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EU sugar policy

assessment of current impact and future reform

Barend Hazeleger

commissioned by NOVIB

Agrapen © 2001

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EU sugarpolicy 2 A g r a p e n © 2 0 0 1

table of contents

1 World sugar market---------------------------------------------------------------------------------------------------------------31.1 Supply and demand (im)balance---------------------------------------------------------------------------------31,2 Main exporters and importers---------------------------------------------------------------------------------4

1.2.1 Raw sugar trade-----------------------------------------------------------------------------------------41.2.2 White sugar trade---------------------------------------------------------------------------------------5

1.3 Market characteristics---------------------------------------------------------------------------------------------6 2 The common market organization of sugar in the EU----------------------------------------------------------8

2.1 Production control--------------------------------------------------------------------------------------------------82.2 Price support---------------------------------------------------------------------------------------------------------9

2.2.1 Guaranteed minimum prices for A and B quota--------------------------------------------92.2.2 C sugar price--------------------------------------------------------------------------------------------102.2.3 Production refunds for the chemical and pharmaceutical industries------------------10

2.3 Trade measures----------------------------------------------------------------------------------------------------102.3.1 Import duties---------------------------------------------------------------------------------------------112.3.2 Export refunds-------------------------------------------------------------------------------------------112.3.3 Preferential access under the sugar protocol-----------------------------------------------112.3.4 Maximum supply needs, special preferential sugar and most favoured .

nation sugar----------------------------------------------------------------------------------------------122.4 The costs of the CMO sugar---------------------------------------------------------------------------------132.5 Conclusions-----------------------------------------------------------------------------------------------------------14

3 The effects of the CMO sugar on third parties-------------------------------------------------------------------153.1 EU exports-----------------------------------------------------------------------------------------------------------15

3.1.1 Cost price comparison with other exporters---------------------------------------------------------163.1.2 Quota sugar exports--------------------------------------------------------------------------------------163.1.3 C sugar exports--------------------------------------------------------------------------------------------173.1.4 Effects of EU exports on world market sugar prices-----------------------------------------------173.1.5 Conclusions------------------------------------------------------------------------------------------------18

3.2 EU market access regime-------------------------------------------------------------------------------------------183.2.1 Conclusions------------------------------------------------------------------------------------------------21

4 Effects of policy changes of the CMO sugar -----------------------------------------------------------------------------22

4.1 The future CMO sugar------------------------------------------------------------------------------------------------224.1.1 Multilateral trade liberalization and developing countries----------------------------------------224.1.2 Effects of trade liberalization on the world sugar market-----------------------------------------24

4.1.3 Conclusions------------------------------------------------------------------------------------------------254.2 Preferential access: Everything but Arms------------------------------------------------------------------------26

4.2.1 Critique on EBA--------------------------------------------------------------------------------------------274.2.2 Conclusions------------------------------------------------------------------------------------------------27

4.3 Production control: current account for sugar-------------------------------------------------------------------294.3.1 Conclusions------------------------------------------------------------------------------------------------30

References--------------------------------------------------------------------------------------------------------------------------31Annex 1: Classification scheme for LEI simulations-----------------------------------------------------------------------32

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1World sugar market

The world production of white and raw sugar exceeds the demand. Stocks haverisen over the last ten years to 45% of the yearly consumption. As a result

prices on the world sugar market have been fallen since 1995 to a level of about 175 - 250 dollars per tonne, which is below the cost price of most producers.

1. 1 Supply and demand (im)balance

The world production of sugar amounted to 132 million tonnes in 1999/2001. In the same year consumptionrose to 128 million tonnes. The average growth of production is 3 to 4 % a year, consumption increases with1,5% a year. Since the beginning of the 1990's stocks rose from 30 to 45% of annual consumption (see table1).

Table 1: world supply balance and international trade in sugar

Source: FO Licht (supply balance), International Sugar Organization (international trade)

The growing stocks resulted into a sharp decline of prices after 1995 to a level of 200 US $ per tonne (see gure1 for raw sugar prices, white sugar prices follow the same trend).This is close to or even below the cost price inmost exporting countries. Brazil, considered as one of the most important sugar cane producers, is able to

1996/97 1997/98 1998/99 1999/00

--------------------------------------1 000 t raw sugar -------------------------------------

Supply balance

(marketing y ear September/August)

Initial stock 45 703 46 548 49 442 56 416

Production 124 103 128 063 135 121 132 264

Imports 37 265 39 281 41 369 38 560

Availability 207 071 213 892 225 932 227 240

Exports 39 436 41 205 43 412 40 413

Consumption 120 940 123 245 126 704 128 269

Final stock 46 548 49 442 56 416 58 558

of which: as % of consumption 38.5 40.1 44.5 45.7

International trade

Imports/world 35 153 37 278 37 076 35 887

of which:

EU-15 1 868 1 883 1 814 1 941% 5.3 5.1 4.9 5.4

Exports/world 35 422 37 021 37 263 39 487

of which:

EU-15 4 209 5 152 6 357 5 086

% 11.9 13.9 17.1 12.9

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produce raw sugar at US$ 150 - 200 per tonne (source NEI). The mayor reasons for this price decline are grow-ing exports from Brazil, Australia, Cuba and Thailand and declining imports by Asian countries and Russia dueto the economic crises in these countries.

Figure 1: World monthly raw sugar prices $ cts/pound (x 1.94 to get Euro cts/kg)

Source: coffee, sugar and cocoa Exchange Inc.

1. 2 Main exporters and importers

On the world market two types of sugar are distinguished: raw and white sugar. Raw sugar is an intermediateproduct shipped for renement in the importing countries. White sugar is the end product. Raw sugar almostentirely consists of cane sugar. White sugar consists of rened beet and cane sugar.

1.2.1 Raw sugar tradeThe raw sugar market is heavily concentrated and dominated by Brazil and Australia, followed by Cuba andThailand. This top 4 exporters accounts for 65% of raw sugar supply on the world market (see table 2). The

preferential sugar exports are exports from ACP countries under the EU/ACP convention to the EU. Later onIndia got the same rights. In total the preferential exports amount to 1,304,700 tonnes a year. The top-4 export-ers of these preferential exports are: Mauritius (491,030.5 tonnes), Fiji (165,348.3), Guyana (159,410.1) andSwaziland (117,844.5). The special preferential sugar exports (SPS) are established on top of the preferentialexports to meet the capacity of the seven EU raw sugar reneries. Again India and the ACP countries accountfor these SPS exports.

Table 2: Raw sugar export volumes, 1997-98 (in 1,000 tonnes of raw sugar)

Source: NEI

exporting country raw sugar export volume of which:

(world market share) preferential US tariff rate worldmarket

sugar + sps quota exports

Braz il 4,721.3 (24%) 221.1 4,500.2

Australia 4,067.7 (21%) 126.6 3,941.1

Cuba 2,509.3 (13%) 2,509.3

Thailand 1,399.1 (7%) 21.3 1,377.8

South Africa 850.3 (4%) 35.1 815.2

Mexico 793.6 (4%) 25.0 768.6

Guatemala 779.6 (4%) 73.2 706.4

Colombia 380.9 (2%) 36.6 344.3

Nicaragua 199.8 (1%) 32.0 167.8

El Salvador 162.8 (1%) 39.6 123.2

Top-10 15,864.4 (82%) 610.5 15,253.9

Others 3,452.5 (18%) 1,744.1 989.5 718.9Total 19,316.9 (110%) 1,744.1 1,600.0 15,972.8

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The main importers of raw sugar are listed in table 3. The top-10 account for 70% of total raw sugar imports.The EU is the third largest importer with a share of 8,2% of total raw sugar imports mostly consisting of preferential and special preferential sugar imports.

Table 3: Raw sugar import volumes, 1997/98 (in 1,000 tonnes of raw sugar)

Source: NEI

1.2.2 White sugar trade

The white sugar market is less concentrated than the raw sugar market. The market share of the top-10 export-ers is 66%; on the world market for raw sugar this is 82%. The same is true for the import side: the marketshare of top-10 importers of white sugar is 37%, of raw sugar this is: 70%. The EU is by far the largest exporterof white sugar with 30% of world exports, followed by Brazil, Thailand and Pakistan (see table 4).EU production and exports are more or less stable. The last years the EU exported an average of 5.4 milliontonnes of white sugar to the world market. 2.5 million tonnes consisted of C-sugar, exported without exportrefunds, the rest 2.9 million tonnes was exported with refunds. The latter consisted of 1.2 million tonnes of quota sugar (EU-production) and 1.7 million tonnes of white sugar, originally imported as preferential orspecial preferential raw sugar from ACP countries and India (non EU-production).

