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Court of Auditors criticises sugar reform

The European Court of Auditors today released a report reviewing the outcome of the 2006 sugar regime reform. The Court makes some criticisms of the design of the 2006 reform, but more important are its findings and recommendations which are likely to feed into the debate on the shape of the CAP post-2013. Here the report manages to give ammunition to both CAP reformers and diehards, and if early reactions in my own Irish media are any guide it is the more reactionary views which are getting the media spin.

The Court notes that one objective of the reform was to contribute to a more competitive sugar industry, and that this was to be achieved by concentrating quota reductions in the least competitive areas. The audit criticises the Commission for the absence of data on the productivity of individual factories and for the fact that data on the overall competitiveness of sugar production in different Member States was somewhat dated. It concludes that particularly the measures introduced in the third year of the reform were “not sufficiently targeted to achieve the desired objective”.

The Commission responds that an explicit targeting approach would neither have been feasible nor politically acceptable. The reform was based on a voluntary restructuring approach where the decision to abandon or remain in production was made by each individual sugar company in the light of the substantially lower institutional prices for sugar beet. It defends its approach by pointing that out that Member States with high profitability in beet production now account for 78% of EU quota (compared to 68% before the reform) where Member States with low profitability now hold 5% of the EU quota (compared to 12% before the reform).

However, the Court makes the point that a significant portion of quotas that were abandoned were not in the least competitive regions. This, of course, reflects the fact that sugar beet production is still limited by quota in all Member States. The Court has previously criticised the rigidities linked to the quota system pointing out that it creates barriers to entry for new sugar beet growers. It is worth quoting in full its analysis and recommendation:

50. In terms of sugar industry processing efficiency, the maintenance of rigidities and constraints incorporated into the current quota system, i.e. such as the establishment of quantitative quotas per individual grower in certain Member States, the absence of tradability of quotas and the limited possibilities for their transferability, results in undue rigidity of production capacity and reduces scope for both growers and producers to increase efficiency. The audit confirmed that in some of the audited Member States, quota restrictions hamper the entry of possible new growers and delivery rights of existing growers may not be changed without their consent. This entails significant constraints in the sugar production market.

51. While certain producers attempted to mitigate this constraint through private initiatives, overall these constraints are a limiting factor in the application of the principle of economic sustainability which the impact assessment considered should be improved by ‘moving away from the principle of the apportionment of the production capacity, currently built into the sugar quota regime, towards a more competitive, more market-orientated sector’.

Recommendation 2. In view of the importance of sugar production in the agricultural economy, the Court recommends that the Commission proposes measures to remove the rigidities and constraints in the current quota system which affect adversely the competitiveness of growers and producers.

In its response, the Commission notes that, in the preparation of its proposal for the rules governing sugar after the marketing years 2014/15, it will examine a “whole series of options”. With the ending of dairy quotas, the continuation of sugar quotas after that date will become an even more glaring anomaly. Recent high world market sugar prices may have taken the pressure off the Commission to propose a radical reform of the sugar regime. On the other hand, it is during such periods when reform is likely to be easier to implement.

More disconcertingly, the Court raises a red herring by pointing out that production quotas currently limit EU production to a level approximately 85% of EU consumption “for what is a strategic product for the agri-food and chemical industries, thus increasing the EU dependence on imports, while world market supplies are dominated by a limited number of exporting countries”. It recommends that future decisions which impact on EU sugar production “take into account the level of internal sugar production which is considered necessary given the Treaty objective of assuring availability of supply”.

The Commission in its response, quite rightly, points out that the Treaty does not stipulate that the EU should be self-sufficient in every product. The reason for quotas is precisely because the EU market is attractive for third country exporters, so there is no likelihood of sugar shortages in the near future. That the Court calls sugar, the ‘empty calorie’, a ‘strategic product’ says more about the sweet tooth of the auditors than their analytical abilities.

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