed that the cost of sourcing sugar from EU markets outside the 

UK incurs a premium. It was suggested that this premium is in excess of the mark-up required 

for the additional transport costs, handling costs, delivery schedules and other required services. 

However, consistent with the findings of the NEI (2000) study (Box 3.1), whether or not active 

and deliberate collusive activities between sugar processors have occurred which may have 

resulted in this lack of alternative viable buying possibilities could not be established. 

Box 3.1: Evidence from industrial users of sugar concerning supply possibilities 

“Industrial users of sugar represented by CIUS point at a lack or even absence of alternative supply possibilities. It 

would be difficult or even impossible to find other EU based sugar processors willing to sell sugar, other than the ones 

with which contractual relationships already exist. Applications for deliveries from alternative EU sugar processors are 

said to be turned down or ignored. Whether or not active and deliberate collusive activities between sugar 

processors have occurred which resulted in this lack of alternative buying possibilities could not be established.” 

Source: NEI (2000). Evaluation of the Common Organisation of the Markets in the Sugar Sector. Report for the 

European Commission 

16


• There has been a history of anti-competitive cases investigated by the European Commission and 

national competition authorities over the last 15 years in a number of Member States (France, 

Denmark, Ireland, Italy, Spain, and Austria), including the UK, which have investigated claims of 

price discrimination and other forms of anti-competitive behaviour by sugar suppliers. 

However, this information is insufficient to draw a firm unequivocal conclusion regarding the 

differential between the intervention price and the actual market price of industrial sugar in EU 

Member States and in the UK in particular. 

3.2. Impact of the CMO for sugar on UK BCCC production, consumption and 

trade 

Industry data presented in Figure 3.3 to Figure 3.5 shows that UK production of BCCC products 

(namely biscuits (and baked goods), all chocolate and sugar confectionery) has declined over the 

analysis period (1998 to 2003), despite modest increases in consumption of most products. Over 

the five year period, sugar confectionery production decreased by the greatest amount (11.6%), 

followed by biscuits (and baked goods) (6.0%) and all chocolate (4.5%). In contrast, total production 

in the EU-15 has increased for sugar confectionery (7.8%) and all chocolate (5.2%) and has remained 

virtually unchanged for biscuits (and baked goods). 

35.0 

25.0 

15.0 

% change 

5.0 

EU-15 average 

-5.0 

-15.0 

-25.0 

Austria 

Belgium 

Germany 

Denmark 

Spain 

Finland 

France 

Greece 

Italy 

Ireland 

Netherlands 

Portugal 

Sweden 

UK 

Production 

Consumption 

Figure 3.3: % change in EU production and consumption of biscuits (and baked goods), 

1998 to 2003 


17


35.0 

25.0 

15.0 

% change 

5.0 

EU-15 average 

-5.0 

-15.0 

-25.0 

Austria 

Belgium 

Germany 

Denmark 

Spain 

Finland 

France 

Greece 

Italy 

Ireland 

Netherlands 

Portugal 

Sweden 

UK 

Production 

Consumption 

Figure 3.4: % change in EU production and consumption of chocolate, 1998 to 2003 


135.0 

115.0 

95.0 

75.0 

% change 

55.0 

35.0 

15.0 

EU-15 average 

-5.0 

-25.0 

Austria 

Belgium 

Germany 

Denmark 

Spain 

Finland 

France 

Greece 

Italy 

Ireland 

Netherlands 

Portugal 

Sweden 

UK 

Production 

Consumption 

Figure 3.5: % change in EU production and consumption of sugar confectionery, 1998 to 

2003 


18


As a result of the fall in the production of BCCC products in the UK, which is in excess of any 

increases in consumption, net trade in sugar confectionery, all chocolate and biscuits (and other 

baked goods) has been decreasing. Moreover, since 2002 there has, for the first time, been a 

negative trade balance in all BCCC products (namely sugar confectionery, all chocolate and biscuits 

(and other baked goods)) (Figure 3.6). 

35.0 

15.0 

Net trade (tonnes) 

-5.0 

-25.0 

-45.0 

-65.0 

1998 1999 2000 2001 2002 2003 

Sugar confectionary Chocolate (all products) Biscuits (and baked goods) 

Figure 3.6: UK net trade in sugar confectionery, chocolate and biscuits, 1998 to 2003 


Section 3.1 found that the CMO for sugar had not resulted in a level playing field between the EU 

(namely extra-EU exporters) and third countries for the price of sugar, nor between the UK and 

other EU Member States. Results from the industry survey suggest that the higher (and more 

volatile) UK price may have contributed to the decline in production and the negative trade balance 

of BCCC products, as presented in Figure 3.3 to Figure 3.6. Of those companies that attached more 

significance to the price of sugar in explaining changes in employment over the last five years, the 

majority have tended to reduce: 

• the volume of sugar used in production of BCCC products (Figure 3.7); 

• the volume of BCCC production (Figure 3.8); 

• the volume of extra-EU exports of BCCC products (Figure 3.9); 

• the volume of intra-EU exports of BCCC products (Figure 3.10); and, 

• the level of employment (Figure 3.11). 

19


These results are indicative of the fact that the price of sugar is a significant contributory factor 

affecting the sector’s performance and employment levels. 

100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 




Increase in sugar utilisation 1998-2003 Decrease in sugar utilisation 1998-2003 

Figure 3.7: Significance attached to the ‘cost of sugar’ according to trend in sugar 

utilisation 

Source: Agra CEAS industry survey 

20


100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 




Increase in total BCCC production 1998-2003 Decrease in total BCCC production 1998-2003 

Figure 3.8: Significance attached to the ‘cost of sugar’ according to trend in BCCC 

production 


100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 




Increase in extra-EU exports 1998-2003 Decrease in extra-EU exports 1998-2003 


of extra-EU exports 


21


100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 




Increase in intra-EU exports 1998-2003 Decrease in intra-EU exports 1998-2003 


of intra-EU exports 


100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 




Increase UK BCCC employment 1998-2003 Decrease UK BCCC employment 1998-2003 

Figure 3.11: Significance attached to the ‘cost of sugar’ according to trend in UK BCCC 

employment 


22


3.3. Impact of the CMO for sugar on UK BCCC employment 

With the overall level of demand for food and beverages remaining relatively stable, employment in 

the UK food and beverage manufacturing sector declined by 9.5% between 1998 and 2003, equating 

to an annual decrease of 1.97% CAGR (Table 3.3). This decline has particularly been driven by the 

ongoing process of merger and acquisition activity within the industry to gain economies of scale and 

increase production efficiency, thereby attempting to protect profitability. 