Table 4: white sugar trade, 1997/98 (in tonnes of raw sugar equivalents)

Source: NEI

importing country imports from world market imports under preferential total raw sugar imports

conditions

Russia 4,152.8 4,152.8

USA 561.5 1,600.0 2,161.5

EU 1,744.1 1,744.1

Japan 1,601.6 1,601.6

South Korea 1,367.2 1,367.2

Canada 1,082.0 1,082.0

Malaysia 974.0 974.0

Egypt 962.9 962.9

Morocco 525.9 525.9

Saudi Arabia 422.9 422.9

Top-10 11,650.8 3,344.3 14,994.9

Others 6,232.9 6,232.9

Total 17,883.7 3,344.3 21,227.8

exporting countries white sugar exports importing countries white sugar imports

EU 6,411.9 Nigeria 897.6

Braz il 3,329.8 Russia 886.7Thailand 1,224.2 India 874.7

Pakistan 639.0 Iran 856.9

India 527.5 Algeria 643.2

Colombia 473.8 Sri Lanka 529.8

Poland 403.2 Iraq 510.1

Ukraine 398.6 Israel 471.6

Guatemala 365.1 Peru 458.3

South Korea 364.9 Indonesia 446.4

Top-10 14,138.0 Top-10 6,575.3

Others 7,169.0 Others 11,312.6

Total 21,307.0 Total 17,887.9

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2The common market organisation of sugar in

the EU

The European common market organisation (CMO) for sugar consists of threeelements: 1 production control (quotas), 2 price support (internal prices produc-

tion levies and refunds) and 3 trade measures (export refunds, import levies and preferential agreements). The CMO is to a large degree financed by the sugar producers and industry except from the re-exporting of sugar originally imported under preferential agreements withthe ACP countries and India.

2. 1 Production control

Sugar production within the EU is controlled by quotas per country and per industry. There are two typesof quota. A-quotas (12 million tonnes) roughly cover the internal demand of the EU. The B-quotas (2.6 mil-lion tonnes) equal the amount of sugar that can be exported with the aid of export refunds. Guaranteed prices(intervention price, basic and minimum prices for sugar beets and cane see paragraph 2.2) only apply to A andB sugar quota. And only A and B sugar can be sold on the EU market. The major difference between A and Bsugar is the amount of production levy (2 respectively 39,5 % of the Intervention price at the maximum, seeparagraph 2.2).Sugar produced in excess of A and B sugar quota, the so called C sugar must be exported without export refunds(on average 2.5 million tonnes).The EU allocates the quotas to the member states (see table 6). The A quotum is equal to the historic sugarproduction of each country at the start of the CMO sugar. B quotum was granted to countries with comparableadvantages in beet production, giving them a change to specialise further. The EU member states allocate thequota further down to individual processors. On the basis of these factory quotas, the processor grants the grow-ers beet delivery rights. Processor and grower may decide to produce on top of this C-sugar and C-beets. Prices,delivery rights etc. are laid down in an obligatory contract between processor and grower (see paragraph 2.2).

Sugar production within the EU is quite stable. The quota system effectively limits the supply on the EUmarket. It does so at the costs of the consumer and to a lesser extent the world market. The production of quota sugar is structurally at least 10% higher than sugar consumption in the EU. For this surplus quota productionthe producers get a price twice as high as the world market price. In addition depending on climatic circum-

stances some C sugar is produced. This is protable thanks to the high prices for A and B quota sugar whichapparently cover all variable and xed costs. With respect to C sugar exports, prices on the world market areacceptable to EU sugar producers as long as they can cover their variable costs. The total volume of EU sugarexport has been quite stable over the years (source NEI, page 36/37).

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Table 6: Allocation of national sugar quota (in tonnes of white sugar)

Source: NEI

2. 2 Price support

Each year the EU Council of the Agricultural Ministers xes an intervention price for white sugar. From itthe basic and minimum prices for sugar beet and sugar cane are derived. Intervention and minimum priceshave been frozen since 1984/85. Intervention has not been practised since 1986 thanks to the fact that theproduction quota can be adapted each year.

2.2.1 Guaranteed minimum prices for A and B quotaThe basic price for sugar beet and cane is 58% of the intervention price. From the basic price the productionrefunds are deducted, resulting in a minimum price for A and for B quota sugar (see table 7). The processor isobliged to pay the growers at least these minimum prices. It is this legal obligation that guarantees basic beetand cane prices for A and B quota.To cover the costs of the export refunds (and also part of the production refunds paid to the chemical andpharmaceutical industry), the EU imposes production levies:• 2% of the Intervention price for sugar on both A and B quota sugar;• a variable levy on B quota sugar with a maximum of 37.5% of the Intervention price for sugar;• an additional levy in case the 2% and 37,5% levies are not enough to cover the costs of the export refunds.The levies are paid by the industry which reclaims 58% of it from the farmers by deducting it from the basicbeet price.

Region A quota B quota B/A (in %) Total quota % of total

Austria 316,529 73,881 23,3 390,410 2,7

Belgium 680,000 146,000 21,5 826,000 5,7

Denmark 328,000 96,629 29,5 424,629 2,9

Finland 133,433 13,343 10,0 146,776 1,0

France-continent 2,530,000 759,233 30,0 3,319,233 22,7

French overseas territ. 466,000 46,600 10,0 482,600 3,3

Greece 290,000 29,000 10,0 319,000 2,2

Germany 2,637,703 811,610 30,8 3,449,313 23,6

Ireland 182,000 18,200 10,0 200,200 1,4

Italy 1,320,000 248,250 18,8 1,568,250 10,7

Netherlands 690,000 182,000 26,4 872,000 6,0

Portugal-continent 63,636 6,367 10,0 70,000 0,5

Portugal-Az ores 9,091 909 10,0 10,000 0,1Spain 960,000 40,000 4,2 1,000,000 6,9

Sweden 336,364 33,636 10,0 370,000 2,5

UK 1,040,000 104,000 10,0 1,144,000 7,8

EU-15 11,982,756 2,609,655 21,8 14,592,411 100,0

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Table 7: Calculation of the basic beet price

Source: NEI and European Commission

2.2.2 C sugar price

C quota sugar is produced in excess of A and B quota. Processors are obliged to sell it on the world market with-

out export refunds. Processors don't have the legal obligation to pay the growers minimum price. In practisefarmers receive about 60% (equal to the share they get for their A and B quota from the Intervention Price) of the receipts of C-sugar (source NEI page 10).Prices, quantities, quality, delivery periods, and payment schedules are put down in a contract between theprocessor and the grower. This so called inter-trade agreement is also prescribed by the CMO to offer the growera minimum protection.

2.2.3 Production refunds for the chemical and pharmaceutical industries

Chemical and pharmaceutical industries using EU sugar would be disadvantaged over competitors outside theEU. To ensure a level playing eld the CMO provides a production refund to these industries. The productionrefund equals the average export refund paid minus 84.5 Euro per tonne.

Up to June 30. 2001 production refunds over the rst 60.000 tonnes were paid out of the EU budget. Thecosts of production refunds for every tonne in excess had to be covered by the production levies. Presently theindustry uses about 200.000 tonnes of sugar per year (source NEI page 16).From July 1. all costs of the production refunds have to be paid out of the production levies (budget neutral).

2.3 Trade measures

The EU sugar market is isolated from the world market through a system of import duties and export refunds.For sugar imports from the ACP countries and India special arrangements have been made

2.3.1 Import duties

Since the GATT Uruguay round the EU imposes xed import tariffs on sugar imports. The agreed upon tariffsare listed in table 8.

The white sugar price in beets equals 58% of the inter-vention price. So the farmer gets 58% and the pro-cessor 42%. In practise the processor gets more. Themarket price is generally higher than the intervention

price and the processor keeps all or most of this pricedifference.The white sugar price is multiplied by 0.13 to get thebasic price of beet, assuming one gets 130 kg of sugar out of one tonne of beets

Intervention price 631.9 Euro / tonne white sugar

Processing costs -243.6 Euro / tonne white sugar

Value of molasse 22.5 Euro / tonne white sugar

Transport of beet - 44.1 Euro / tonne white sugar

White sugar price in beets 366.7 Euro / tonne white sugar

Basic price of beet with 16% sugar 47.67 Euro / tonne of beets

Minimum price for A quota beets 46.72 Euro / tonne of beets

Minimum price for B quota beets 32.42 Euro / tonne of beets

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Table 8: EU import tariffs for white, raw and preferential sugar (in ECU's per tonne)

Source: NEI

There is a special safeguard clause in the GATT agreement which allows the EU to impose an additional importduty if the value of the imported sugar (price plus xed duty) drops below the trigger level (530 ECU per tonnefor white sugar). This has been constantly the case since the agreement went in force (1995/96). The additionalimport duty varies from zero to 100 ECU/tonne if the value drops from 531 to 200 ECU/tonne of white sugar.

