Any application of the leaked values would severely hamper the ability of biodiesel manufacturers to enter into the EU’s new biofuels certification plan, announced last August.

Assuming that the EU does not relax its overall target for renewable energy in transport fuel (10% by 2020), if biodiesel fails to make the grade this would raise the demand for bioethanol made either from domestically-produced sugar beet or imported either from Brazil or Southern Africa.

This post was written by Alan Matthews.

The Presidency structured the debate around two themes: the effectiveness of exceptional measures in case of market disturbances and crisis; and the proposed measures aiming at a more competitive and well-functioning food supply chain. The debate, which lasted just over two hours, can be followed here on video.

The key battle lines that emerged can be summarised as follows. For simplicity, I refer to those who would like to return to a more managed market as the ‘blues’, and those who would like to push further in a more market-oriented direction as the ‘reds’, while recognising that this crude distinction does not always work. For another summary of Monday’s debate, see this Europolitics article.

Market disturbances (Articles 154-156)

There was general agreement that agriculture is vulnerable to various types of crisis and market disruption, including from animal disease outbreaks, extreme weather events, and loss of consumer confidence due to a food safety breakdown. The Commissioner also highlighted that sectors could face a crisis not only because of low product prices but also where margins are squeezed by high input costs.

The regulation provides for measures to deal with both kinds of crisis and the general market disruption clause is expanded to cover all sectors in the current CMO. The Commissioner has emphasised the need for a speedy response to crisis situations, and supplementary funding to deal with crises is proposed in a crisis reserve outside of the main EU budget.

The ‘blues’ did not have much to complain about in this proposal. Some countries were unhappy with the extent of the dismantling of market instruments in the past – Spain and Poland called for a broadening of intervention and an increase in reference and trigger prices but there seemed little appetite for that. Latvia wanted the risk management toolkit proposed for Pillar 2 to be moved into Pillar 1.

The ‘reds’ raised a range of issues. Some countries were concerned about the need for a clearer definition of market disturbance and for a clear distinction between crises and normal volatility to avoid this measure becoming a form of income support. These countries expressed unease about giving the Commission quite far-reaching powers through delegated acts to introduce safeguard measures. They wanted more guidance on when these measures could be invoked written into the basic law, and more involvement by the member states in making the decision.

Countries differed on whether the crisis reserve should be outside the budget or not. Poland was not happy with the level of co-financing of the animal health and consumer confidence measures and wanted a higher rate of co-financing than the 50% proposed.

Market management

The milk quota system and the vine planting ban are set to expire under existing legislation. Sugar quotas are also set to expire under the existing regulation by 30 September 2015.

Wine-producing countries are unhappy with the disappearance of the vine planting ban and have come together to reverse this decision. Commissioner Ciolos at the Berlin Green Week earlier this month announced the establishment of a high level group to discuss wine reform to report by the end of this year, with no subject taboo. This proposal was not surprisingly welcomed.

‘Blue’ countries also sought to delay the end of sugar quotas, with a number of countries calling for an extension of quotas to 2020. An extension was justified on the grounds that the sector had just come through the 2006 reform, and that a number of processors had invested heavily in acquiring additional quota. One country argued that quotas were necessary to secure adequate sugar supply in the EU.

The fact that the end of quotas in 2015 was clearly signalled as part of this reform and processors should have been aware of this when making their investment decisions seems overlooked in this argument. It was left to the Irish Minister to point out that, in a situation of high sugar prices and short supplies on the EU market, the quicker that quotas were removed, the better.

Improving the functioning of the food supply chain

The ‘blue’ countries are generally happy with the proposal for compulsory recognition of producer organisations and inter-branch organisations, and with the proposal to extend the derogations from competition policy rules which currently apply in the fruit and vegetable sector to all products (while still excluding activities which would fix prices or restrict market access).

The ‘red’ countries objected to the mandatory recognition of producer groups, arguing it should be left up to member states. Other countries were concerned that the proposal to extend PO rules to all producers could lead to the creation of a dominant position in the market place, or the potential for abuse of dominant position. Sweden took the most radical position that strengthening producers’ competitiveness was fundamentally about innovation and not about market regulation.

Phasing out export subsidies

The Commission has not proposed any change to the existing situation with respect to export subsidies. But one of the encouraging aspects of the debate was the number of member states who took the opportunity to explicitly make clear their opposition to the continued use of export subsidies after 2013. There is an opportunity here which can be built on.

This post was written by Alan Matthews

This medium-term outlook for the EU sugar market is based on a status quo assumption for agricultural and trade policy. The Commission notes that its CAP towards 2020 legislative proposal confirms the existing provisions on expiry of the regime after the marketing year 2014/15. Thus it argues that the policy assumption on the expiry of sugar quotas is in conformity with existing legislation.

