The reform measures are agreed
After extensive debate the European Agricultural Council agreed on November 24th 2005 on measures to reform the EU sugar regime. The final package involved a number of changes compared to the initial European Commission proposals with regard to:

• the extent and time-frame for reductions in the EU sugar price;
• the level of compensation to be paid to EU sugar-beet farmers;
• the scale of the voluntary restructuring scheme;
• the coverage of the restructuring scheme;
• the phasing-out of intervention buying;
• the source of supply for sugar used in the chemical and pharmaceutical industries, and for bio-ethanol production.

The following specific measures have been announced:

• ‘the guaranteed price for white sugar will be cut 36% over four years’, beginning in the 2006/07 season;
• ‘compensation to farmers at an average of 64.2% of the price cut’, through a ‘decoupled’ payment linked to cross compliance, which will form part of the single farm payment scheme;
• the payment of an additional ‘coupled’ payment equivalent to 30% of the price cut for a transitional period of five years in ‘countries which give up more than half of their production quota’, plus the possible payment of ‘limited national aid’;
• the establishment of a ‘voluntary restructuring scheme lasting four years for EU sugar factories and isoglucose and inulin producers, consisting of a payment to encourage factory closure and the renunciation of quota’; the aim of the restructuring fund is to: ‘encourage less competitive producers to leave the industry’; finance social and environmental adjustment costs and provide funds to most affected regions to diversify; payments will be €730 per tonne in the first two years, falling to €625 in year three and €520 in year four;
• the introduction of scope to use restructuring funds to compensate beet producers affected by factory closures (reportedly up to 10% of the amount);
• the establishment of a ‘diversification fund for member states where quota is reduced by a minimum amount, which increases the more quota is renounced’;
• the funding of restructuring measures through a special levy placed on remaining quota holders over three years of the transition;
• the merging of the ‘A’ and ‘B’ quotas;
• a provision for the use of non-quota sugar in the ‘chemical and pharmaceutical industries and for the production of bio-ethanol’;
• the maintenance of the intervention agency during the four-year transition period followed by ‘the introduction of a private storage system as a safety net in case the market price falls below the reference price’;
• the allocation of an additional quota of 1.1 million tonnes to sugar-producing countries against ‘a one-off payment corresponding to the amount of restructuring aid per tonne in the first year’;
• an increase in the isoglucose quota of 300,000 tonnes for existing companies, phased in over three years;
• the possible purchase by Italy (60,000 tonnes), Sweden (35,000 tonnes) and Lithuania (8,000 tonnes) of extra isoglucose quota at the restructuring aid price.

According to the Agriculture Commissioner, Mariann Fischer Boel, the agreed reform package will ‘bolster the competitiveness of the EU sugar industry, improve its market orientation and produce a sustainable market balance in line with the EU’s international commitments ... This agreement will also ensure that we come rapidly into line with the recent WTO panel’. What is more ‘developing countries will continue to enjoy preferential access to the EU market at attractive prices’, while ‘those ACP countries which need it will be eligible for an assistance plan worth €40 million for 2006, which will pave the way for further assistance’. The scale of this assistance will depend on ‘the outcome of the discussions on the financial perspectives’ within the EU.

The direct impact on the ACP
For the ACP the most important reform measure is the reduction in the EU sugar price. According to the EC press release ‘the guaranteed price for white sugar will be cut 36% over four years’, beginning in the 2006/07 season. The press release indicates that this will involve a cut of ‘20% in year one, 25% in year two, 30% in year three and 36% in year four’. However, analysts show that these cuts refer to the net earnings of EU beet farmers and refiners, and are inclusive of the restructuring levy payments that they must make. Thus the reference price follows a slightly different course of price reductions, remaining at €613.9/tonne through the 2007/08 season before falling by 17.1% to €524 in 2008/09 and a total of 36% in 2009/10 to €404.4/tonne. This gives an institutional price for ACP raw sugar as set out below:

Changes in prices for ACP raw sugar

In the first two years of reform the only price cut which ACP supplier face will be that equivalent to the loss of the refining aid formerly paid from the EU budget to EU cane refiners. In this context the ACP as a whole will face the following income losses on their exports under the sugar protocol:

Losses on ACP sugar-protocol earnings from final agreed EU sugar reforms

These losses may be broken down by ACP sugar-protocol beneficiary as in the table below. This neglects the losses to those ACP countries which will abandon sugar production entirely as a result of the price cuts, as has St Kitts & Nevis already.