Fixed and additional import duties are more or less prohibitive. Hardly any non-preferential sugar is importedinto the EU (source NEI page 15).

2.3.2 Export refundsThe EU exports three distinctive categories of sugar:• quota sugar (A and B) that qualies for export refunds• a quantity of sugar equivalent to the amount of imported preferential sugar (re-export) which also qualies

for export refunds and• C sugar which must be sold on the world market without export refunds.The maximum export refund equals the intervention price plus free on board costs minus the world marketprice (export value). Export refunds are granted through a weekly tendering system. Exporters make a bid

consisting of the desired level of export refund and the amount of sugar they want to export. The EU sugarmanagement Committee decides on the basis of actual price developments on the world market and the totalamount of sugar that needs to be exported in the current marketing year.Not only white and raw sugar qualies for export refunds also sugar contained in food and drinks (non Annex I products) does. This export refund is xed monthly and equals the export refund for white sugar at the begin-ning of the month minus 30 ECU per tonne of sugar.Under the GATT agreement the EU is obliged to reduce the amount it spends on export refunds. It will do soby reducing the quantities (sugar quotas) exported with the aid of export refunds. For the rst time this wasapplied for the 2001/02 marketing year. Quotas were reduced with 115,000 tonnes.

2.3.3 Preferential access under the sugar protocol

Before entering the EU the UK imported large quantities of raw sugar from its former colonies for renement.

To safeguard the interests of both the UK reners and the ACP countries concerned these imports were includedin ACP-EU convention rst signed in 1975 and became part of the CMO sugar. The so called sugar protocolof the Lomé conventions forms an integral part of the new ACP-EU Partnership Agreement signed in Cotonouon 23 June 2000. In the protocol the EU commits itself for an indenite period of time to purchase and import,at guaranteed prices, specic quantities of cane sugar, raw or white, which originate in the ACP states.The quantities of sugar to be imported are given in table 9. These export can enter the EU free, no import dutiesare charged. Later on 10.000 tonnes of sugar from India was added to the list. The guaranteed price for thispreferential sugar equals the intervention price for raw sugar in the UK. If the ACP (or Indian) sugar can not besold on the market for this or a higher price the EU is obliged to buy it through the intervention agencies.

Marketing year white sugar raw sugar

1995/96 507 410

1996/97 490 3961997/98 473 382

1998/99 456 368

1999/00 439 354

2000/01 419 339

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2.4 The costs of the CMO sugar

The CMO sugar is often referred to as being a self nancing market organisation. It differs from other schemesin the sense that the producers (processors and growers) themselves are paying the costs for exporting surplus

sugar to the world market. And compared with other market organizations the CMO sugar does not draw heav-ily on the EU budget, but it isn't budget neutral either. Total expenditures are estimated at 1,575 million ECU,total production levies at 813 million ECU and thus the yearly decit at 762 million ECU (source NEI page198) see table 10.

Table 10: Expenditures and receipts CMO sugar 1990-99 in millions of ECUs

Notes and sources:DOM = Departements Outre Mer = French overseas territories.Source columns 2 to 5: Depenses dans le secteur du sucre, DGVI-G-1, 3-3-1999.Column 2 does not include export refunds of non-annex I products, which are booked under chapter 20.Source columns 7: calculations from DG.VI.C and annual Commission Regulations as regards fixing the levies.Column 7 does not include production levies paid for isoglucose and inulin, which varied from 7.7 to 9.3 million Ecus per year in recent years.Production levies (columns 7 refer to the production year, which runs officially from 1/7 till 30/6.

Source: NEI

This decit is mainly due to the fact that the production levies only cover the costs of exporting surplus quota sugar to the world market. Export refunds for the equivalent of the imported preferential sugar under the vari-ous regimes are paid out of the EU budget. The same is true for special aid for the raw sugar cane reneries, the

French overseas departments, the administration costs of the CMO and production refunds for 60.000 tonnesof sugar used by the chemical and pharmaceutical industry (as of July 1. this has altered and production refundsare now 100% self nanced). The decit is analysed further in table 11.

(1) (2) (3) (4) (5) (6) (7) (8)

Year Export Production Aid Other Total Total Not covered

Refunds Refunds Transport Inter- Expen- Production Expenditures

Sugar + Raw sugar ventions ditures Levies

Isoglucose from DOM (90%)

1990/91 1251 50 21 32 1354 571 783

1991/92 1306 63 22 51 1441 469 972

1992/93 1531 72 17 67 1687 528 1159

1993/94 1377 74 18 42 1511 632 879

1994/95 1312 70 15 35 1432 694 738

1995/96 1230 81 15 24 1350 615 735

1996/97 1116 82 14 34 1246 670 576

1997/98 1266 105 13 44 1427 699 728

Av.95/96-97/98 1204 89 14 34 1341 661 680

Budget 1998/99 1412 110 12 41 1575 813 762

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3The effects of the CMO sugar on third parties

The CMO sugar enables European producers to export sugar at prices far below the production costs in the EU and thus contrib-

utes to the downward trends in international sugar prices. Sec-

ondly the CMO sugar market access regime is highly discriminative in the

sense that it shuts the door completely at some parties while others are wel-

comed in at favourable conditions.

3.1 EU exports

As shown in paragraph 1.3 almost all major exporters support and protect their own sugar producers and arethus able to export sugar at low prices. Sugar prices on the world market don't reect the costs of productionof the major exporting countries.

Table 12: Average cost of sugar production for country aggregates (in US $/tonne)

Source: NEI page 113

Product Country group Cost Period 1989-94 Cost Period 1994-98

Refined beet sugar Belgium, Netherlands, Chile, Turkey, UK, US 456 450

Low cost producers (434-479)

Refined beet sugar EU, Turkey, Ukraine 656 710

Major exporters (566-713)

Refined beet sugar Bulgaria, Kaz achstan, Moldova, Romania, 989 n.a.

High cost producers Russia, Ukraine, Japan (791-1221)

Raw cane sugar Braz il, Colombia, Malawi, Guatemala, Zambia 198 197


Refined cane sugar Braz il, Colombia, Malawi, Guatemala, Zambia 280 n.a.


Raw cane sugar Australia, Braz il (CS), Cuba, Colombia, 277 335

Major exporters Guatemala, Thailand, Mauritius, South Africa (246-329)

Refined cane sugar Australia, Braz il (CS), Cuba, Colombia, 366 n.a.

Major exporters Guatemala, Thailand, Mauritius, South Africa (332-429)

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3.1.1 Cost price comparison with other exportersThe EU is not the most efcient producer of sugar nor is beet an obvious source for sugar. Production costsof sugar in the EU varies on average between 625 and 560 Euro/tonne. This is well above what is consideredto be the benchmark for international competitiveness (230 $/tonne), well above actual world market prices(around 245$/tonne white sugar in the summer of 2001) and well above the cost price of efcient producerslike Australia and Brazil (150 $/tonne). The most important reason for the gap between EU cost price andother southern producers is the origin of the sugar. Cane and beet sugar have the same chemical content andalso in the use there is little difference between the two sugars. But the average costs of producing beet sugar are50 - 70 per cent higher than those of cane sugar. Consequently cane sugar is outperforming beet sugar and setsthe prices at international markets.On the basis of the average production costs the EU processors can't compete with its major competitors (seetable 13). But thanks to the CMO sugar, processors don't have to compete on the basis of the average costs.They can compete on the basis of the variable costs. The costs of producing sugar in the EU are shown morein detail in table 15.

Table 13: Beet sugar production costs in the EC: comparison between 1993 and 1998 (in ECU per tonne)

Source: NEI

The EU exports roughly 20% of the quota sugar produced (11% if preferential sugar is not taken into account).,So 80% is sold on the internal market. Prices on the EU market are higher than the intervention price and muchhigher than the cost price of efcient producers like the UK, the Netherlands and Belgium. The processor's netmargin on the internal market is highly disputed. The industry states it is less than 10%, researchers come upwith gures between 4 and 25% (source NEI page 74). In any case it can be assumed that all or almost all of the processor's xed and variable costs of the total sugar production is met at the internal market. Sales to theworld market are protable if the variable costs plus levies (in the case of quota sugar) or the processing costs(C-sugar) are covered.