In my own review of the legislative proposals I argued that the Commission’s decision not to propose an extension to the sugar quota regime after 2014-15 is a part of the 2013 CAP reform, on the grounds that this was the first time that the Commission had made its intentions clear. But formally the Commission is correct that the current legislation expires in September 2015 and would require a positive decision to extend it.

In my review I was surprised at the limited impact of removing sugar quotas that the Commission was projecting. This is confirmed in the sugar market balance projections to 2020 published in the market outlook. This balance sheet refers to centrifugal white sugar only. It does not account for other sweeteners (isoglucose), nor does it include sugar used for bioethanol (whether use for other industrial processing such as in the manufacture of medicines and enzymes is included is not clear) which is currently supplied from out-of-quota sugar. With sugar beet one of the top feedstocks for ethanol production in the EU, increased utilisation of sugar beet for ethanol in line with the overall increase in demand for ethanol is also projected.

It is striking how steady the market balance remains over the projection period. Sugar processing is expected to remain largely unchanged from its current level. Since the EU sugar reform, the EU has turned from a net-exporter into a net importer of sugar. Despite the expectation of relatively high prices and the end of production constraints following the expiry of the quota system, it is projected that the net-trade position of the EU will not change much during the projection period. This implies that the EU import market will still be available after 2015 for those developing country exporters that currently meet this demand.

This post is written by Alan Matthews

The increase in world prices means that world prices are now above the (much reduced after the recent sugar reform) EU reference price. Recent price trends are shown in the following figure, reproduced from the SugarTraders website

Despite the very tight global market, EU sugar beet supplies have moved in the opposite direction. The EU expects a bumper sugar beet harvest this year, with beet yields among the best in years. Combined with imports from developing countries which now have free access to the EU market, the EU will have a considerable surplus over its domestic needs. However, exports are limited by a WTO ruling to 1.374 million tonnes, so the EU will be building carry-over stocks at a time of a significant global sugar deficit.

Beet growers in the EU, according to a post on the Agrimoney.com website, have called on the Commission to allow more of the EU’s sugar surplus on to the world market, but the Commission has rejected this call, saying it has to stand by the WTO ceiling. According to a Bloomberg report on 14 December last, the Commission view is that “the carry-over of surplus sugar in the EU is inevitable as it is not possible to export out-of-quota sugar in excess of the WTO limit.”

Whether this is the case or not goes back to the basis for the WTO ruling on the complaint brought by Brazil, Australia and Thailand against the previous EU sugar policy. The WTO ruled that, despite the absence of explicit export refunds for over-quota EU sugar, over-quota sugar was effectively subsidised because it was being sold at less than average cost of production and was cross-subsidised by the higher price of quota sugar.

The Bloomberg report quotes a number of UK agricultural economists who argue that because world prices are now above EU reference prices, then exports can be undertaken without subsidy and the export limits should not apply. The French Miniser for Agriculture has promised his country’s beet growers that he will raise with the Commission ways to avoid carrying over this year’s surplus into the following year.

However, the EU spokesman points out that EU market prices are still above the world price (as is also seen in the diagram above, although EU prices are only published with a 3-month lag). Thus, even without an explicit export subsidy, other exporting countries may still be able to argue that additional EU exports are only possible because of cross-subsidisation.

EU market prices have been falling, and this has consequences for those ACP developing country exporters which still benefit from a price guarantee on the EU market. Whereas ACP exporters were getting €512/tonne and €616/tonne for ACP raw and white sugars respectively in May 2007, these prices had fallen to €448/tonne and €517/tonne by September 2009 (EU sugar prices including ACP prices are reported on the EU Circa website). Some ACP exporters are now arguing that it does not pay in the short-term to export to Europe, so projected imports in the current year may be lower than expected.

The Barcelona paper provides a good account of the reform. It has a particularly useful table showing the situation with regard to preferential import quotas before and after the reform. The Doha Round compatibility issue is based on examining the Commission’s market forecasts (they use the 2007 version which projects supply and use statistics out to 2014).

The authors take a relatively sanguine view of the possible impact of a Doha Round agreement, based on their assumption that sugar will be declared a sensitive product, and thus will be subject to a tariff cut of around half the projected 73% tariff reduction for products with the highest tariffs. (Their argument here confuses the impact of cutting the internal reference price by 36% with cutting the external tariff by 36% which they erroneously assume to mean the same thing, but this does not change the essentials of their argument).