Table 3.3: Change in UK food and beverage manufacturing employment levels, 1998- 

2003 

Manufacturing of food and beverages 

(SIC (2003) 15) 

1998 478,816 

1999 484,028 

2000 476,463 

2001 454,150 

2002 439,672 

2003 433,555 

% change between 1998 and 2003 -9.5% 

% Compound Annual Growth Rate (CAGR) -1.97% 

Source: ONS (Annual Business Inquiry) 

Given the trends in UK BCCC production reported in Section 3.2, it is not surprising that over the 

last five years the BCCC industry has seen the closure of some 15 BCCC factories and the loss of 

many thousands of jobs. Figure 3.12 and Figure 3.13 quantify the extent to which employment in the 

BCCC sector has evolved using employment in other food and beverage manufacturing sectors as a 

benchmark to gauge the natural rate of structural change. 

Figure 3.12 shows the changes in UK food and beverage manufacturing employment levels by sector 

between 1998-2003. With overall employment levels in the UK food and beverage manufacturing 

sector as a whole falling by 9.5% over the period, only two food and beverage manufacturing subsectors 

recorded a net increase in employment. The other six food and beverage manufacturing subsectors 

showed a decrease in employment over the period, with employment levels in three of these 

sub-sectors falling by a greater amount than the overall food and beverage manufacturing industry 

average. 

Looking at the specific food and beverage manufacturing sub-sector, which includes the manufacture 

of BCCC products (i.e. the manufacture of other food products), employment fell by 12.8% over the 

period (equating to an annual decrease of 2.71% CAGR). Only two other sub-sectors (manufacture 

23


of dairy products and manufacture of vegetable and animal oils and fats 14 ) showed higher double digit 

declines in employment (Figure 3.12). 

5.0% 

0.0% 

-5.0% 

% change 

-10.0% 

-15.0% 

Average for total food and beverage industry 

-20.0% 

-25.0% 

-30.0% 

Production, 

processing and 

preserving of 

meat and meat 

products 

Processing and 

preserving of fish 

and fish products 


preserving of 

fruit and 

vegetables 

Manufacture of 

vegetable and 

animal oils and 

fats 


dairy products 


grain mill 

products, 

starches and 

starch products 


other food 

products 

(includes BCCC 

products) 


beverages 

Figure 3.12: Change in UK food and beverage manufacturing employment levels by 

sector, 1998-2003 


However, when looking in more detail at the manufacturing ‘classes’, which represent the business 

activities of BCCC production within the ‘manufacture of other food products’ sub-sector, the fall in 

employment over the period is even more marked and similar to the extreme levels experienced in 

the manufacture of dairy products sub-sector of 5.56% CAGR (Figure 3.13). Specifically: 

• employment in the manufacture of cocoa, chocolate and sugar confectionery has fallen by 21.6% from 

31,021 in 1998 to 24,323 in 2003 (equating to an annual decrease of 4.75% CAGR); and, 

• employment in the manufacture of rusks and biscuits and preserved pastry goods and cakes has fallen 

by 22.5% from 42,505 in 1998 to 32,925 in 2003 (equating to an annual decrease of 4.98% 

CAGR). 

14 

The decline in the latter sector may be partially explained by the ban on the use of meat and bonemeal in feed production 

24


5.0% 

0.0% 

-5.0% 

% change 

-10.0% 

-15.0% 

Average for total food and beverage industry 

-20.0% 

-25.0% 

-30.0% 

Production, 

processing and 

preserving of 

meat and meat 

products 


preserving of 

fish and fish 

products 


preserving of 

fruit and 

vegetables 


vegetable and 

animal oils and 

fats 


dairy products 


grain mill 

products, 

starches and 

starch 

products 


other food 

products 

(includes 

BCCC 

products) 


beverages 


rusks, biscuits, 

preserved 

pastry goods 

and cakes 


cocoa, 

chocolate and 

sugar 

confectionery 

Figure 3.13: Change in UK food and beverage manufacturing employment levels by 

sector (including BCCC manufacturing activities), 1998-2003 


The marked decrease in employment in the manufacture of dairy products sub-sector, the manufacture 

of cocoa, chocolate and sugar confectionery and manufacture of rusks and biscuits and preserved pastry 

goods and cakes, relative to other manufacturing sub-sectors, is not surprising given that production 

in both the EU sugar and EU dairy sectors is constrained by quotas. In response to the need to 

maintain margins in the face of fixed production, there have been a considerable number of mergers 

and acquisitions in both sectors. In this respect, production quotas have facilitated structural change. 

In both sectors the number of companies and production facilities have steadily reduced under 

quotas and the capacity of the remaining companies and production facilities has increased. As the 

capacity of these production facilities has increased, the labour intensity of the production process 

has been decreased, thereby resulting in the large-scale reduction in employment in these sectors. 

Unlike in the UK dairy sector, where the perishability of milk has meant that to service the domestic 

liquid milk market companies must remain in the UK, BCCC manufacturers are more readily able to 

produce for the UK market in another EU country where it is more economic to do so (e.g. where 

the cost of sugar for industrial use is cheaper). As such there has also been a series of divestments, 

with production being moved outside the UK, further reducing employment in the sector. 

Results from the industry survey undertaken by Agra CEAS corroborate this. As shown in Figure 

3.14, the cost of sugar was one of the most important factors contributing to changes in employment 

25


in the BCCC sector (with changes in consumer demand, employment costs and rationalisation of 

production facilities to improve production efficiency also being rated as important factors). 

Critical 

Very 

important 

quite 

important 

not very 

important 

no 

importance 

Rationalisation - M&A 

Rationalisation - efficiency 

Relocation - EU15 

Relocation - NMS 

Relocation - nonEU25 CEECs 

Relocation - third countries 

Technological change 

Changes in demand 

Competition - intra-EU imports 

Competition - extra-EU imports 

Sugar cost 

Labour cost 

Other raw material costs 

Exchange rates 

Figure 3.14: Average importance placed on various factors driving changes in BCCC 

employment 


Further analysis 15 of those companies that consider the price of sugar to be an important factor shows 

that, in general, over the last five years: 

• their use of sugar in the manufacturing process has been declining; 

• their total production of BCCC products has been falling; and, 

• the proportion of their BCCC production destined for export has decreased. 