3.1.2 Quota sugar exports

For quota sugar exports the processor receives the world market price plus the export refund which equals moreor less the intervention price of 629.3 Euro/tonne. The difference between A and B quota sugar is the amountof production levy (2 or 39.5% maximum, not taking an additional levy into account). All member statesexcept for Finland, Portugal and Greece fully use their A and B quotas. So it must be protable to export evenB quota sugar to the world market. Table 14 shows why.

Table 14: Cost price calculation for B quota sugar exported to the world market

Source: NEI

1993 1998e

Beet 400 388

Capital costs 100 80

Permanent personnel 52 37

Maintenance materials 20 15

Fuel (sugar only ) 18 15

Lime 14 9

Total overheads 20 15

Processing costs, seasonal personnel included

are around ECU 58 per tonne.

Beet price 0.58 x 631.9 ECU/t 366.5 ECU/t

Variable production costs 58.0 ECU/t

Levy 0.42 x 0.395 x 631.9 ECU/t 105.0 ECU/t

Total 529.5 ECU/t

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The calculated 529,5 ECU/tonne is still lower than the intervention price (632.9 ECU/tonne) the processorswill receive. That is the reason why the main exporters of quota sugar (France, Germany, the UK,Belgium, Italy and Denmark) nd it still worthwhile to export some of their A and even B quota sugar to theworld market.

3.1.3 C sugar exports

Because of the protability of producing and selling quota sugar in the EU, both processors and growers areeager to use their total production quota. If not, they risk the transfer of the unused quota to other countries,processors or growers. Therefore the area sown under beet is usually based on a conservative estimate of thepotential yields. On average this practise results in the production of 800.000 tonnes 'unintentional' C sugar(source NEI page 117).Both intentional (1.4 million tonnes) and unintentional C sugar have to be exported without export refunds.This is possible only under the assumption that all xed and variable costs of the industry have been coveredthrough the sale of A and B sugar on the internal market. The major C sugar producers (France, Germany, theU.K., Spain and Denmark) reckon only with the variable processing costs of 58 ECU/tonne. Usually the growerreceives 60% of the receipts of C sugar, the processor 40%. So if the world market price is at low as 150 $/tonne

white sugar C sugar processors still break even.

3.1.4 Effects of EU exports on world market sugar pricesIn the absence of the CMO sugar the EU would not be able to export sugar to the world market. On thecontrary most of its demand would be secured by buying white sugar and raw cane sugar on the world market.In the absence of the CMO sugar Borrell and Hubbard (cited in Goodison: the EU sugar regime, 2001) expectEU imports to rise with 7 million tonnes and exports to decline with 5 million tonnes. The CMO sugar notonly isolates the EU production and consumption from the world market but the production imported underpreferential trade agreements as well. All taken together the NEI estimates that in the absence of the CMOsugar the volume traded on the world market would be 46% higher (NEI page 44).The effects of the CMO sugar on the world market will be twofold:

• it contributes to the price instability on the world market. Changes in supply and demand have a greatereffect on prices than they would have if the EU did not isolate its own market;• it depresses the prices on the world market. The CMO sugar increases supply and decreases demand on

the world sugar market. In a situation of surplus production this has a depressing effects on prices.In the absence of the CMO sugar the sugar price on the world market would be higher and less volatile.

How much higher and how much less volatile is hard to say. Studies on the quantitative effects are not very clearand differ considerably from each other. The NEI made a "quick-and-dirty" estimate of the short term priceeffect. If the EU would decrease its quotas with 10%, .... this would cause an increase of the New York spot price of about 15 US $/tonne per tonne (which is about 8.5% of the present raw sugar price of US $ 175 per tonne). Butthe same institute also concludes: The volume of EU sugar export has been quite stable over the years. As such the EU exports have not caused instability on the world market. Also the dramatic decline of world market prices since

1995 was not caused by EU exports. The price decline was primarily caused by a substantial increase of exports fromBrazil, Thailand and Australia. At the same time, import demand from Russia and a number of Asian countries declined . (source NEI pages 43,44).

A study by the World Bank concluded that the long-term impact of the CMO Sugar on the sugar world marketprice could be about minus 17% (cited in NEI).Borrell (cited in Goodison 2) and the FAO have calculated the price rise on the world sugar market if all (notonly EU) protective measures were removed at respectively 33 and 43 per cent. Borrell expects EU exports todiminish and import to rise, the FAO the opposite.

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3.1.5 Conclusions Although not exactly quantiable the depressing effect of the CMO sugar on the world sugar price is bad forexporting countries and good for importing countries.The losers are most likely Australia, Brazil, Colombia, Guatemala, Cuba, Thailand and South Africa being thecurrent major exporters of raw and rened cane sugar to the world market (see table 3). Mauritius, -also a majorexporter- has more to loose than to gain given the fact that this country exports almost all its sugar under theEU / ACP sugar protocol embedded in the EU CMO sugar.The World Bank study by Borrel and Duncan; 1990) estimated that the annual income foregone because of lower prices would amount to US $ 160 million for Australia and Brazil, US $ 72 million for Thailand, US$ 50 million for the Philippines and South Africa, US $ 20 million for the Dominican Republic and US $ 13million for Colombia and Guatemala (in 1984 US $ values) (NEI page 37).The top 10 of winners are the main importing countries of sugar: : Russia, Japan, South Korea, Canada, Malay-sia, Egypt, Nigeria, India, Iran and Algeria. Of these countries only Egypt and Russia have a considerabledomestic production of over 1 respectively 2 million tonnes. In the long run these countries might be better of with high prices, with the further development of domestic production and with substitution of the imports.

Box 2: Non Annex I products, the South African experience

Besides exporting sugar, the EU also exports products (mainly foods and drinks) containing sugar (so called annex I products). For these

products more or less the same trade measures (export refunds and import duties) are applied as for sugar. The sugar content of non

annex I products qualifies for export refunds (see 2.3) and products entering the market face import duties plus in some cases a sugar

levy. The exports of the non annex I products (more than just sugar containing products) has more than doubled since the fixed tariff

regime of the Uruguay Round was put in place. Over the last years EU non annex I products have been pushing other suppliers of the

markets. A good example is South Africa (Kaplan)

South Africa peaches canning industry has a cost advantage over other producers. In addition it is widely acknowledged that South African

peaches are of the highest quality. Up to the 1980s South Africa dominated international trade with 35% of the total. This situation changed

in the two last decades of the previous century. Production in the EU (Spain and Greece) boomed and South Africa lost large parts of its

markets in the EU, USA and Japan. According to Kaplan EU-trade and agricultural policies are to blame: "The combination of high duties

into Europe and subsidies on peaches has two impacts on comparative production shares. First, it significantly favors European producers

in their domestic markets. Comparing like-with-like grades of canned peaches, the f.o.b. prices of Greek producers selling to Germany

was $ 16.50 per standard carton in 1997, compared to $ 13.62 for South African firms, providing a 21% premium to the Greek canners

-almost exactly equivalent to the extent of the tariff. Second, a profitable domestic market provides the wherewithal for European producers

to cross subsidize sales into third country markets. Relative f.o.b. prices for like-for-like grade exports to Japan were $ 14.78 for the Greek

firms, and $ 17.60 per standard carton for their South African counterparts .... . The same cross subsidizing trends are evident in other

third-country markets. One consequence of this is that European, and in particular Greek, producers have frequently been the subject of

dumping actions -most recently in Mexico and New Zealand."

3.2 EU market access regime

As seen in paragraph 2.3 the EU uses a highly detailed and discriminative import regime. Annually it importsaround 2.2 million tonnes of sugar (white sugar equivalent) of which 1.6 million tonnes consist of preferentialand special preferential sugar (see table 15).

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Tabel 15: annual EU sugar imports by category 1996/97-1998/99 (in 1,000 tonnes of white sugar equivalent)

source: NEI

Through the xed and additional import duties the EU applies, it virtually blocks all imports from the worldmarket. Combined the import duties can amount to more than 500 ECU per tonne.

Preferential and Special Preferential Sugar are allowed to enter the Union at import tariffs of respectively 0and 83.3 ECU per tonne (1999/00). Importers of PS and SPS sugar are obliged to pay guaranteed prices forthese imports equal respectively to the intervention price of raw sugar (PS) and the intervention price minus anadjustment levy paid to the reneries. For the period 2001/02 - 2002/03 these prices are xed at 523.7 Euro /tonne and 494.5 Euro / tonne. This is well above the current raw sugar world market price (200 Euro / tonne).The income transfer from the EU to those ACP countries and India that provide the PS and SPS sugar is listedin table 16.

