A study on the impact of EU sugar sector reforms on price transmission in the sugar sector, commissioned by the EC, was posted on the Commission website in June 2013.
The analysis looked at the extent to which:
- changes in the institutional price of sugar resulted in changes in the retail price of sugar;
- reforms had “influenced the degree of competition and concentration in the sugar industry”;
- reforms had “reduced the distance between domestic and international prices”.
The review set out both the expected and actual price transmission effects of the 2006 sugar sector reforms.
It was expected that sugar sector reforms would promote “more favourable conditions for the functioning of price transmission”, with improved market access for sugar imports (progressive introduction of duty-free, quota-free access for ACP/LDC sugar) permitting “stronger integration between the EU domestic markets and the international market”, fostering a process of price convergence. However, it was also anticipated that reforms would result in a greater concentration of ownership in the sugar sector and less competition, with this promoting “a worsened functioning of price transmission” along the sugar supply chain.
The empirical assessment of the impact of reforms showed that:
- “the three-step reduction of sugar intervention price… did not fully translate [into] a decrease of ex-works sugar prices in the EU”, with the ex-works prices staying “well above the intervention price until the end of the 2009/10 marketing year” and maintaining “an ample margin over the reference price from October 2009 onwards”;
- “the reduction of sugar beet minimum prices introduced by the 2006 reform did not fully translate in an equal decrease of sugar beet prices paid to farmers”;
- retail prices “[appeared] not to be influenced by policy events”, with the “market power of retailers vis-à-vis sugar producers” meaning that “retailers’ pricing behaviour [tended] to be independent… from the dynamics of ex-works sugar price”;
- reforms have not yet achieved efficient price transmission, in that changes in the institutional price of sugar are not reflected in changes in the retail price of sugar;
- reforms contributed to an “acceleration of the ongoing process of concentration of the sugar industry”, with it being suggested that “EU sugar producers might again be exerting remarkable market power”;
- the process of “convergence to price transmission proper between EU domestic sugar markets and the international sugar market has not occurred yet”; indeed, it was considered that the early 2012 price dynamic suggests “a (possibly temporary) setback in the process of convergence between EU domestic prices and international sugar price”.
Overall it was concluded that reforms had “contributed to improve the conditions for the functioning of price transmission… by removing some remarkable constraints to free variation of domestic sugar prices”, and that a process had been started “which might lead… to improved price transmission in the EU sugar sector”. However, it was maintained that “changes in the EU sugar regime are probably not sufficient to promote full price transmission along the entire sugar supply chain… without the contribution of changes in other policies and of favourable non-policy developments.”
The analysis in the study suggests that sugar prices in the EU have not evolved as the EC has expected. This is in part linked to the “remarkable market power” of EU sugar producers and in part due to the pricing behaviour of retailers. Implicit in the analysis is recognition of the need for other policy measures to strengthen the functioning of sugar supply chains to improve price transmission. This needs to be seen against the background of the “surprise inspections” launched by the EC in May 2013 of several sugar companies, amid “concerns [that] they may have breached anti-trust rules”, and efforts in member states to promote retailer codes of conduct.
From an ACP perspective, the “remarkable market power” of the EU sugar producers heightens concerns over the functioning of ACP–EU supply chains. Currently only Mauritius has pursued a strategy of converting to refined sugar exports to the EU, in anticipation of the price transmission ‘stickiness’ that the report describes. Other ACP suppliers have not embarked on such a strategy. In the case of a number of expanding Southern African sugar exporters (notably Zambia and Malawi) this may be linked to the close corporate links between local sugar millers and European sugar refiners, with there being little interest in investing in competing refining capacity. This potentially carries implications for the structural development of ACP sugar sectors.