These results suggest that the current cost of sugar is not only an important issue in terms of 

determining sector employment, but also one that is encouraging restructuring of the sector in order 

to reduce sugar utilisation, BCCC production and export orientation. 

Moreover, the cost of sugar was also found to be more important amongst those companies that 

expect a marked decrease in employment levels over the next five years if the current differential 

between the UK price of industrial sugar and the world price remains unchanged (Section 5.1). 

15 

There was no significant difference in the significance attached to the cost of sugar and the production of different BCCC products. 

26


3.4. Conclusions 

It is evident from the preceding discussion that the CMO for sugar has had an important impact on 

the formation of the price of sugar for industrial use. Although sugar using industries in the EU have 

to buy sugar produced in the EU at a relatively high price compared to prices on the world market 

and in many other developed countries, the CMO for sugar effectively isolates and protects the EU 

sugar market from the world sugar market. The high EU internal price of sugar is protected and 

maintained through high import duties on sugar and the guaranteed minimum sugar price. 

Nevertheless, it can be argued that EU industrial users of sugar are not specifically disadvantaged by 

these high prices, because the CMO for sugar effectively maintains a reasonably level playing field for 

EU industrial users as compared to non-EU manufacturers through a system of export refunds. 

However, for exporters of Non-Annex 1 sugar containing products, it is acknowledged that export 

refunds do not make up entirely for the difference between EU market and world market prices. 

For these industrial sugar users, the CMO for sugar may be contributing to sugar price differentials 

between EU and non-EU manufacturers. 

Similarly, within the EU the CMO for sugar has not resulted in a level playing field with regard to the 

price of sugar between Member States. In a single (common) sugar market, it would a priori be 

expected that prices would converge between Member States. Analysis of unofficial price data from 

CAOBISCO suggests otherwise. In summary, this analysis demonstrates that the UK ex-factory 

delivered price for sugar for use in the production of chocolate, biscuits and confectionery is higher 

and more volatile than in any other Member State. From an economic perspective, this finding is 

difficult to explain, particularly given that there seems to be no correlation between the CAOBISCO 

prices for industrial sugar and the supply and demand conditions in each Member State. In the UK, 

for example, the industrial sugar price is at its highest although sugar is typically in surplus. 

The above large differential, relative to other Member States, calls into question the assumption of a 

competitive environment, particularly given that: little sugar is traded among Member States. These 

doubts would tend to be reinforced by the existence of a highly concentrated sugar processing 

industry; and the fact that a number of cases of anti-competitive behaviour have been investigated 

and found to be prevalent by the EU and national authorities. However, while there is insufficient 

information to draw an unequivocal conclusion as to why the UK sugar price for industrial use in the 

UK is higher and more volatile than in any other Member State, it is clear that along with production 

quotas, the high sugar price has tended to accelerate and amplify the process of structural change 

within the industry resulting in a series of merger and acquisition activities and divestment of 

production facilities out of the UK. This is consistent with the findings of our survey of the UK 

BCCC sector. These divestments have resulted in reduced production and export of BCCC 

products and for the first time in 2002 a negative trade balance of sugar product exports. 

Analysis of industry employment data reveals that this induced concentration of the sector has 

resulted in a marked decrease in employment in the manufacture of cocoa, chocolate and sugar 

confectionery and manufacture of rusks and biscuits and preserved pastry goods and cakes, relative to most 

other food and drink manufacturing sub-sectors. 

27



28


Part B: 

Likely future impact of the EU sugar regime on the UK biscuit, cake, 

chocolate and confectionery manufacturing sector 

29



30


4. Reform of the EU sugar regime 

4.1. Options for the reform of the CMO for sugar 

As discussed in Section 2, the main features of the CMO for sugar (Council Regulation (EC) No 

1260/2001) are institutional price arrangements, production control and arrangements for trade with 

third countries. These provisions expire on 30 June 2006. Consequently, in September 2003 the 

European Commission produced a Communication, which set out a series of possible options for 

reform to the CMO for sugar 16 . These reform options differ according to, among other things, the 

instruments which are used for regulating the market (prices or quotas). It was intended that this 

Communication would help the Council of Ministers to reach a broad consensus over how the CMO 

for sugar should be reformed, prior to the presentation of formal legislative proposals. A brief 

description of the proposed four possible reform options is provided below 17 : 

• An extension of the present regime beyond 2006, known as the ‘status quo’ option. This would 

consist of keeping intact the current CMO for sugar based on flexible quotas, which would be 

adjusted annually according to changes in the volume of imports, and price intervention. The EU 

market would be open to import quantities, according to the various international commitments 

already agreed or to be agreed in the future. Custom duties, internal prices and production 

quotas would be reduced. 

• A slight modification of the ‘status quo’ option is an extension of the present regime beyond 

2006 through a ‘fixed quota’ option, which presumes that production quotas will be reduced to 

an agreed level and that free import concessions would be converted into preferential quotas. 

This reform option arises from a request by the Everything But Arms 18 (EBA) countries to assess 

the impact of extending the present regime beyond 2006 through a fixed quota system rather 

than the flexible quotas under the ‘status quo’ option. 

• A reduction in the EU internal price, known as the ‘price reduction’ option. Under this reform 

option, once the levels of imports and production have stabilised, production quotas would be 

phased out. The internal market price would be allowed to adjust itself to the price of nonpreferential 

imports. 

16 

See http://europa.eu.int/comm/agriculture/capreform/sugarprop_en.pdf 

17 

For a more detailed description of the four reform options, see http://europa.eu.int/comm/agriculture/capreform/docs/prop2_en.pdf 

18 

The ‘Everything But Arms’ (EBA) initiative is a unilateral trade concession by the European Union which essentially will eliminate duty 

and quota from all products, except arms and ammunition, originating from the 49 Least Developed Countries (LDCs) (Council Regulation 

(EC) No. 416/01). The initiative took effect from 2001, but incorporated a transitional phase-in of liberalisation for three sensitive 

commodities, including sugar. Prior to the end of the transitional period, the duty-free amount of sugar accepted into the European Union 

will reach almost 200,000 tonnes. Up to this point, the increase in imports from LDCs will be accommodated by reducing the Special 

Preferential Sugar imports from ACP countries. After 2009, however, when quantitative restrictions on LDC imports are lifted, there is 

much more potential for a serious increase in the oversupply of the European sugar market, especially if prices remain so high. Further 

disruption of the market is also possible if LDC countries export their local production to Europe and source sugar from the world market 

for domestic consumption although this would almost certainly run counter to provisions concerning rules of origin. 