Table 16: income transfers through PS and SPS sugar and dependence on the EU sugar market

source: NEI, prices and quantities 1997/98

Country SPS+PS extra revenue Extra revenue per capita PS+SPS quotas as % of

total sugar exports

1000 ECU ECU PERCENTAGE

Barbados 17,166 64.5 117

Beliz e 14,790 62.7 49

Congo 3,703 1.3 45

Cote dIvoir 6,593 0.5 56

Fiji 60,118 72.7 79

Guyana 58,422 68.2 82

Jamaica 43,367 16.8 99

Madagascar 4,055 0.3 39

Malawi 10,461 1.0 80

Mauritius 178,531 154.0 96

Saint Kitts and Nevis 5,715 139.4 108

Swaz iland 51,474 52.1 69

Tanz ania 3,703 0.1 73

Trinidad and Tobago 16,037 12.2 92

Zambia 3,406 0.4 16

Zimbabwe 18,214 1.6 48

ACP 495,756 4.8 79

India 6,072 0.0 4

ACP + India 501,828 0.5 64

types of import quantity

preferential sugar 1,308

special preferential sugar 303mfn (most favoured nation) sugar 82

imports by Aegan Islands, Az ores, Canary Islands and Madeira 74

imports pure sugar at full import duty 28

imports of sugar in non-annex I products (duties fully paid) 462

total imports 2,257

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The SP and SPS arrangements create an income transfer of more than 500 million ECU per year (in currentprices it would be even higher). Mauritius, Fiji, Guyana and Swaziland are the prime beneciaries, receiving almost 70% of the total income transfer. The importance of the EU sugar market to the sugar sector in the

ACP countries and India is illustrated in the third column. Some states like Barbados, Saint Kitts and Nevisand Jamaica export all of their surplus sugar (or even more) to the EU. Dependence is also strong in Mauritius,Trinidad and Tobago, Guyana and Malawi. Some of these countries are high cost producers and would not beable to export sugar without the preferences granted by the EU.

Little is known about the effects of the income transfers on the development of the sugar sector in the countriesconcerned. Goodison has done some research on Southern Africa countries. Two examples are highlighted here(Goodison 1).

Box 3: The effects of the income transfers to Mauritius and Swaziland

Mauritius exports virtually all of its sugar production to the EU and thus its sugar sector is strongly dependent of the high priced demand

in the EU. Currently the sector employs about 24,000 people and accounts for 7% of GDP. Total production is 574,000 tonnes, PS and

SPS quotas are 573,000 tonnes and consumption (in most years covered by imports) is 43,000 tonnes. Mauritius is a high cost producer with production costs at 200% of those in countries like Zambia, Malawi and Zimbabwe. Sugar production would not be profitable at

world market prices. Recently Illova, one of the two sugar processors that dominate the regional sugar production in Southern Africa,

sold its interests in 3 mills in Mauritius and shifted production and processing to the low cost producer Zambia. The Mauritian sugar

sector plans to rationalize milling capacities. This will probably involve the closing down of 6 out of 14 mills and could result in a 20 -

25% cut in the labour force.

Swaziland exports 36% of its production as PS and SPS to the EU, another 36% is sold to industrial users serving regional markets, 9%

is sold to non-industrial regional users and the rest is sold as Tariff Quota Sugar to the USA. The sugar sector is the dominant sector

in Swaziland, accounting for 60% of GDP and employing 80,000 people. Production is 526,000 tonnes, PS and SPS quotas are 170,000

tonnes and consumption is 204,000 tonnes. 55% of total sugar sector revenues comes from the sales to the EU (36% of production).

Through this high returns the Swazi Sugar Association has been able to undercut South Africa's sugar prices and to offer industrial userslow prices. The latter has stimulated the development of a value added foods and drinks industry, that buys a higher volume of sugar

now than is exported to the EU. The ability to cross subsidise sugar prices on the back of high sugar revenues from the EU market, has

promoted the structural development of sugar based value added industrial activities in Swaziland. The Swaziland sugar sector wants to

increase (small holder) production to 700,000 in 2008.

The NEI describes the income transfer as a 'sort of development aid' (NEI page X Summary). True or not, factis that it exceeds in many case the amount of development aid to the countries concerned. The EU does notmonitor the use of the income transfer. Questions can be asked about the spending of the money.

• Who prots from it? Goodison (Goodison 2) suggest that the additional revenues have helped sugar sectorcompanies to make provisions for health and educational services for sugar workers. Having said so, the study

concludes Undoubtedly, the sugar companies and their shareholders are major beneciaries of the preferential sugar arrangements extended by the EU to Southern African sugar producers.

• Does the income transfer generate employment and stimulate economic developments? The case of Swazi-land suggest that it does. The income transfer has played a crucial role in the development of a regional valueadded foods and drinks industry. But at the same time it was also instrumental in gaining competitive advantageover South Africa, illustrating the (in)direct discriminative nature of the preferential arrangements.

• Are the countries that currently qualify for the preferential treatment, the countries that need it most? Outof the 17 countries listed in table 16, only eight countries belong to the LDCs. Some of the poorest countriesbeing low cost sugar producers like Sudan and Mozambique don't have access to the European market, while

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high cost producers from the Caribbean do. Oxfam GB touches upon these irrationalities: It is important that Caribbean countries are assisted through transitional arrangements to diversify their economies and improve their competitiveness, rather than rely on the continuation of the EU sugar regime that excludes equally-deserving, competi-tive producers like Mozambique from the EU market (Oxfam)

3.2.1 Conclusions

The CMO sugar market access regime is highly discriminative in the sense that it shuts the door completely at some parties while others are welcomed in at favourable conditions. Even the sugar protocol, at rst sighta nice gesture towards ACP countries, has unintended negative side-effects. With the aid of the preferentialarrangements some countries have gained competitive advantage over other developing countries and competi-tive low income countries are arbitrarily denied access to the EU. Some processors have been sheltered frominternational competition for years and have not been stimulated to improve their operations and lower thecosts of production. In some countries the sugar sector depends totally on the CMO sugar. Some countries haveearned a lot of money thanks to the CMO sugar but the question remains: Who has proted?In the light of these effects and given the EBA initiative and the fact that the CMO sugar as well as the EU-ACPrelations will change the coming years, a plea to just preserve the preferential arrangements with regards to PS

and SPS is simply too simple. One must keep in mind also that measures to minimize the price effects of theCMO sugar could be in conict with the wish to stimulate sugar production in certain developing countries.Liberalization of the EU sugar market i.e. removing trade barriers and ending price support is logically notcompatible with preferential access of developing countries.

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4Effects of policy changes of the CMO sugar

The overall direction of changes in the Common Agricultural Policy is clear: price support will be replaced by direct aid to farmers. In

the case of the CMO sugar changes could be as follows: reduc-

ing internal sugar prices (1), compensating farmers through direct payments

(2) and reducing the quota (3) in the short run and abolishing the quota

system in the long run. This comes close to a full liberalization of the EU

sugar market. As a result world sugar market price will rise and access to the

EU market will improve. The bad news is that preferential access is lost and

that import substitution and dumping will not end. After analysing the effects

of liberalization regarding sugar on developing countries, some policies of

'managed' trade are discussed in this chapter. These are (at the access side):

the EBA (everything but arms) initiative and at the export side: a current

account for sugar.

4.1 The future CMO sugar

The reform of the Common Agricultural Policy of the EU has been set in motion with the MacSharry reforms

of 1992, conrmed by the Agenda 2000 package. The overall aim is to lower domestic price, partly compen-sated by direct income payments. The CMO sugar is not included in Agenda 2000. With minor adaptationsthe current policy will be extended to 2005. Recently the European Commission commissioned several impactassessment studies to investigate possible options for the future sugar CMO. Anticipating these assessments,it is safe to assume that domestic sugar prices will be lowered after 2005, especially so since both the volumeof subsidized sugar exports and the amount of sugar export refunds are exceeding the commitments of theUruguay Round with roughly 35 and 60 per cent.The most likely future CMO sugar will consist of the following elements:• low domestic sugar prices, moving towards world market prices;• direct income payments to (partly) compensate farmers for the lower prices and• reduced quotas (A and B sugar) and nally abolishment of the quota system.

Lower or even zero tariffs are not necessarily part of this future sugar policy, since the reform is primarily aiming at the internal EU market, but it is obvious that lower domestic prices may go hand in hand with lowering tariffs. If the assumptions made here are right, the future CMO sugar looks very much alike to liberalization of the EU sugar market, with the important exception of the direct payments to farmers.

What will be its effect on international trade and agricultural development? The answer to this question isbased on two recent quantitative studies by the FAO and the LEI (Agricultural Economics Research Institute).

