EU sugar policy reform and developing countries
World sugar markets and developing countries
Sugar is a dynamic part of the world agricultural economy, with average growth rates in production of around 3 per cent annually over the past decade. Around 75% of the world’s sugar is produced from sugar cane, mainly in developing countries, with the remainder from sugar beet, mainly in developed countries. Costs of sugar production vary widely between countries even with the same cultivar, but they are usually lower for sugar produced from sugar cane than sugar beets. For this reason the EU protects domestic sugar beet producers against more competitive third country sugar imports.
The EU used to be a significant sugar exporter as a result of this protection, but because of recent reforms it is now a net importer. World sugar exports are dominated by Brazil, which accounts for 60 per cent of the total and growing, with Thailand, Australia, South Africa and Guyana other important players. Importers are less concentrated, with the EU, Russia, China and at times India among the more important ones.
Although a significant proportion – around one-third - of global sugar production enters world trade, only a small share is produced and traded at world prices. The bulk of international trade takes place under long-term arrangements (preferential trade agreements and contracts), regional agreements or with subsidies. A relatively recent factor is the growing integration of sugar and ethanol markets, linking sugar prices more closely to the price of oil. The ability of Brazil to switch cane production between ethanol and sugar production affects both the supply of sugar available to world markets and the volatility of world sugar prices. Increasing investment in ethanol production from sugar cane and sugar beet is also occurring in a number of other sugar-producing countries and these developments can be expected to have a greater influence on the international sugar market in coming years.
The EU sugar regime
The essential features of the current sugar regime are support prices (a minimum price to growers of sugar beet, and a guaranteed price to support the market), production quotas to limit over-production, tariffs and quotas on imports from third countries, and subsidies to export surplus production out of the EU. Although EU tariffs on sugar and sugar products are sufficiently high to keep out third country imports, the EU has had a number of preferential agreements under which limited volumes of sugar are admitted. The most important has been the Sugar Protocol under the Cotonou Agreement with African, Caribbean and Pacific countries which guaranteed the EU support price for a limited quantity of sugar imports from these countries. Unlimited access was granted to least developed countries from 2009, while other developing countries have benefited from import quotas for specific amounts under other agreements.
The high level of support to EU sugar beet growers meant these producers benefited from prices that are two to three times world levels, although this gap closed during the price surge in 2009. Over time these protection policies led to increasing production in the EU and both lower imports and increasing surpluses exported to the world market with the aid of subsidies. Domestic consumers of sugar in the EU have been forced to pay high prices for sugar, while at the same time low cost producers in developing countries have faced depressed world prices and reduced trade opportunities.
In November 2005 the European sugar policy underwent reform for the first time in forty years. One of the drivers for change was a WTO dispute finding which found that the EU sugar regime was in breach of its WTO obligations. The reform involved a reduction in the European sugar price by 36 percent over a four year period, together with a voluntary restructuring scheme which provided incentives for the EU’s least efficient sugar producers and sugar beet growers to leave the industry. Intervention support was effectively removed and a purely ‘safety net’ scheme put in its place. Sugar producers were partially compensated for the cut in support prices by a decoupled direct income payment. Subsidised exports up to the WTO ceiling are still permitted following the reform. Over-quota sugar can also be used for industrial uses, as biofuel or in the chemical and pharmaceutical industries, and these have access to out-of-quota sugar at world market prices.
Effects on developing countries
The reform has led to a gradual reduction in EU self-sufficiency for sugar, and the EU has become an increasing net sugar importer. This has benefited developing country sugar exporters who sell on the free market. However, for two (overlapping) groups of countries with preferential access to the protected EU market the benefits are not all one way.
- ACP exporters under the Sugar Protocol faced a similar reduction in their guaranteed export price of 36% as a result of the 2005 reform. In addition, the EU annulled the Sugar Protocol with its guaranteed price with two years’ notice on 1 October 2007, using the argument that as price guarantees had been removed for EU farmers they could scarcely be maintained for ACP exporters. However, ACP countries which signed Economic Partnership Agreements with the EU benefit from duty-free, quota free access for sugar (subject to a special safeguard mechanism setting a ceiling on total ACP/LDC exports of 3.5 million tonnes of white sugar equivalent up to and including the 2015/16 season). High-cost ACP exporters in the Caribbean will find the EU market no longer attractive under these conditions, but low-cost exporters particularly in Southern Africa will be able to expand their exports albeit at a lower (but still protected) price.
- The least developed countries already benefited from duty-free quota-free access from 2009. These countries suffered a loss of potential export revenues as a result of the drop in the EU market price, but unlike ACP exporters their export price had never been guaranteed (apart from those LDC exporters who were also ACP countries). Developing country sugar importers will pay more for their sugar imports now that the EU is no longer a net exporter.
EU response to preference erosion
Higher compensation for ACP countries under the Sugar Protocol was also one of the recommendations. In 2006 the Commission proposed a Regulation (266/2006) that was later adopted by Parliament and Council that foresaw in: establishing accompanying measures for Sugar Protocol countries affected by the reform of the EU sugar regime. The EU helps several ACP Countries, through a multi-annual strategy for the period of 2006-2013, to enhance the competitiveness of the sugar and cane sector, promote the economic diversification of sugar-dependent areas, and/or address broader impacts generated by the adaption process. Thirteen ACP countries under the Sugar Protocol asked for this EU assistance. The amount of money set aside for the assistance is 1 244 million for the period of 2006-2013 , which is less then the 200 million a year we recommended, but more then the first 40 million announced by the Commission in 2006. As a positive element though, this money will not be taken from the EDF.
Future prospects post 2013
The reformed EU sugar regime Is designed to respect the EU’s obligations under the WTO Agreement on Agriculture. However, further changes would be required under a Doha Round agreement which would end subsidised exports and lower tariffs. The extent to which sugar tariffs would be reduced will depend partly on domestic considerations (whether sugar is declared a sensitive product thus subject to smaller tariff reductions) but also on the classification of sugar as either a ‘tropical’ or ‘preference erosion’ product in the Doha agreement. The EU, ACP countries and the tropical products group reached an agreement in 2009 that the EU would be allowed to treat sugar either as a ‘sensitive’ product or as a ‘preference-erosion’ product. If sugar were treated as a sensitive product, tariff reductions and the new TRQs would both be implemented in annual instalments over a seven-year period. If sugar were treated as a preference-erosion product, tariffs would be reduced over an eight-year period, with the first two years free from any reduction. However, this agreement has yet to be accepted by the rest of the WTO membership.
The longer-term EU objective must be to substantially reduce the gap between EU and world market prices. Thus the post-2013 CAP reform should be used to make a further reduction in the EU reference price, especially given that expected higher world market prices for sugar will provide an important cushion for EU beet producers.
CTA, 2010. Sugar: Trade issues for the ACP Executive Brief, updated March 2010
A regularly updated brief by the ACP-EU Technical Centre for Agricultural and Rural Cooperation
Elobeid, A., How Would a Trade Deal on Sugar Affect Exporting and Importing Countries?. International Centre for Sustainable Trade and Development, 2009
Oxfam, The Great EU Sugar Scam: How Europe's sugar regime is devastating livelihoods in the developing world (PDF), 2002
One of the earliest critiques of EU sugar policy by a development organisation, although published before the 2005 EU sugar reform