31


• A complete liberalisation of the current regime, known as the ‘liberalisation’ option. Under this 

reform option, the domestic EU price support system would be abolished and production quotas 

and quantitative and tariff restrictions on trade would be abandoned. 

The first two reform options are characterised by high prices through the regulation of supply by 

production quotas. In contrast, the latter two reform options regulate the market by maintaining a 

balance between prices and costs with and without tariff protection. 

4.2. Timetable for reform 

The Commission’s reform options were presented to the Agriculture Council and the European 

Parliament at the end of September 2003, with the first substantive Council discussion held on 17 

November 2003. The Commission presented a further Communication in support of its preferred 

approach in July 2004. Progress to agree a reform has been slow, particularly given the European 

Parliamentary elections in May 2004 and the change in Commission personnel in November 2004. 

However, the examination of the Commission’s Communications was completed at the Agriculture 

Council of 22-23 November 2004. 

The Commission is currently in the process of preparing a new proposal to reform the EU sugar 

regime, which is due to be published in June 2005. As a result, the Commission’s Communication 

deadline for implementing the reform in June 2005 will be delayed. 

32


5. Impact of the reform options on the UK BCCC sector 

5.1. Impact of the reform options on the EU sugar sector and its implications for 

the UK BCCC sector 

As presented in Section 3, the current CMO for sugar has not created the competitive conditions 

necessary for a level playing field vis-à-vis other Member States; in the UK the industrial price for 

sugar is higher and more volatile although sugar is typically in surplus. In an environment of 

production quotas, this relatively high sugar price has tended to accelerate and amplify the process of 

structural change within the industry, through a series of merger and acquisition activities and 

divestment of production facilities out of the UK. Any reform to the current CMO should therefore 

address these issues and encourage and enable change for the long-term sustainability of the sector. 

According to our industry survey, if reform of the present regime results in no change in the current 

differential between the UK price of sugar and the world price over the next five years, then in 

general UK BCCC production and employment is likely to decline further (Figure 5.1). This trend 

would result from further concentration within the industry and divestment from the UK. Of those 

companies interviewed, over three-quarters believe that employment would continue to decline 

(with over a third believing that this decline would be major or considerable), with the remainder 

believing that there would be no change. Looking at the individual product sectors, the survey 

results revealed slightly different trends: 

• in the biscuit sector, half of the respondents suggested that there would be some production 

decrease, with the other half believing that there would be no change; 

• in the cake sector, the majority considered that there would be no change in production, 

although a quarter suggested that there would be a considerable decrease; 

• in the chocolate sector, all respondents were concerned that production would fall, with over a 

third believing that this decrease would be major or considerable; and, 

• in the sugar confectionery sector, over three quarters of respondents claimed that production 

would decrease. 

As one would expect a priori, these results indicate that those product sectors where sugar accounts 

for a greater percentage of raw material costs, namely chocolate and sugar confectionery, are more 

concerned about the cost of sugar and its impact on UK production and employment. 

33


100% 

90% 

80% 

70% 

% respondents 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Biscuit production Cake production Chocolate production Sugar confectionery 

production 

Employment 

major decrease considerable decrease limited decrease no impact limited increase considerable increse major increase 

Figure 5.1: Impact of the current UK and world sugar price differential on future UK 

BCCC production and employment 


5.1.1. Impact of the ‘status quo’ reform option 

Although the ‘status quo’ option merely seeks an extension of the present regime beyond June 2006, 

it is expected that under this policy option there will still be a substantial impact on the sector as a 

result of changes in market conditions: 

• Price. It is likely that future WTO negotiations will lead to a reduction in the EU sugar price. In 

order to accommodate LDC imports under the EBA agreement at a minimum prices on the EU 

market would have to fall by some 17% (Table 5.1). There is concern, however, that when the 

agreed concession of free access to Least Developed Countries (LDCs) (i.e. preferential imports) 

begins from 2009 onwards the remaining significant difference between EU and world market 

prices would lead to a potential surge in imports from Least Developed Countries (LDCs) over 

and above the approximately 2 million tonnes 19 currently anticipated. 

• Production. Under this reform option, the level of sugar production is subject to quota 

reductions, which would affect all Member States in the same way regardless of their 

comparative advantages. Beyond a certain level, however, the reduction of quotas would weigh 

19 

Estimate based on likely LDC production capacities 

34


disproportionately heavily on the competitiveness of the most efficient producers and would 

seriously hamper restructuring because of the differing proportions of A and B quota between 

Member States. Specifically, Member States with below average B sugar quotas, like the UK, 

would be hardest hit, as all of the equivalent B quota would be eliminated, along with a 

proportion of A quota. 

Furthermore, EU production will become a consequence of the actual volume of preferential 

imports and the reduction in support for exports, which has yet to be agreed within the WTO. 

If the WTO were to impose a reduction in EU exports with refunds, there would be a greater 

reduction in EU production, which would benefit the market shares of producers in third 

countries which have a competitive advantage in sugar production (e.g. Brazil). In the worst case 

scenario, total production is likely to fall by around 23% to 16 million tonnes. According to the 

European Commission’s impact assessment, production in Greece, Ireland and Italy would be 

most affected (and may to a much lesser extent be affected in Spain, Finland, Latvia, Lithuania, 

Portugal, Slovakia and Slovenia) (Table 5.1). As the UK is relatively one of the most competitive 

sugar beet producers in the EU, production under this reform option is likely to evolve along 

with production quota. 