4.1.1 Multilateral trade liberalization and developing countries:The LEI used a model to quantify the effects of liberalization on developing countries distinguishing differentgroups of (developing) countries (see annex 1) and various liberalization scenarios of which four are presentedhere:

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1. Trade liberalisation in primary products: reduction of all import tariffs and export subsidies with 50% in allcountries (AC50)

2. Trade liberalisation in primary products and reduction of domestic agricultural support: in addition to therst experiment input and output subsidies in developed countries are reduced with 50% (ACD50)

3. Trade liberalisation in primary and processed agricultural products and reduction of domestic agriculturalsupport. All reductions are 50% (ACPD50)

4. Trade liberalisation in all products and reduction of domestic agricultural support: in addition to the secondexperiment all import tariffs and export subsidies in non-agricultural sectors are reduced with 50% in allcountries (AAD50) source: LEI page 34.

Some of the results are presented in table 17.

Table 17: change in trade balance and in GDP

a) change in million US $

source: LEI

LIEXP Low Income exporters in both primary agricultural and processed food productsLIAEXP Low Income exporters in primary agricultural (and importers of processed food products)

LIIMP Low Income importers of both primary agricultural and processed food productsMIEXP Middle Income (both lower and upper middle) exporters in both primary agricultural and processed food productsMIAEXP Middle Income (both lower and upper middle) exporters in primary agricultural (and importers of processed food products)MIFEXP Middle Income (both lower and upper middle) exporters of processed food products (and importers of primary agricultural products)LMIIMP Lower Middle Income importers of both primary agricultural and processed food productsUMIIMP Upper Middle Income importers of both primary agricultural and processed food productsChina People's Republic of China (mainland, excluding Hong Kong)India IndiaEU European Union (EU15)NAFTA North American Free Trade Area

AusNz Australia and New ZealandJPNNIC Japan GroupROW Rest of World contains GTAP regions: Rest of World, Rest of Efta and Switzerland

Country(group) Change in trade balance Welfare

million US $ AC50 (extra income as percentage change in GPD)

all products prim. ag. prod. AC50 ACD50 ACPD50 AAD50

Liexp 54 211 0.0 -0.1 0.6 1.3

India 451 1,226 0.0 0.0 0.6 1.5

Liaexp 60 -104 0.0 -0.1 0.2 0.1

Liimp -119 -315 0.1 0.1 0.5 1.7

Miexp 46 2,455 0.1 0.1 0.3 0.7

Miaexp 280 234 0.0 0.0 0.0 0.1

Mifexp -98 160 0.0 0.0 0.2 0.6

Lmiimp -1,695 -1,710 0.2 0.1 0.4 0.8

China -476 -247 0.1 0.1 0.2 0.5

Umiimp -127 -162 0.0 0.1 0.3 0.8

Jpnnic -2,300 -2,377 0.1 0.1 0.1 0.4Ausnz 143 798 0.0 0.1 0.3 0.3

Nafta 2,274 1,733 0.0 0.0 0.0 0.0

EU 1,987 -2,457 0.0 0.1 0.2 0.2

Row -479 -1,034 0.1 0.1 0.6 0.8

World 0 -1,590 0.0 0.1 0.2 0.3

World a) 11,490 17,253 44,477 78,348

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In the context of this report three conclusions of the LEI study are worth mentioning:

• Trade liberalisation in agriculture (AC50) leads to an expansion of the primary agricultural sector for netexporters of primary products and a decline of processing and manufacturing. The LIAEXP countries are theexception to this overall trend. In the case of liberalisation their imports (food grains) will grow faster than theirexports, because these countries have relatively high initial import tariffs on food grains and they encounter a very low tariff on their exports of other primary products. Their loss in international market share is translatedinto a decline in domestic primary production, which also leads to drops in domestic supply prices. Hence,their agricultural sector experiences clearly negative effects from this partial liberalisation scenario.

• If domestic agricultural protection in high-income countries (direct income payments) is reduced (ACD50),production in the EU en Japan (&NICs) will go down, demand will rise and EU exports will decline. New market opportunities arise. However, developing countries are not able to increase their market share. It's theindustrialised world that prots, mainly farmers in NAFTA and AUSNZL who are able to expand production.

• In terms of agricultural growth prospects, the most positive effects on developing countries are simulatedif trade barriers in the agri- processing industries are reduced on top of agricultural trade - and domestic policy reforms (ACPD50). Large shifts in trade and production can be expected, with high income country processing

sectors declining and middle income countries expanding their processing sectors. Also, primary production isexpanding signicantly in low- and middle income exporting countries -especially in Latin America. Again theonly exception to this pattern are the LIAEXP countries, who don't prot. This is a consequence of the factthat their trade pattern is biased towards trade with the EU, which is expected to decrease import demand of primary agriculture in the wake of shrinking processing activities. The biggest winners in this simulation arefarmers and processing rms in AUSNZL.

4.1.2 Effects of trade liberalization on the world sugar market

The ndings of an FAO study on the effects of trade liberalization on the world sugar market, published in2001 are more or less in line with those of the LEI results. Also the FAO study distinguishes different groupsof countries and liberalization scenarios.

Full compliance with and continuation of the Uruguay Round Agreement to 2005 was chosen as a baselineprojection. In this scenario the world market price is estimated at 262 US $ per tonne and countries are obligedto reduce its tariffs and in the case of the EU, its amount of export subsidies as agreed in 1995. The overall effectwould be an increase in production and consumption in most countries. In the EU production would decreasebecause of its Uruguay Round obligations.

Under full trade liberalization, i.e. sugar trade barriers between all countries will be eliminated completely,world market price for sugar is estimated to rise with 43% to 386 US $ per tonne, overall production andconsumption would rise and net trade would fall (because domestic consumption rises more than production).There are striking differences between continents and countries, mainly depending on the level of protectionthese regions / countries initially applied. Countries with high tariffs will experience under full trade liberaliza-tion a fall of production and a rise of consumption. This is most clearly the case in Asia, notably India. Besides

India, Japan and the USA would experience under full trade liberalisation the largest increases in exports.

ACP countriesThe FAO study pays special attention to the effects on ACP countries (and small island states) because of their preferential status in sugar trade. The effects of the different liberalization scenarios on ACP countries arepresented in table 18.

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Table 18: projections of production, consumption, net trade, export blend price, and export earnings in Africa, Carib-bean and Pacific countries (signatories to the sugar protocol)

source: FAO

In all the scenarios except for those described in the last two rows of the table, it is assumed that the preferentialstatus of the ACP countries stays unaltered. Under this (questionable) assumption ACP countries would gainunder complete and partial global trade liberalization (compared to the baseline scenario in row 3) and undercomplete and partial trade liberalization in the selected large developing countries (Brazil, China, Indonesia andthe Republic of Korea). They would lose under continued market reform in developed countries (because of lower prices) and if their preferential status would be undermined (rows 10 and 11). With a 20 per cent decreasein transfers to ACP countries with partial global trade liberalization (20% lower tariffs), export earnings of ACPcountries would decline with 6% (row 10). Under complete trade liberalization and complete elimination of transfers, export earnings would fall with 7.8%.

4.1.3 Conclusions

• The effects of liberalization on developing countries are mixed; some countries will lose, others will gain. Asthe LEI study shows, it is possible to distinguish different groups of developing countries who will be affecteddifferently by liberalization;

• The same is true for reform of the CMO sugar. Most likely the new CMO sugar will have some liberalizationcharacteristics: lower domestic prices, lower tariffs and lower or no export subsidies. Again winners and loserscan be discerned. Most third countries (developed and developing) will gain, some, notably the ACP countries,will lose;

• The EU will compensate its farmers for the lowering of the sugar prices with direct income support. Directincome support enables farmers to keep up sugar beet production and to continue exports to the world market.The same has happened with cereals. Prices have been lowered since 1992 and direct aid expenditures haveincreased. Thanks to lower internal prices, domestic demand has risen and production has grown. Nowadays

Scenario Production Consumption Net Trade Blend Price World Price Export Value

..................................... Tonnes ................................... ................... US$/tonne ............... ..1,000 US$..

No Trade

Liberaliz ation 3,309,718 1,609,650 1,700,067 481 254 818,408

Uruguay Round

to 2000 3,321,378 1,599,982 1,721,396 481 270 828,088

Uruguay Round

to 2005 3,369,969 1,809,337 1,560,631 467 262 729,433

Complete Trade

Liberaliz ation 3,410,283 1,797,471 1,612,811 506 386 816,985

Partial (20%)Trade

Liberaliz ation 3,378,032 1,806,964 1,571,067 475 287 746,616

Complete Trade Liber.

