Impact of the Sugar Regime Reform

THE CAP REFORMS: 2005-2007

• SOURAV ROY

THE SUGAR REGIME REFORM (2005-06)

The European Union (EU) forms one of the largest sugar producers in the world. This position was formed through the application of protectionist policies ranging from production and prices to exports and imports that is applicable throughout the EU. The policy that is prevalent in Europe with regard to sugar regulation is commonly known as the CMO (Common Market Organisation). Since its inception in 1968 the CMO had hardly undergone any reform. Taking into account all the reforms that the EU’s Common Agricultural programme (CAP) had gone through – the 1992 MacSharry Reform, Agenda 2000, and the 2003 CAP reform- the sugar market of Europe had escaped through all the reform periods. But the 2003 reforms gave rise to certain factors which led to the need for reforming their sugar market. First the Everything-But-arms (EBA) initiative that led the EU to withdraw tariff from 48 developing countries which means that there availability of more quantity of sugar. Secondly, the sugar regime of EU does not comply with the EU’s WTO export rules which in turn imply that EU cannot export out-of –quota sugar. Thirdly, there was addition of 10 more countries in the EU which led to the increase in the imbalance of demand and supply of sugar.

The main purpose of the CMO is to ensure uninterrupted sugar production within the countries of the EU where sugar production is feasible. This is made possible through the National Production Quota given to the producers of sugar within the EU. There also exists an intervention price – a minimum amount that is guaranteed to the producers of sugar so that they have the incentive for continuous sugar production. The EU under takes several mechanisms in order to protect the domestic sugar industry. Firstly, EU imposes high restrictive quotas on import of sugar substitutes. Secondly, high amount of subsidies are given to dispose off the excess amount of supply and maintain high domestic prices.

The 2005 sugar reform under the CAP of EU aims at (1) lowering the production of sugar at places where the cost of inputs are higher or where the rate of yield is low (2) to bring the export subsidies in line with rules laid down by the WTO (3) to reduce the import of sugar from the EBA countries into the EU (4) to reduce the price gap between sugar and other substitutes of sugar. The main elements of the new sugar regime reform 2006 are as follows:

• Over a four year period beginning in 2006/07 the intervention price for sugar is reduced from 631.9 Euros to 404.4 Euros per ton, that amounts to a cut of about 36%
• In order to compensate for the price cut, the farmers were entitled to receive a compensation amounting to 64.2% of the price cuts. Farmers in those countries giving up at least 50% of the quota on sugar are provisioned to receive a coupled payment (coupled with production) of 30 percent of the income loss along with all possible national aids.
• Unlike the previous reform, in this reform the A and B quota are coupled together into a single quota amounting to 17.4 million tons of sugar.
• In order to encourage the system of quota, a voluntary restructuring scheme is introduced for a maximum period of 4 years. The scheme involves buying out quota from th producers of sugar and encouraging factory closures.
• With regard to the management of the supply side, it consists of both the old and the new system mechanisms. An important feature is the replacement of the intervention system with a reference price. The supply management mostly depends on the private storage system when market prices fall below the reference price.
• The border protection measures did not undergo a change except for cutting down on the quotas and the tariffs in order to bring them at par with the WTO commitments. Non preferential import duties including the special safeguards were not affected by the new regime.

An examination of the market reveals some effects of the current sugar regime reform. Although the existing reform has been replaced by a new reform, there still exist some price support policies which have the potential to limit the extent to which the goals of the reform policy can be achieved. Moreover, high import barriers will continue to shield the domestic sugar industry. The inability of quota holders to trade quotas across member states may restrict the degree of industry adjustment toward greater cost efficiency.

The application of the new sugar reform regime is going to alter the sugar market for the EU. According to the estimates given by the EU commission, a cut in the export of sugar due to the due to the rules set out by the WTO there is going to be a reduction in the production of sugar amounting to be around 2 million. High cost regions like Ireland, Greece, Italty and Portugal would face a lot of trouble while the low cost regions would be in a advantageous position to increase production.

With regard to trade, shipments of sugar were expected to increase to the EU from the EBA countries after 2009 but there exists certain uncertainty regarding this. Under the SWAPS provision, the EBA countries could import sugar at world price and then export locally produced sugar within the EU. Even with the lower intervention prices, very few people within the EU believe that EBA countries will be able to export raw sugar at a reasonably low price. Under the reform, only the ACP countries within the LDC group (i.e., Malawi, Zambia, and Zimbabwe) have the potential to offset losses in their current quota exports to the EU by increasing their export volumes under the EBA Initiative.

THE 2007 REFORM

In order to have an environment-friendly development the various sections of CAP are monitored. On the November 2007 the commission declared that there will be a “Health Check up” on the various reforms of CAP. It gives the direction that the CAP should undertake to continue the reform process that started in 2003 with the introduction of SPS (Special Payment Scheme). It mainly focuses on three measures:

• Simplifying the SPS scheme.
• Market measures
• New environmental challenges.

Simplifying the Single Payment Scheme

According to the CAP Health Check, the Single Payment Scheme should be developed in the following ways:

• standardising the application of the system in order to limit cases where aid is still granted under a coupled support system;
• continued adaptation of the principle of cross-compliance, which promotes sustainableagriculture whilst taking account of society’s new requirements;
• Reviewing the allocation of aid: limiting the higher level of payments and increasing the minimum area threshold required for small amounts.

Market developments

In order to encourage effectivecompetitionon agricultural markets, the Commission intends to review some CAP management instruments which no longer meet market requirements, in particular measures concerning cereals and dairy products.

New environmental challenges

This illustrates the new challenges that the CAP could contribute towards meeting: climate change, bio-energy and water management, as well as other challenges such as biodiversity.