Losses by ACP sugar-protocol beneficiary countries*

In the short term the measures as adopted do represent a significant ‘saving’ for ACP countries compared to the losses that would have arisen under the initial EC proposals. Effectively, when compared to the initial proposals, the final agreed reform programme ‘saves’ the ACP some €231,334,510 (about €57,833,625 per annum) over the first four years of the reform period. This represents a reduction in the losses faced in the first four years of 35% compared to the initial proposals. This has been achieved by effectively deferring the full reduction in the raw sugar price paid to ACP suppliers until 2008/09, saving the ACP some €131,929,930 in 2007/08 compared to the impact of the initial proposal. The losses that would have occurred under the initial EC June 2005 proposals are set out in the table below:

Losses to the ACP under the initial June 2005 EC proposals

These ‘savings’ could help cushion some of the initial costs of adjustment in certain ACP countries, providing EU restructuring support is now swiftly and effectively deployed.

There are in addition some areas of concern in Commissioner Fischer Boel’s accompanying statement, where she refers to EU restructuring support being made available to ‘those ACP countries which need it’. This implies that the EC does not consider all ACP sugar-exporting countries to be in need of restructuring support in the face of EU price reductions. This is a fundamental misunderstanding of the nature of the economic impact of EU sugar-price reductions in even the most competitive of ACP sugar producers. In Swaziland, for example, which is one of the lowest-cost producers in the world, the loss of an annual industry income of €22,644,000 (compared to €24,504,000 under the initial EC proposal) will constitute a profound economic shock, representing as it does a 21% reduction in the country’s export earnings on trade with the EU. Unless targeted restructuring support is extended to manage the transition and facilitate adjustment to the new price, efforts to develop the sugar sector as a tool for rural-poverty alleviation which have been underway for over ten years (with extensive EU financial assistance in the form of loans) will be seriously undermined.

It thus needs to be appreciated that the modification of the EC’s reform proposals has simply ‘bought time’ for the implementation of effective programmes of support to ACP sugar exporters to adjust to the new market realities they will face. If this time is not effectively used then the adjustment costs faced in ACP countries will be as profoundly damaging to even low-cost ACP sugar producers as the initial EC reform proposals.

In the longer term (beyond 2009/10), the ‘savings’ are marginal, amounting to slightly over €20 million per annum for the ACP as a whole, a mere 7.6% ‘saving’ on an annual basis compared to the initial proposal. This means that in the longer term ACP sugar suppliers will still face 92.4% of the income losses they would have faced under the initial proposal.

In the run up to the EU Council meeting, with the UK Presidency looking for a compromise proposal, prime minister Blair assured Caribbean leaders that he would seek to:

1. lengthen the transitional period;
2. push for an increase in transitional assistance;
3. examine the issue of greater market access.

With the EU Council decision on the trajectory for reform now having been made, it is apparent that prime minister Blair delivered in part on this commitment, with the transition being twice as long as initially planned and the price reduction being somewhat lower. However this still leaves two dimensions unaddressed:

• ensuring that sufficient restructuring assistance is made available in a timely manner to support well-designed adjustment measures;
• ensuring that for those ACP suppliers which can supply the EU market at the much lower post-reform price, the market access they enjoy is expanded to a level commensurate with the level of income losses faced as a result of the administratively determined reductions in the EU sugar price.

It is to be hoped that in the closing months of the UK Presidency prime minister Blair will provide the political impetus for an ‘early harvest’ for ACP sugar suppliers in these two remaining critical areas.

