Wednesday, June 22, 2005

Sugar reform proposals

The European Commission's proposals on sugar reform announced on 22nd June are no surprise to those who have been following this debate. What is most interesting, given the recent background of debates on the cost of the CAP, is any detailed discussion of the cost implications.

It is admitted that direct aid compensation for farmers will cosr €1,543bn a year and that the restructuring fund is stated to be be €4.225bn over three years. The Commission claims that these costs will be mainly offset by a substantial reduction in export fund expenditure and abolition of the refining aid. Even given that factory closure aids and a top up aid for farmers who no longer have a factory to sell their beet to will be paid for by a levy on quota holders, it seems likely that earlier cost estimates of €1.5bn in the second year of the programme will still broadly apply.

As expected, there will be no trading of quota across national boundaries as the existence of an internal market would imply, although limited 'reallocations' (not trading) will be permitted by national governments. An opportunity to use a market mechanism to achieve an efficient readjustment is thereby lost, but the political cost would probably be too high given that marginal production is going to be eliminated anyway - meaning that production will largely be concentrated in Northern Europe with Poland the only major East European producer.

The main elements of the proposal are:
* A 39 per cent cut in the EU support price over two years from 2006-7
* Compensation for farmers for 60% of the cut price through the Single Farm Payment
* Replacement of intervention buying by a safety net system using private storage
* Payments to encourage factory closures

Farm commissioner Mariann Fischer Boel has said that she is aware of the bitterness of the battle ahead. She is likely to be opposed by an unholy coalition of NGOs like Oxfam worried about the impact on LDCs and member states who stand to lose their sugar industries. They will be backed up by the large scale industrial farmers who grow sugar beet and the oligopolistic sugar companies who refine it.

It would seem that the reform proposals cannot succeed but something has to be done by the start of the 2006-7 marketing year to meet the demands of the WTO's Appellate Body. In a fully liberalised market, the EU would probably not be growing sugar beet at all.

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