The fall in the level of production in all Member States is expected to cause further restructuring 

of what is already a consolidated sugar processing sector 20 as barriers to entry for new sugar 

refining companies would effectively be maintained. Any further consolidation in both industry 

structure and domestic supply is likely to further strengthen the capacity that the sugar 

processing sector has to influence the price for industrial users of sugar. It is therefore likely 

that this reform option would have no impact on eliminating the industrial sugar price differential 

between the UK and other Member States. As such, current trends in the merger and 

acquisition activities of the industrial sugar using sector and divestments out of the UK (and 

hence employment), as a result of this price differential, are not likely to change. 

• Trade. The overall reduction in EU sugar production, hence the elimination of EU surpluses, 

will mean the disappearance of subsidised EU exports of quota sugar. Subsidised sugar exports in 

line with the volume of preferential imports would continue to be borne by the EU budget 21 . As 

a result, total exports are expected to fall by 25% to 4 million tonnes (with exports with refunds 

expected to fall by 46% to 1.5 million tonnes). At the same time, total imports are expected to 

double to around 4 million tonnes (Table 5.1). While there would appear to be some marginal 

improvement in terms of the likely price prevailing on the EU industrial sugar market, the 

benefits of this are likely to be limited since the factors affecting the rationalisation process in the 

UK are likely to be unaffected and the differential between EU and third country sugar prices is 

not substantially diminished. 

20 

The number of sugar refineries likely to fall by a greater amount given that refineries are viable only beyond a certain threshold of 

production capacity. 

21 

Accordingly, the benefit of EU support, ultimately financed by European consumers, would gradually be transferred to third countries 

and intermediaries. 

35


• Other stakeholders. A continuation of the ‘status quo’ would also not alleviate many of the 

criticisms of the current CMO for sugar, including those resulting from the distortion of 

competition between farmers, the sugar processing sector and the rest of the supply chain. 

Consequently, EU farmers’ incomes from sugar beet would remain (artificially) higher than 

incomes from most other arable crops. For the sugar processing sector, despite lower sugar 

prices, margins would continue to be guaranteed by set prices, regardless of actual developments 

in production costs. The lower prices would also result in a reduction in the revenue generated 

from sugar exports to the EU for ACP countries (Table 5.1), although to a lesser extent than the 

other reform options. 

For consumers, the cost of sugar (and sugar containing products) would remain high relative to 

the other reform options. In contrast, the cost of the CMO for sugar to the Community budget is 

expected to fall (Table 5.1), as the expected elimination of production surpluses will result in the 

disappearance of subsidised exports of quota sugar 22 . 

Finally, ceteris paribus, the expected reduction in sugar beet production is likely to have a positive 

effect on the environment (although this will in part depend on the replacement crop and 

agronomic conditions). These are likely to include less soil erosion and compaction, reduction of 

the unnecessary removal and transportation of soil, less contamination of water by pesticides and 

a lower quantity of water used for irrigation in certain regions 23 . 

In summary, this reform option maintains a long-term quota scheme thereby making it possible to 

continue EU sugar production at a higher level than would otherwise be the case under the reform 

options without quotas. However, this would come at a high cost to the industrial sugar using sector 

as prices would be maintained at a relatively high level. 

22 

The cost of subsidised exports caused by preferential imports would continue to be borne by the Community budget. 

23 

Beet cultivation does however have positive effects on the environment, including keeping certain species of animals in sugar beet 

production regions and improving the agronomic quality of soil in the context of crop rotation. 

36


Table 5.1: Impact assessment of the ‘status quo’ option for the EU-25 in 2010-2015 

Production 

Current sugar regime 

‘Status quo’ option 

• quota (million tonnes) 17.5 13.5 

• total (million tonnes) 20 16 

Import 

• total (million tonnes) 1.9 4 

Export 

• with refunds (million tonnes) 2.8 1.5 


Price of EU white sugar (€ per tonne) 725 600 

Drop in customs duties 0% < -36 % 

Beet prices 

• under quota (€ per tonne) 48 40 

• C sugar (€ per tonne) 17 20 

Direct aid (producers) No No 

Fall in ACP revenue (€ million) 150 

Net expenditure on sugar (€ million) 1,000 – 1,200 600 - 800 

Member States ceasing or substantially 

reducing production - 


Greece, Ireland and Italy 

(Spain, Finland, Latvia, Lithuania, 

Portugal, Slovakia and Slovenia) 

5.1.2. Impact of the ‘fixed quota’ reform option 

The impact of the ‘fixed quota’ option is similar to that of the ‘status quo’ option. The main 

difference to this option is that the ‘fixed quota’ option seeks the prospect of returning to a more 

predictable situation because quotas would be fixed, although at a reduced level, thereby allowing 

more certainty for making investment decisions in the sector. As in the case of the ‘status quo’ 

option, it is expected that under this policy option there will still be a substantial impact on the 

sector, despite it being one of relatively limited reform 24 . (Only the main differences and impacts are 

presented below). 

• Price. The EU market price for sugar would remain relatively high, as in the case of the ‘status 

quo’ option as a result of tariff protection (Table 5.2). However, this reform option does not 

preclude the provision for guaranteed prices to fall to levels equivalent to those contemplated 

under the ‘price reduction’ option (Section 5.1.3). 

24 

The ‘fixed quota’ option would require the EU to go back on its international commitments such as the Everything But Arms (EBA) 

agreement, which opens up the Community market to all products from the LDCs. The EBA initiative is one of the pillars of the 

agricultural proposal on market access in the WTO and other international fora. Reintroducing tariff quotas would exact a high political 

price and harm the EU’s credibility. However, some LDCs are themselves calling for negotiations to guard against prices falling to a level 

which would prevent several of them from enjoying what they consider are supposed to be the benefits of free access. Similarly, the ACP 

countries which are signatories of the Sugar Protocol have come out in favour of returning to fixed quotas. 

37


• Production. This reform option would entail a similar reduction in production quotas (20%) to 

that envisaged under the ‘status quo’ option, with preferential imports, although subject to 

import quotas again 25 , making up much of the shortfall in supply (Table 5.2). 

It is envisaged that this reform option could also provide a framework for regulating the transfer 

of production quotas between production areas according to comparative advantage. Such a 

system, if introduced, would facilitate industry concentration as production would move to those 

regions which have a comparative advantage in sugar beet production, including the UK. If 

production increases in the UK were significant, then this could result in lowering entry barriers 

for new sugar refiners to enter the market. This may result in a change to the competitive 

nature of the sugar processing sector, thereby reducing any hold that this sector has on price for 

industrial users of sugar. Thus, if the transfer of production quotas were to be allowed under 

this reform option, and the current industrial sugar price differential between the UK and other 

Member States were to disappear, then the rate of merger and acquisition activities within the 

industrial sugar using sector and level of divestments out of the UK (and hence employment) may 

lessen. 

