2205 final report.pdf - Agra CEAS Consulting

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IMPACT OF THE EU SUGAR REGIME ON BCCCA MEMBER COMPANIES 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
IMPACT OF THE EU SUGAR REGIME ON BCCCA MEMBER COMPANIES 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
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2205 final report.pdf - Agra CEAS Consulting

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