Developed Countries 3,311,288 1,783,130 1,528,158 340 296 520,289

Partial (20%) Trade Liber.

Developed Countries 3,359,845 1,803,514 1,556,331 443 270 690,081

Complete Trade Liber.

Developing Countries 3,482,227 1,768,778 1,713,448 564 315 967,011

Partial (20%) Trade Liber.

Developing Countries 3,392,421 1,801,226 1,591,195 486 272 774,578

20 percent

Decrease in Transfers 3,381,159 1,806,964 1,574,194 436 287 686,804

100 percent

Decrease in Transfers 3,536,727 1,797,471 1,739,256 386 386 672,465

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cereals can be exported to the world market without the aid of export subsidies. Indirectly exports are subsidizedthrough direct income support. To third countries there is little difference between export subsidies and directincome aid. Both have a depressing effect on world market prices (Goodison 3). The LEI study clearly showsthat world market prices will rise and production in the industrialised countries will fall, if the domestic support(amongst others direct income support) is reduced (scenario ACD50). But it are not developing countries thatwill gain. To them the effect of reducing domestic support is only marginal. Developed countries prot fromit. In the case of sugar low cost big exporters like Brazil, Australia and Thailand will gain from a reduction of domestic support in the EU;

• In order to qualify for the WTO's 'blue box' direct income support has to be linked to production control.This could be a simple set-aside scheme. The distinction between A and B sugar becomes meaningless onceexport refunds (and production levies) are abolished. From the point of view of the European Commissionthere is no need to preserve the quota system. A very effective mechanism to control sugar production in theEU may be exchanged to a very frail one . As a result sugar production of the EU could rise as has been the casewith cereals;

• The LEI study clearly indicates that developing countries will gain most if trade barriers are reduced, notonly for primary but also for processed agricultural products. This is probably also the case with sugar and non

annex I sugar products. As described in box 2 paragraph 3.1 EU annex I exports have been doubled since theUruguay Round Agreement and are pushing other suppliers from (inter)national markets. If sugar prices willbe lowered to world market level, EU processors will even be in a better position to expand their market shares.Lowering of domestic sugar prices must be accompanied by lowering tariffs for non annex I sugar products;

• The future sugar policy as described in this paragraph is a generic one. It does not discriminate betweentrading partners and therefore it does not specically improve the trading conditions of low income countriesor small-scale producers. On the export side an effective production control mechanism is missing. Subsidizedsugar exports to the world market can be avoided only by preventing surplus production to be grown. On theimport side the preferential access for developing countries is lost. In the next paragraphs examples of produc-tion control and of preferential access will be discussed.

4.2 Preferential access: Everything but Arms

On 5 October 2000, the European Commission adopted a proposal to grant duty-free access to the world’s48 poorest countries (LLDCs), 39 of which are in the ACP group. The proposal covers all goods except thearms trade. The current gap between the EU and the World price for agricultural products is substantial, andonce import tariffs are lifted the EU market would become a very attractive destination for exports. EBA wentin force on January 1. 2001 except for 'sensitive' products. For sugar the tariffs will be reduced in the period2006-2009 to zero. In the transition period 2001-2009 some import duty free sugar is allowed in, increasing from 74,00 tonnes in 2001/02 to 197,000 tonnes in 2009.

Altogether the LLDCs produce on average some 2,1 million tons of sugar and consume some 3,7 million tonsannually. The decit of 1,6 million tons is covered by imports. Some LLDCs are already net exporters notably Sudan (114.000 tons of net exports) and Zambia (84.000 tons out of which 13,000 tons are exported to theEU). The speed and extent to which LLDCs would be able to export to the EU cannot be estimated in advancewith precision. The European Commission distinguishes two scenarios (European Commission).

Scenario 1 assumes that LLCDs will export their domestic sugar to the EU and meet their demand throughimports from third countries. This substitution could amount to 1,4 million tonnes. Furthermore the new economic incentive of free access to the EU market can be expected to enhance production in the LLDCs aswell as their rening activities. This could add another 1,3 million tons of exports to the EU. On this basis, itcould be expected that total EU sugar imports from the LLDCs could reach some 2,7 million tons.Scenario 2 is less optimistic (or alarming) and stresses the infra structural constraints in the LLDCs to respond

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quickly to the new possibility. In this scenario, EU imports of LLDC sugar would gradually increase to 900000 tons in the medium run on the basis of LLDCs redirecting current exports, some import/export swaps andincreases in production.

In both cases these volumes will have serious consequences for the CMO sugar:• the rst 300.000 tonnes could replace the SPS sugar (also 300.00 tonne) at no extra costs;• subsidized exports are restricted by the WTO to 2,8 million tonnes. They consist of 1,8 million tonnes

originally imported from ACP countries (sugar protocol) and 1,0 million tonnes of quota sugar. If theLLDCs imports exceed the 300.000 tonnes of SPS sugar the EU would have to reduce its own productionquota. Apart from the income loss of the farmers and processors this would draw heavily on the EU budget.Export refunds on quota sugar are covered by the production levy. On sugar from third countries they haveto be paid out of the budget;

• additional imports exceeding the 1,3 million tonnes that can be re-exported with export refunds, have tobe either placed on the internal market for consumption (implying further reduction of production quota)or used for non-food purposes (ethanol);

• if European reneries no longer are interested to buy ACP sugar, the sugar protocol obliges the Commis-

sion to publicly buy this sugar at the intervention price and then disposed of as mentioned above.

For scenario 1 (2,7 million tonnes additional sugar imports from LLDCs) the costs are estimated at 1,054 mil-lion € (farmers and processor losses excluded) and for scenario 2 (900,000 tonnes) at 263 million €.

Oxfam GB / IDS published a study on the impact of the EBA, partly to counteract the EU sugar sector criticismthat the EBA initiative will have a devastating effect on EU producers and processors. In this report additionalsugar imports are estimated at only 100,000 tonnes coming from countries that already export sugar such asSudan, Zambia, Malawi, Mozambique, Tanzania, Madagascar and (if the human rights situation improves)Myanmar. Oxfam / IDS claims that the effects on the European sugar sector will be marginal, but that EBA at the same time will bring economic benets to the world's poorest countries and people and thus should be

supported.

4.2.1 Critique on EBA

Criticism comes from Jean Francois Smeessens, a lecturer at Leuven University and secretary of the Belgian Beetgrowers Federation. He points out that EBA does not guarantee minimum prices for additional sugar imports.In his view ACP sugar which enters the community at a zero tariff and is bought at guaranteed prices will besubstituted by LLDC / EBA sugar which also enters freely but is not offered guaranteed prices. This wouldundermine the system of guaranteed prices and also of production control at the costs of the ACP as well as theEuropean producers.

As mentioned earlier the EU apparently holds on to the sugar protocol and feels obliged to buy ACP PS sugarat guaranteed prices for an indenite period of time, regardless of what will happen under the EBA. The rstsugar to be substituted by EBA sugar will be the SPS quota. But what happens if exports from LLDCs rise to

900,000 or even 2.7 million tonnes? How indenite is indenite?

4.2.2 Conclusions

• ACP countries have gained considerably over the years from the Sugar Protocol. But the effects of the trans-fers on (economic) development in these countries are questionable (see paragraph 3.2). EBA is even morequestionable as a development tool. According to Smeessens substantial imports aren't expected to enter theEU before 2007. The reform of the CMO, planned in 2005, can make the EBA superuous or undesirable. So,to begin with, questions can be asked about the rmness of the EBA offer to LLDs. Will it ever materialize?Secondly no guarantees about prices and volumes are given. These insecurities are making it very hard for poorcountries to invest in sugar production.

• If Novib / Oxfam wants to preserve preferential access in the future CMO sugar (which is tricky, see the

experiences in ACP countries) then this should be based on agreements between the EU and selected countrieson prices and volumes.

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Box 4: Mozambique and EBA

Mozambique is identified as one of the countries that could profit by EBA. Oxfam GB commissioned a study to investigate the potential of

the Mozambique sugar sector (Hanlon). The main findings are presented here.

Mozambique sugar production has been seriously affected by the war of destabilisation. Production fell from 325,000 tonnes of raw sugar

(1972) to only 13,000 tonnes in 1992. The sugar sector is now in the phase of rehabilitation. Sugar in Mozambique is produced on large

estates each with an own sugar mill. Two mills produce white sugar, the others raw sugar. After completion of the rehabilitation in 2004

4 out of these 6 plantations will produce each 100,00 tonnes a year, a fifth plantation may be reopened if demand grows and the sixth is

not likely to be reopened for sugar production any more.