They do point out that opening a tariff rate quota of 4 to 5% to compensate for declaring sugar as a sensitive product could mean additional tariff rate quota imports of around 700,000 tonnes, which they admit could constitute a threat to the stability of the EU market. However, they point out the reform equipped the Commission with a number of new market regulation instruments, including the possibility of private storage as well as compulsory quota cuts, which give the Commission the means to address this issue.

Whether such drastic measures might be needed now appears unlikely. As the US FAS report points out, in-quota sugar production has fallen by 5.5 million tonnes, close to the 6 million tonnes sought by the Commission. A significant import surge from preferential suppliers could, of course, create market balance difficulties but the FAS report is sceptical that this will happen.

For ACP exporters faced with declining returns from selling sugar on the EU market, there is little sign of a desire to ramp up production for export. Even if there was, a safeguard clause in place until 2015 limits total imports from ACP states to 3.5 million tonnes annually.

For the LDC exporters (some of whom are, of course, also ACP countries), there has been some investment interest particularly in Southern Africa. There is potential for the three largest LDC exporters, Sudan, Mozambique and Zambia, to increase exports to the EU but the Commission already allows for some increases in its market outlook forecasts.

Currently, the EU sugar market is in reasonable balance. The Commission has determined that there is no requirement for ‘preventative withdrawal’ (meaning an additional obligatory cut in quotas if supply is projected to exceed demand) for the 2009/10 marketing year, although this decision can be reviewed in October. While in-quota sugar production has fallen, the use of sugar beet for bioethanol in France and Germany has helped to maintain overall production levels in the more competitive countries. Export subsidies are no longer used and total exports are projected to fall dramatically from 3.2 million tonnes in 2006/07 (including processed products) to just 700,000 tonnes in 2009/10. While we cannot forget that the EU sugar price remains at twice world market levels, the 2006 sugar reform must be deemed a success at least in its own terms.

The key elements of the ‘reform of the reform’ are

• The percentage of the restructuring aid to processors which is to be given to growers and processors is fixed at 10 percent, with an additional top-up payment to growers of €237.50 per tonne of quota renounced, payable retrospectively.
• No levy will be charged on the preventative withdrawal 2007/08 if at least this quantity is renounced in 2008/09.
• Beet growers who wish to renounce quota for the first time may now apply directly for aid from the restructuring fund, up to a limit of 10 percent of a factory’s quota.

The Commission hopes that these changes will encourage the renunciation of a further 3.8 million tonnes of sugar quota in addition to the 2.2 million tonnes given up so far.

The restructuring fund was the key mechanism introduced in the 2006 sugar reform to encourage a reduction in quota and EU production. The fund is financed by a levy on quota production in each of the three years 2006/07, 2007/08 and 2008/09, and the fund is used to pay the restructuring amounts to factories (and now growers) who renounce quota, with the size of the amount decreasing over the four transitional years of the reform. The restructuring fund is intended to be self-financing.

The new measures enhance the predictability of the restructuring payment to processors, who can now plan on securing 90% of the restructuring amount, while introducing an additional one-off payment for exiting growers. This increased generosity is possible without breaching the self-financing requirement because the revenues to the fund are much greater than the Commission had originally estimated.

In its 2005 proposal, the Commission estimated total revenue to the fund over three years would be €4.13 billion whereas it is now estimating revenue to be €6.12 billion. The main reason is that the Council agreed much higher restructuring payments in 2005 than the Commission had originally proposed (€126.4/t per tonne of quota in 2006/07, €173.8/t in 2007/08 and €113.30/t in 2008/09, as compared to €126.4/t in 2006/07, €91.0/t in 2007/08 and €64.50/t in 2008/09). The fact that less quota was renounced in the first two years of the scheme than the Commission expected has also contributed to more buoyant revenues.

Whether the new measures will work as the Commission hopes remains to be seen. Agrana, one of the main players in the Central European sugar industry, anticipates that an additional 2.3 million tonnes will be surrendered in 2008/09, requiring a further 1.4 million tonnes of quota to be given up in the final cut without restructuring payments in 2009/10.

If insufficient quota has been renounced by 2010, the Commission will make compulsory quota cuts. The level of these cuts will vary depending on how much quota each Member State had renounced under the restructuring scheme.

Sugar was included in the DG Agri projections for the first time in the 2006-2013 projections published earlier this year in January 2007, and there is little difference in the new projections now published six months later, apart from the sharp fall-off in exports now foreseen after 2011 (though this may be a misprint in the table as the text refers to exports of unprocessed sugar remaining at the WTO limit of 1.3 mio tonnes).