• Other stakeholders. The impact of the ‘fixed quota’ option on other stakeholders would be 

similar to that of the ‘status quo’ option. However, the possibility of transferring production 

quotas between areas according to comparative advantage would likely have a positive impact on 

the environment, since quotas often maintain sugar beet production in less favourable regions 

from an environmental perspective. The expectation of positive environmental impacts will of 

course depend on the choice of alternative land uses and their location. 

In summary, as in the case of the ‘status quo’ option, this reform option maintains a long-term quota 

scheme thereby making it possible to continue EU sugar production at a higher level than would 

otherwise be under the reform options without quotas. However, this would come at a high cost to 

the industrial sugar using sector as prices would remain relatively high. Although this reform option 

provides the possibility for regulating the transfer of production quotas between production areas 

according, it would require the EU to go back on its international commitments such as the 

Everything But Arms (EBA) agreement. 

25 

The quotas to be negotiated would have to consolidate the highest export levels attained while taking into account the investment 

undertaken by a number of LDCs with a view to accessing the European market from 2009 onwards. 

38


Table 5.2: Impact assessment of the ‘fixed quota’ option for the EU-25 in 2010-2015 

Production 


‘Fixed quota’ option 

• quota (million tonnes) 17.5 14 


Import 

• total (million tonnes) 1.9 3.5 

Export 

• with refunds (million tonnes) 2.8 1.5 

• total (million tonnes) 5.3 3.5 


Drop in customs duties 0% < –36 % 

Beet prices 

• under quota (€ per tonne) 48 40 


Direct aid (producers) No No 


Net expenditure on sugar (€ million) 1,000 – 1,200 600 - 800 


reducing production - 



(Spain, Finland, Latvia, Lithuania, 

Portugal, Slovakia and Slovenia) 

5.1.3. Impact of the ‘price reduction’ reform option 

The ‘price reduction’ option differs from the previous two reform options in that it aims to regulate 

production by maintaining a balance between prices and costs with some tariff protection (i.e. 

production quotas will be eliminated within a managed timeframe). 

• Price. This reform option presupposes that setting an adequate level of tariff protection 

supports prices on the domestic market. A market balance in sugar would thus be achieved by 

adjusting EU supply and preferential import supply to prices (at least in the long-term) free from 

production quotas 26 . In a context of an increase in non-quota preferential imports, market prices 

would then adjust themselves to the entry price of non-preferential imports to which the tariff 

protection (resulting from the negotiations in the WTO) would apply. The maintenance of 

adequate tariff protection would limit the extent to which the EU sugar industry is exposed to 

volatility in the world market price of sugar. 

The price of EU white sugar under this reform option is expected to fall to €450 per tonne 

between 2012 and 2015 (€600 per tonne between 2006-2011) (Table 5.3). Accordingly, the 

industrial sugar using sector producing for the internal market may benefit from this reduced 

price for industrial sugar. (Under the CMO for sugar, exporters of sugar containing Non-Annex 

26 

Intervention would be reduced to the role of a genuine safety net in the event of a sharp fall in domestic prices, within a given threshold. 

39


1 products are compensated for difference in the world market and the EU sugar price (Section 

3.1.1)). 

• Production. A reduction in the internal sugar price is expected to lead to a reduction in the 

overall level of EU production. Production quotas would be abolished once the levels of imports 

and production had stabilised. The Commission expects total production to fall by around 30% 

under this reform option to 14 million tonnes (Table 5.3). 

This reduced production would likely increase competition and intra-EU trade to the benefit of 

the most competitive producers, particularly after the abolition of quotas. Consequently, the 

effects of a fall in price should be felt most in regions without comparative advantage in sugar 

beet production. According to the European Commission’s impact assessment, production in 

Greece, Ireland and Italy would be most affected from the early years of any reform (2006 to 

2011) and in Spain, Finland, Latvia, Lithuania, Portugal, Slovakia and Slovenia between 2012 and 

2015 as the reform becomes fully implemented (Table 5.3). 

As the UK is one of the most competitive sugar beet producers in the EU, production under this 

reform option could increase when quotas are abolished. If so, this increased production may 

lower entry barriers for new sugar refinery companies to enter the market, thereby changing the 

competitive nature of the sugar processing sector and any hold that this sector may have on the 

price for industrial sugar. If this is the case, then this may lead to a reduction in the differential in 

the industrial sugar price between the UK and other Member States and lessen the current rate 

of merger and acquisition activities within the sector and level of divestments out of the UK (and 

hence employment). This would in turn help to maintain demand from UK sugar users for other 

raw materials produced by other UK agricultural sectors (such as dairy ingredients and cereals). 

• Trade. With a fall in the price of sugar to around €450 per tonne, the EU market will become 

less attractive for a large proportion of exporters with high production costs (including a 

significant proportion of ACP countries). Accordingly, imports into the EU are likely to increase 

by a lesser amount than under the two reform options with quotas. By the end of the reform 

period (2012 to 2015), imports are forecast to have fallen by 32% to 2.5 million tonnes. In 

contrast, exports to third countries are likely to fall by 91% to 0.5 million (Table 5.3). This 

option has the benefit of allowing the sourcing of sugar for industrial users at a level far closer to 

the world market price thus contributing substantially to removing the distortions currently 

affecting the sector. 

• Other stakeholders. The expected reduction in the price of sugar beet for EU farmers is likely 

to be only partially compensated for by the introduction of direct payments in line with the 

reformed CAP. Econometric analysis suggests that under this reform option, the agricultural 

sector would be slightly worse off in economic welfare terms (€1.4 billion (1%)) compared to the 

current regime (Table 5.4). For the sugar processing sector, margins would continue to be 

guaranteed by set prices, regardless of actual developments in production costs, however sugar 

40


prices are expected to be much lower and reduced production of sugar beet would require a 

lower sugar processing capacity. As a result, econometric analysis suggests that this reform 

option is likely to lead to a loss in economic welfare in the sugar processing sector, amounting to 

€773 million (54%) (Table 5.4). 