Responding to the announcement of the reforms adopted, the Ambassador to Brussels of the Eastern Caribbean States, George Bullen, spoke of his dismay that ‘they are taking from the poor and giving to the rich’. While Ian McDonald the head of the Sugar Association for the Caribbean described the price cut as ‘devastating news’. This needs to be seen against the backdrop of the ACP appeal of November 11th 2005 which called for a ‘net price cut of 19% spread over eight years, starting in 2008, with the retention of refining aid of 5.1%’. Against this background, the final EU deal is seen as a disappointment, since the price cut is nearly twice as high as the ACP request, the transition period is substantially shorter, and the refining aid has not been retained.

The indirect impact on the ACP
With EU sugar prices set to decline by 36% by 2009/10, the raw material costs of the EU sugar-containing food-and-drink industry will fall sharply. This will be particularly importance for those products with a high sugar content (and also high dairy content, with dairy-sector reforms also being implemented) for example sweets and chocolates. With the process of price reduction closing the gap between EU and world market prices, EU financial allocations to export refunds on the raw materials content of value-added products will be able to finance a much larger volume of exports (slightly more than twice the volume for sugar-containing products) with the same level of export refunds (currently frozen at €415 million per annum under the WTO agreement). If, as seems likely, the elimination of export refunds on the raw-material content of value-added food products is ‘back-loaded’ in the EU’s final offer on export subsidies under the Doha Round of WTO negotiations, then during the transition ACP countries, particularly in southern and eastern Africa could face intensified competition in high-sugar-content food-product markets.

Therefore ACP sugar-producing countries which are seeking to develop sugar-based value-added food-product industries may well need to negotiate safeguard clauses to protect against import surges which deal not just with the trade in sugar alone but also with high-sugar-content food products. In this context products within the whole sugar chain, will need to be subject to any special safeguard mechanisms established under the WTO agreement or within economic partnership agreements.

One little-noted aspect of the November 24th agreement, the one dealing with the use of non-quota sugar in the ‘chemical and pharmaceutical industries and for the production of bio-ethanol’, is also worthy of note when considering the indirect impact of EU sugar-sector reform. As the chemical and pharmaceutical component of this market currently takes around 500,000 tonnes of sugar per annum, an expansion of this market and the intensified development of bio-ethanol production based on sugar (with public assistance through tax breaks and other financial incentives), could provide a domestic outlet for future surplus ‘C’ sugar and accumulated EU sugar stocks. This could avert a sudden upsurge of EU sugar exports, prior to compliance with the more narrowly interpreted version of the EU’s WTO commitments. However, it would also free up certain elements of the ‘non-annex 1’ budget currently deployed in support of the chemical and pharmaceutical industries for deployment in support of other sugar-containing food-product exports.

A final indirect impact of EU sugar-sector reform as agreed relates to the impact on the functioning of regional sugar markets in the context of a reduced price-attractiveness of the EU market. With the EU market less attractive, neighbouring regional markets will become relatively more attractive. The region most likely to be affected in this regard is southern and eastern Africa, where seven countries currently export over 832,000 tonnes of sugar to the EU market. The question arises: what will be the knock-on effects, in terms of regional sugar prices, of a dramatic (36%) fall in the EU sugar pric "ehe most obviously attractive alternative regional markets in this regard are South Africa and Kenya, both of which, after the implementation of EU sugar-sector reforms, will offer prices higher than those obtainable on the EU market. The very real danger exists that sugar which currently goes to the high-priced EU market will be redirected to regional markets. If this occurs on a large scale this could undermine national sugar prices. The challenge facing the sugar industry in southern Africa is how to raise regional demand for regionally produced sugar and sugar-containing products while maintaining the value of regional sugar markets, in the face of the changed price conditions for exports to the EU market.

Careful consideration will need to be given to the question: what policy measures need to be set in place nationally and regionally both to promote growth in demand for regionally produced sugar and sugar-containing products and, at the same time, to maintain the value of the sugar market?