2006 was the first year of the sugar reform which is being phased in over four years. This transition phase to 2009/10 includes a stepwise reduction in reference prices, the offer of restructuring aid and the phasing in of increasing import rights for least developed countries under the EBA initiative. From 2010/11 onwards, the EU will be completely open to EBA imports and the market will be managed by linear quota reductions to maintain market balance.

During the first year of the reform, member states renounced 1.5 mio tonnes of quota (which, however, was offset by an allocation of 1 mio tonnes in additional quota for sugar and isoglucose), but only 700,000 tonnes in 2007/08. As a result, the Commission introduced a mandatory 2 mio tonne cut in 2007/08 to avert a potential surplus which would have derailed the reform. Some of this has been offset by increased out-of-quota production which, under EU rules, can only be used for industrial or biofuel purposes. In addition, the Commission has proposed changes to the restructuring scheme to make it more attractive which it hopes will be adopted by the Council and Parliament before October this year in time for decisions for the 2008/09 campaign.

Sugar market projections for the European Union (EU-25 and EU-27), mio tonnes

Source: Table A.8, Prospects for Agricultural Markets and Income 2007-2014, European Commission Directorate General for Agriculture, July 2007.

Note: 2006 figures assume a twelve-month campaign until it was exceptionally prolonged to 15 months in that year. Years refer to marketing years which start in Oct after 2006, i.e. 2007 is the marketing year 2007/08. Stock changes represent a balancing item. Years up to 2007 refer to EU-25; years 2007 and after refer to EU-27.

Domestic use of sugar is projected to increase from 17.8 mio tonnes in 2005 (including Bulgaria and Romania) to 20.9 mio tonnes by 2014. The main reason for this increase is the emerging biofuel industry which is assumed to absorb 2.2 mio tonnes of white sugar annually by 2014.

The main uncertainty concerns the expected level of EBA imports after 2010. The Commission assumes that these will amount to 2.2 mio tonnes, and thus total imports will amount to 4.4 mio tonnes when account is taken in addition of ACP imports, imports from Western Balkans as well as the import quota opened after the accession of Bulgaria and Romania.

The market for sugarbeet for ethanol was not foreseen when the sugar reform was being drawn up. It will help to absorb some of the ‘C’ quota sugar which otherwise was exported from the EU without the aid of export subsidies. Ethanol production is expected to attract, on the DG Agri projections, an amount equivalent to the EBA imports of white sugar equivalent. The profitability of this outlet depends, in part, on the tariff protection provided against imported ethanol in the EU (19.2 euro per hectolitre on undenatured alcohol and 10.2 euro per hectolitre on denatured alcohol, though considerable duty-free preferences for developing countries (but not Brazil) exist).

Nonetheless, sugar stocks are expected to remain high until 2010, and the Commission projects that there will be considerable pressure for supply adjustment in 2011 and 2012. And, while DG Agri focuses on the potential supply from least developed countries (LDC) under the EBA initiative, the projections do not appear to take into account the April 2007 offer of duty-free access for sugar from non-LDC African, Carribbean and Pacific countries after October 2009 (subject to a volume constraint until 2015 which would nonetheless allow a ‘substantial increase’ in export levels)  under the terms of the proposed Economic Partnership Agreements with these countries due to come into force after January 2008.

Moreover, the new rules also allow most sugar producers to purchase limited quantities of extra quota at €730 per tonne, and many companies who believe that their long-term future is promising have taken up this option, with nearly 900,000 tonnes of extra quota having been bought. In all, therefore quotas have only fallen by a net total of just over 1 million tonnes. Only three countries have ceased production altogether: Ireland, Latvia and Slovenia.

The quota system, together with high support prices, has not only built in large surplus production, but has left no room for imports. The commitment to import sugar from the ACP countries is being replaced over a transition period by quota free imports from the least developed countries and eventually from the ACP countries. The prices set in the EU will still be well above current world market levels even at the end of the reform process and the EU market is likely to be attractive to many producers in the developing world where the option for growing alternative crops is limited.

The reform cut sugar sale prices by 36 per cent over four years and set up a restructuring fund to pay uncompetitive processors and farmers to close down. Factories could choose between competing for sales at the new price, or being paid to cut their production quotas. According to the Commission, sugar facories were reluctant to reduce quotas because it was unclear how much of the restructuring aid they would have to pass on to sugar farmers. The reform gave farmers the right to at least ten per cent of the aid but member states could decide to hand out more.

The Commission is concerned that processors have been discouraged from taking up restructruring as they have been offered too small a proportion of the payment, particularly in the new member states where take up of restructuring money has been much lower than expected. The Commission plans to allow producers to keep 90 per cent of the restructuring money, with the remainder passed on to farmers. In any event, the world sugar market is very volatile and likely to become more so now that the EU has virtually disappeared from world trade.