The lower sugar prices forecast are expected to make the EU market less attractive for quite a 

large proportion of exporters with high production costs, including a significant proportion of 

ACP countries. This is expected to result in a reduction in the revenue generated from sugar 

exports to the EU for ACP countries by some €300 million (Table 5.3). In addition to the cost of 

introducing direct payments, any compensation given to ACP countries because of the expected 

lower sugar price under this reform option is likely to place a significant demand on the 

Community budget (Table 5.3). 

For consumers, it is difficult to quantify the impact of these lower sugar prices on retail prices for 

sugar and products containing sugar. Research carried out by Agra CEAS Consulting for the 

European Commission 27 suggests that a price reduction is likely for the 30% of sugar consumed in 

the EU for direct consumption, particularly in view of the high levels of competition in retail 

sales. However, for the remaining sugar consumed that is incorporated in processed products, 

the impact of the reduced sugar price will depend on many factors, including the cost of other 

raw materials in the final product and competitive conditions downstream. 

As with the ‘status quo’ and ‘fixed quota’ reform options, the impact on the environment will in 

part depend on the alternative land uses taken up. The abolition of production quotas would be 

expected to provide a positive environmental impact similar to that described under the ‘fixed 

quota’ reform option. Furthermore, the introduction of direct payments would make it possible 

to apply cross-compliance requirements to sugar beet production areas, with the possibility of 

promoting less intensive cultivation methods. 

In summary, under this reform option, the industrial sugar using sector will benefit from a reduced 

price for industrial sugar as tariff protection would diminish and the gap between the internal EU 

price and the world price would close. In terms of economic welfare, econometric analysis has 

found that the food industry (which includes the industrial sugar using sector), consumers and the EU 

budget would be better off under this reform option compared to the current regime (Table 5.4). 

27 

Agra CEAS Consulting (2002). ‘Study on price transmission in the agri-food sector’ for the European Commission (Unpublished). 

41


Table 5.3: Impact assessment of the ‘price reduction’ option for the EU-25 in 2006 –2011 

and 2010-2015 

Production 


‘Price reduction’ option 

2006-11 2012-15 

• quota (million tonnes) 17.5 15.5 0 

• total (million tonnes) 20 17.5 14 

Import 

• total (million tonnes) 1.9 2 2.5 

Export 

• with refunds (million tonnes) 2.8 1.5 0 

• total (million tonnes) 5.3 3.5 0.5 

Price of EU white sugar (€ per tonne) 725 600 450 

Drop in customs duties 0% < –36 % < –60 % 

Beet prices 

• under quota (€ per tonne) 48 -40 - 

• C sugar (€ per tonne) 17 20 25 

Direct aid (producers) No No Yes 

Fall in ACP revenue (€ million) 150 300 

Net expenditure on sugar (€ million) 1,000 – 1,200 600 - 800 800 - 1000 


reducing production 


- 



(Spain, Finland, Latvia, 

Lithuania, Portugal, 

Slovakia and Slovenia) 

Table 5.4: Welfare impacts 1 of the ‘price reduction’ option 

Baseline 

‘Price reduction’ option 

deviation from baseline 

€ million € million % change 

Agriculture 136,353 -1,377 -1.0% 

Sugar industry 1,438 -773 -54.0% 

Consumers/food industry 631,234 2,367 0.4% 

EU budget 45,237 1,039 2.3% 

General welfare - 1,257 - 

Source: Witzke, H. P. and Kuhn, A. (2003). Assessing reform options for the Sugar Common Market Organisation - 

quantitative analyses with interlinked models. http://www.eurocare-bonn.de/profrec/sugar/sugar03r.pdf 

1 

where welfare impacts are measured in terms of changes in activity levels, market balances and income in agriculture and 

in terms of estimated profit for the sugar industry. Consumer and food industry impacts are equivalent variations in 

percent of total final consumer expenditure. Budgetary impacts are mainly savings in export refunds. 

5.1.4. Impact of the ‘liberalisation’ reform option 

The ‘liberalisation’ option differs from the other options in that it aims to regulate the market by 

maintaining a balance between prices and costs with no tariff protection. 

42


• Price. In the absence of any protection, domestic sugar prices would fall into line with world 

market prices. The price of EU white sugar under this reform option is expected to fall to €350 

per tonne between 2012 and 2015 (Table 5.5). Accordingly, this policy option is expected to 

provide industrial sugar users with the ‘lowest’ price for industrial sugar, as the internal market 

price would be allowed to adjust itself to the price of non-preferential imports. This would 

create a level playing field between the UK and both the EU and non-EU industrial users, with 

regard to the price of sugar. However, under this reform option, there would be a greater risk 

of price volatility for industrial sugar users as the market will no longer be ‘protected’. 

• Production. At world market price levels, total EU sugar production is expected to fall 

considerably, by an estimated 70% to 6 million tonnes (Table 5.5). This will likely lead to the 

complete cessation of sugar beet cultivation in certain EU areas which do not have a comparative 

advantage in sugar beet production. In addition to those Member States expected to cease 

production under the ‘price reduction’ option, production is also likely to cease in Belgium, 

Czech Republic, Denmark, Hungary and the Netherlands. Accordingly, at current production 

costs, production would be concentrated in those regions having a comparative advantage, 

namely, the UK, France, Germany, Austria and Poland (Table 5.5), although the profitability of 

sugar beet production in these areas is likely to be severely challenged. 

• Trade. At world market price levels, the EU market would remain attractive to the most 

competitive exporters, such as Brazil. Imports are forecast to increase fourfold to 10 million 

tonnes (and EU exports to third countries are likely to cease) (Table 5.5). Assuming the capacity 

to supply these volumes at the current price exists, it is expected that the EU would depend to 

almost 80% on this single country for nearly two thirds of its sugar needs. It is likely that Brazil’s 

exports to the EU would replace the majority of preferential exports from ACP countries, India 

and the LDCs, where production costs are considerably higher. While this option has the major 

benefit of reducing the price to industrial users of sugar, this reduction in sources of supply 

would expose the EU and world markets more directly to the consequences of a single large 

exporting country’s weather and economic and political risks. As such, it would have potentially 

important adverse effects for the sugar-using sector in terms of the regularity and consistency of 

supply. 

