Proposed EU sugar reforms

The details of the pro­posed plan, leaked to the FT, will undoubt­ed­ly be fol­lowed by alarms and wail­ing from the EU sug­ar pro­duc­ers and, under­stand­ably, from the ACP(African, Car­ribbean and Pacif­ic) coun­tries that have for years extract­ed rents from their pref­er­en­tial access to the high-priced EUsug­ar mar­ket. bq. Accord­ing to doc­u­ments seen by the Finan­cial Times and com­ments by senior Com­mis­sion offi­cials, Mr Fis­chler will pro­pose cut­ting the guar­an­teed sug­ar price by one-third between 2005 and 2007. He will also reduce sug­ar quo­tas (the amount of sug­ar EU farm­ers are allowed to pro­duce) from the cur­rent 17.4m tonnes to 14.6m tonnes a year. Farm­ers will be com­pen­sat­ed through direct finan­cial pay­ments, though these will cov­er no more than 50 to 60 per cent of their loss­es. For the first time, they will also be allowed to trade their pro­duc­tion quo­tas — a move that the Com­mis­sion hopes will result in more and more pro­duc­tion mov­ing to the most com­pet­i­tive areas such as north­ern Ger­many, the Paris basin and Britain. (“Finan­cial Times”:http://www.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1087373217417&p=1012571727102) The ‘leaked’ plan (noth­ing in Brus­sels “leaks”, because every­thing does) could not come at a more embar­rass­ing time for the Com­mis­sion. The ACP coun­tries whose loy­al­ty on trade issues has been pur­chased for many years by pref­er­en­tial access to the EU mar­ket are hold­ing their annu­al “sum­mit meeting”:http://allafrica.com/stories/200406230621.html today in Maputo, Mozam­bique. There will undoubt­ed­ly be a lot of wor­ried heads of state in Maputo. Some ACP coun­tries such as Mau­ri­tius and Fiji derive a big pro­por­tion of their for­eign exchange from access to the EU mar­ket at the inter­ven­tion price (€570 per tonne) that has typ­i­cal­ly been two to three times the world mar­ket price. Fiji alone gar­ners €55 mil­lion excess val­ue every year from the EU sug­ar mar­ket. But there are sev­er­al puz­zles about how this will impact on EU pro­duc­tion and prices. Drop­ping the inter­ven­tion price by 30% over the next two years—let’s say to some­thing less than twice the world price—should see inter­nal prices soft­en and pro­duc­tion fall. The mar­ket would nor­mal­ly fac­tor this price fall in imme­di­ate­ly. But the report­ed plan to cut pro­duc­tion quo­tas by about 15% will ini­tial­ly at least have a con­trary effect on price, by short­ing the mar­ket. Prices may hold at high­er lev­els while the mar­ket works out what the sup­ply will be. Remem­ber, imports are a fixed vol­ume, but domes­tic sup­ply can be sup­ple­ment­ed by with­hold­ing export sub­si­dies—undoubt­ed­ly a key part of the Com­mis­sion plan. With­in a year or so, how­ev­er, domes­tic pro­duc­tion could be on the rise again, even with a 30% inter­ven­tion price cut, because the trans­fer­abil­i­ty of quo­ta will see pro­duc­tion migrate to the most effi­cient pro­duc­ing areas. No doubt, the Com­mis­sion has mod­eled the expect­ed sup­ply bal­ance to ensure that its future inter­ven­tion risk is min­i­mized under con­di­tions where it no longer uses export sub­si­dies and (prob­a­bly) faces no change in import sup­ply. The time between the announce­ment of quo­ta cuts and the emer­gence of new pro­duc­tion from the trans­ferred quo­ta (say a year or so) will allow some cur­rent pro­duc­ers to sell their quo­ta at advan­ta­geous prices. Of course, their land val­ues will fall to their next most valu­able use (dairy?) but—as ever under the giant ‘com­pen­sa­tion machine’ that is the CAP—they will be com­pen­sat­ed for up to 60% of their loss­es from sug­ar by a direct pay­ment regime. Some low­er cost exter­nal pro­duc­ers with pref­er­en­tial access such as South Africa are “claiming”:http://www.busrep.co.za/index.php?fSectionId=&fArticleId=2123591 that the changes will bring gains for them. Oth­ers, such as Fiji will almost cer­tain­ly see the changes as a major threat. ABARE(Australian Bureau of Agri­cul­tur­al Eco­nom­ics) argued, how­ev­er, in an excel­lent “recent paper(pdf file about 100k, free reg­is­tra­tion required)”:http://www.abareonlineshop.com/product.asp?prodid=12571, that the pref­er­ences are per­ni­cious for Fiji and the coun­try needs to quick­ly pre­pare an exit/adjustment strat­e­gy. Now, it will have to plan even more quick­ly. Over­all, the changes promise to reduce or, maybe, elim­i­nate EU sub­sidised sup­ply to the world mar­ket. This has been the long­stand­ing objec­tive of the major low-cost pro­duc­ers (Brazil, Aus­tralia, Thai­land, Philip­pines). It will make it eas­i­er for the EU to com­ply with an adverse deci­sion in the cur­rent Brazil/Australian/Thai WTO dis­pute “case”:http://www.wto.org/english/tratop_e/dispu_e/DS266 aginst its re-exports of ACP sug­ar and it will prob­a­bly avoid an oth­er­wise inevitable “Cotton-type”:http://www.scoop.co.nz/mason/stories/PA0406/S00352.htm case against the exter­nal impact of its domes­tic sup­ports.

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