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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