Domestic demand is currently 150,000 tonnes a year and rising steadily to a forecasted 200,000 tonnes in 2003 and 250,000 tonnes

in 2005.

Mozambique is a low cost producer with production costs between 190 and 250 $ per tonne. It enjoys preferential access to the US

market for 1.3 per cent of US imports (about 14,000 tonnes in 2000/2001). So the opening of the EU market through the EBA initiative

(and of the SADC market as well), should allow the export of a few tens of thousands tonnes, according to the director of the National

Sugar Institute.

Mozambique protects its local market by imposing an import duty on sugar, raising the price of imported raw sugar to 385 US $ / tonne

and of white sugar to 450 US $ / tonne. These tariffs enable local producers to sell their sugar on the Mozambican market well aboveproduction costs. The protection is under fire by the IMF and the World Bank but is expected to last until 2012 (opening of the free

SADC sugar market).

Currently the plantations and mills produce 140,000 tonnes a year and employ about 17,000 workers (6,000 permanent and 11,000

seasonal). In the post colonial era Frelimo and the Government gave high priority to the workers and working conditions on the plantations.

For permanent workers, houses with water and electricity were built and health and education facilities provided. The new private owners of

the plantations have taken over these responsibility albeit reluctant.

The work force is unionized and the union has been recognised by the private sugar companies. Except for land preparation the agricultural

work is not mechanised in order to create the maximum number of jobs. Also this policy is continued by the new owners. Seasonal work

(the cutting) is done in the dry season and does not compete with the work on the family farms. The local household economy is dependent

on some external cash income. Thus permanent and seasonal jobs in sugar production are very much sought after and contribute to the

rural economy. According to the Union unskilled labour earns about 30 US $ a month, skilled labour (about one third) 45 - 48 US $ a

month. Expansion of sugar production and raising the number of jobs would improve living conditions in the poorest parts of Mozambique

and would contribute to political stability in these areas.

There are some worrying issues too. With the privatization of the plantations and mills, some outgrowing has been established. All sugar

estates expect to (partially) back out of actual sugar cane production and hand this over to large and small farmers and peasants. These

growers bear the risks for the company and at the same time are dependent on the good will of the company which can manipulate the

cane price or give preference to its own plantation or favoured growers. Also working conditions on individual farms are worse than on the

plantation and the work force gets fragmented, harder to organize and harder to use as a force to improve wages and working conditions.

An expansion of exports would create jobs, but they would be much poorer jobs than exist now in the industry.

And then there is the problem of EU low prized sugar exports to Southern Africa. The EU imports 216,000 tonnes of raw sugar and

molasses from LLDCs, but exports 492,000 tonnes of white sugar to these countries. If the EU simply ended these exports it would create a

southern market for Mozambique and other LLDCs, probably of more importance than the EBA would do on the EU market.

The overall conclusion is, that the opening of the EU market to sugar from Mozambique would create thousands of jobs with few negative

side effects. But campaigning for EBA which applies only to raw sugar imports, is not satisfactory. The EU should also lower its tariffs for

refined sugar and processed sugar products and end its subsidized exports of sugar and sugar-based products.

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4.3 Production control: current account for sugar

The future CMO sugar should have an effective production control mechanism. Subsidized exports to the

world market undermine the trust in a future EU sugar policy, not only in the eyes of the WTO or developing countries but also in the eyes of a growing number of European farmers. Subsidized exports can be avoided by preventing surplus production to be grown in the rst place. The Dutch Arable Growers Union came up witha plan to do just that.

The so called current account for sugar makes it possible to reduce C sugar exports to almost zero. Reduction of B quota sugar which is also exported with subsidies to the world market, is not foreseen in the plan. The crisisin arable farming makes it impossible to discuss this with farmers right now (source: secretary of the Dutch

Arable Growers Union).Nevertheless the current account for sugar is discussed here, because it would diminish exports with around 2.5million tonnes, is simple and could be put in place tomorrow.

The considerable amount of surplus C sugar production in the Netherlands has two reasons:• every farmer wants to fully produce his quota sugar because of the remunerative prices for A and B sugar• farmers are afraid of losing quota sugar since allocation is based on past production, others speculate on

higher allocationsThe overall response from the farmer is to play safe and sow more hectares than is necessary to meet his quota delivery rights.

The current account for sugar gives the farmer more security regarding his or hers quota allocation and moreexibility in response to yield uctuation, so he can grow less sugar beet. To do that it uses the carry forwardmechanism included in the CMO sugar. A processor may carry forward a certain quantity of B or C-sugar tothe next year not exceeding 20% of its A quota. This sugar will become part of next year’s A-quota and will

receive the A quota price of that year. The carry forward mechanism is set up for processors allowing them tosmooth out the effects of good and bad harvests but can be extended also to growers.The farmers have proposed to lay down in the contracts with the processors that each individual farmer getsa band width for sugar production between 95 and 115% of his or hers quota sugar. If a farmer producesmore than his or hers A and B quota he may carry this surplus sugar forward up to a maximum of 15% of the allocated quota. If he produces more than 115% of his quota he must sell this produce as C-sugar. Thecarrying forward of sugar is voluntary. If an amount of surplus sugar is carried forward it will be deducted fromnext years quota allocation. If not carried forward the surplus sugar is sold and exported as C-sugar. If a farmerproduces 5 per cent or less under his quota, this will have no consequence on net years quota allocation.

With the individual farmer's bandwidth of production, allocation is more or less secured and through the carry

forward mechanism he or she can make optimum use of the remunerative A and B quota sugar prices. Fluctua-tions in yields and difference between elds to be sown can be handled more easily by the farmer.Once the structural factors behind surplus production are eliminated the decision to grow or not grow C-sugarwill be a matter of simple economics. For C-sugar the grower receives about 60% of world market price. Grossincome from for example wheat production is 1,000-2000 € per hectare higher. If the responsibility for surplusproduction is put entirely in the hands of the farmer, C-sugar production will be reduced to almost zero in theNetherlands. And the same is true for the other EU countries.

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The problem of course are the processors. Unlike land, the machinery for sugar processing can't be used in analternative way. Scaling down costs money, but there are other reason for obstructing the current account forsugar too. According to the secretary of the Dutch Arable Growers Union, Dutch processors are anticipating future reforms of the CMO sugar. They fear that the Netherlands as a low cost producer won't be compensatedor won't be compensated as much for the lowering of prices or reduction of quotas as the southern and northernEU countries. They want to expand now and hold on to all the customers they can serve. Scaling down is not intheir interest because it could be a hell of a job to win customers back under the conditions of a future CMO.

4.3.1 Conclusion

The current account for sugar offers a perfect example of diverging interests of sugar growers and processors.Processors are mainly interested in buying the primary product cheaply and in selling the end product dearly and / or in high quantities. With regard to the future CMO sugar this means that they favour a policy thatlowers the prices, abandons production control, lowers the tariffs for primary products and keeps up those forthe processed products. For most farmers it is quite the opposite. Farming need prices (supported or not) thatreect the costs of production, border protection for primary products and production control.

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References

Dutch Arable Growers Union, Rekening-courant: louter plussen, Een pleidooi voor de invoering van rekening-courant in het suikersysteem, April 1999

European Commission, EU trade concession to least developed countries, Everything but Arms proposal , possibleimpacts to the agricultural sector).

FAO Effects of Trade Liberalization on the World Sugar Market, 2001?Goodison 1 The impact of the EU regime on individual Southern Africa sugar producing countrie s, August

2001Goodison 2 The EU sugar regime, August 2001Goodison 3 The future of the Common Agricultural Policy: implications for developing countries, August 2001Hanlon, Mozambique and the potential for a campaign in Europeon sugar - the position inside Mozambique,

August 2001

Hannah The World Sugar Market and Reform, in Prosi Magazine, January 1998Kaplan, Trade and Industrial Policy on an uneven playing eld: the case of the deciduous fruit canning industry in South Africa, in World Development, no 10 1999

LEI Multilateral trade liberalisation and developing coun-tries: A North-South perspective on agri culture and processing sectors, July 2001

NEI, Evaluation of the Common Prganisation of the Markets in the Sugar sector , September 2000Oxfam Everything but Arms and Sugar, European Parliamentary Brieng, December 2000Oxfam IDS, The Impact of the EU's 'Everything but Arms' Proposal: A Report to Oxfam, January 2001Silvis H.J, C.W.J. van Rijswick, Alternative instruments for agricultural support, A survey of measures applied

by competitors of the EU, March 2000Smeessens Initiative PMA et sucre: Vers un "compromis" dangereux?, Fberuary 2001

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Annex 1: Classication scheme for LEI simulations

EUSugar

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