• Other stakeholders. The impact of the ‘liberalisation’ option on other stakeholders is similar 

to that described in the ‘price reduction’ option. The greater reduction in production and price 

of sugar in the EU expected under this reform option is likely to lead to a greater loss in 

economic welfare to sugar beet farmers (€3.3 billion (2.4%)) and the sugar processing sector (€1.4 

billion (98%)) (Table 5.6). 

Similarly, the considerably lower sugar prices forecast will make the EU market less attractive for 

a greater number of exporters, including a significant proportion of ACP countries. As a result, 

revenue generated from sugar exports to the EU for ACP countries is expected to decline by 

some €350 million (Table 5.5). In addition to the cost of introducing direct payments to 

43


compensate EU producers for these price falls, any compensation provided to ACP countries is 

likely to result in a significant increase in the cost to the Community budget. However, there 

would also be a budgetary gain from the fact that there would no longer be any need to provide 

sugar export subsidies, thereby limiting the impact of these increased costs on the Community 

budget (Table 5.5). 

For consumers, the impact on the retail price for sugar and sugar containing products is likely to 

be similar to that of the ‘price reduction’ option. Likewise, the impact on the environment would 

generally be positive as described in the ‘price reduction’ option, although the extent of the 

expected reduction and movement in sugar beet production under this reform option would 

possibly result in greater benefits. 

In summary, the ‘liberalisation’ option would lead to a significant and rapid change in EU sugar supply 

conditions that would potentially have important adverse effects in terms of the regularity and 

consistency of supply. Nevertheless, this reform option is expected to provide industrial sugar users 

with the ‘lowest’ price for industrial sugar. In terms of economic welfare, econometric analysis has 

found that the food industry (which includes the industrial sugar using sector), consumers and the EU 

budget would be better off under this reform option compared to the current regime 28 (Table 5.6). 

Table 5.5: Impact assessment of the ‘liberalisation’ option for the EU-25 in 2010-2015 

Production 


‘Liberalisation’ option 

• quota (million tonnes) 17.5 0 


Import 


Export 

• with refunds (million tonnes) 2.8 0 



Drop in customs duties 0% - 

Beet prices 

• under quota (€ per tonne) 48 - 


Direct aid (producers) No Yes 


Net expenditure on sugar (€ million) 1,000 – 1,200 1,150 – 1,350 


reducing production 


- 

All except perhaps UK, France, 

Germany, Austria and Poland 

28 

It should be noted, however, that this measurement of ‘welfare gains’ will not include potential costs for the sector arising from supply 

disruption. 

44


Table 5.6: Welfare impacts 1 of the ‘liberalisation’ option 

Baseline 

‘Liberalisation’ option 

deviation from baseline 

€ million € million % change 

Agriculture 136,353 -3,315 -2.4% 

Sugar industry 1,438 -1,410 -98.0% 

Consumers/food industry 631,234 5,713 0.9% 

EU budget 45,237 1,043 2.3% 

General welfare - 2,030 - 

Source: Witzke, H. P. and Kuhn, A. (2003). Assessing reform options for the Sugar Common Market Organisation - 

quantitative analyses with interlinked models. http://www.eurocare-bonn.de/profrec/sugar/sugar03r.pdf 

1 

where welfare impacts are measured in terms of changes in activity levels, market balances and income in agriculture and 

in terms of estimated profit for the sugar industry. Consumer and food industry impacts are equivalent variations in 

percent of total final consumer expenditure. Budgetary impacts are mainly savings in export refunds. 

5.2. Conclusions 

Looking at the impact on the supply of industrial sugar for the sugar using industry, only the complete 

market ‘liberalisation’ option would lead to a significant and rapid change in EU sugar supply 

conditions. Analysis suggests that ‘liberalisation’ would lead to a reduction in EU production to 

around one third of present levels and the EU would become a net importer of sugar from countries 

with a competitive advantage for sugar production (e.g. Brazil). This would potentially have 

important adverse effects for the sugar-using sector, as the regularity and consistency of supply may 

be impacted by weather-induced production fluctuations as well as economic and political problems 

in these countries. 

Nevertheless, the complete market ‘liberalisation’ option is expected to provide industrial sugar 

users with the ‘lowest’ price for industrial sugar, as the internal market price would be allowed to 

adjust itself to the price of non-preferential imports. This would create a level playing field between 

the UK and both the EU and non-EU industrial users, with regard to the price of sugar. However, 

under the ‘liberalisation’ option, there would be a greater risk of price volatility for industrial sugar 

users as the market will no longer be ‘protected’. 

Under the ‘price reduction’ option, the UK sugar using sector will also benefit from a reduced price 

for industrial sugar as tariff protection would diminish and the gap between the internal EU price and 

the world price would close. However, unlike the ‘liberalisation’ option, the EU market would retain 

some protection from the volatility of industrial sugar prices on the world market. 

The UK industrial sugar using sector would have most protection against price volatility on the world 

market in the two policy options with quotas (i.e. ‘status quo’ and ‘fixed quota’ options). But this 

would come at a high cost to the sugar using sector. This is because the industrial sugar price will be 

maintained at a relatively high price level, vis-à-vis the world market price, and production quotas will 

limit the UK’s ability to expand production, even though it is one of the most cost competitive 

producers of sugar beet in the EU. With the continuation of production quotas, barriers to entry for 

45


new sugar refining companies would effectively be maintained, thereby reaffirming any hold that the 

refining sector may have on industry prices. The current differential in, and volatility of, the price for 

industrial sugar between the UK and EU markets would be likely to remain. As such, the current 

rate of mergers and acquisitions in the UK sugar using sector would tend to continue at a similar rate 

as has been the case in recent years and further divestments are likely to move production outside 

the UK. This continued process of concentration would be likely to result in a further significant 

reduction of employment in the sector. This is consistent with the findings of our survey of UK 

BCCC manufacturers. 

Consequently, the only reform options which allow an improvement in the competitive nature of the 

sugar supply chain are those that result in the elimination of production quotas. If the level of 

merger, acquisition and divestment activity is to be reduced to a sustainable level, then the ‘price 

reduction’ and ‘liberalisation’ policy options would appear most suitable. Moreover, econometric 

analysis has shown that both these policy options result in a net welfare gain for the industrial sugar 

using sector. 

46

2205 final report.pdf - Agra CEAS Consulting

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