Radical reform of sugar regime more likely

A radical reform of the EU sugar regime is now more likely after the WTO's Appellate Body upheld a ruling against the elaborate subisdy scheme. The complainants,Australia and Brazil, welcomed the decision, their only disappointment being that the EU has been given fifteen months to implement the necessary changes.

The appeal body upheld the original ruling that so-called 'C' sugar exports benefit from an element of cross-subsidy through production quotas and tariff barriers. These work in such a way that EU sugar producers can sell their sugar abroad at below the cost of production, in other words dumping on the world market to the disadvantage of other producers.

The appeal body also confirmed that the EU could not deduct a quantity equivalent to the sugar imported at the full EU price from ACP countries and India under preferential arrangements from the subsidised exports notified to the WTO.

The consequences

The affected exports amount to almost 4 million tonnes a year and would push the EU's volume of subsidised exports well over the 1.273 million tonnes agreed in the Uruguay Round. The EU's notifiable spending on export subsidies would jump to €1.3bn a year as a result of the verdict, compared with the official (and misleading) ceiling of €499m.

The Commission will now have to revise its reform proposals for the sugar regime. A revised reform package is now promised for 22 June. The EU is going to have to find a formula for reform that effectively eliminates the production of C sugar. It is not economic to produce beet sugar in Europe at typical world prices for sugar which are about one third of the current EU support price.

The EU cannot hope to be rescued by a higher world sugar price. There is a structural surplus of production over consumption leading to a declining trend in prices. Given the continuing obesity debate, sugar consumption (especially in processed foods) is likely to fall rather than rise.

In order to conform with the WTO ruling the EU has to cut its support price to the level where it is no longer profitable to produce sugar outside the quota. Account must be taken of the increase in sugar imports that will result from the implementation of the 'Everything But Arms' agreement intended to help least developed countries.

The current draft plans would eventually achieve what is required, but they would not do so within the timetable laid down. To do so, the whole of the 37 per cent cut in price would have to be introduced at once, not in three stages.

The politics

The Comission's plans have already been under attack in the Farm Council as too radical. The European Commission's own calculations suggest that at world prices almost all of the EU sugar beet industry would be wiped out.

It is difficult to see the Council accepting measures that would cut the EU's production by more than a quarter with the biggest hit taken by the most marginal beet sugar producing areas which include politically sensitive parts of France and Germany.

Both beet farmers and the sugar processing industry have always been very effective lobbyists, hence the delay in the implementation of the EBA agreement. Beet refining is an important employer in rural areas. Most beet farmers in the UK are large scale farmers in Eastern England who have considerable political clout and will argue that including beet in their rotation brings agronomic benefits.

Companies take hit

Beet processing companies are already taking a hit. British Sugar was set up by the government as part of its moves to counter the depressionin the 1930s, but is now owned by Associated British Foods. It is reducing its dependence on the sugar beet refining business, but its shares dropped after it admitted that the looming EU reform was likely to have an impact eventually.

The first serious impact on profits is expected in 2007. At present analysts are forecasting a halving of British Sugar's profits over the next five years.