Irish sugar production is not an economic activity

 

Opposition to sugar reform could carry a heavier price than simply paying 45 cent per kilo more than is necessary, writes Alan Matthews.

Farmers and workers protested yesterday at the closure of the sugar factory in Carlow and at the severity of proposed reforms in the EU's sugar market regime. It is natural to feel sympathy with those whose jobs and incomes are affected by this move, but it is also important to understand its inevitability.

Sugar production is not an economic activity in Ireland. It cannot compete with sugar produced from sugar cane in tropical countries. Even within the EU, Ireland is not a competitive producer of beet sugar.

From its earliest days, beet production has been profitable only because of subsidies. When the sugar industry was established in the 1920s, the subsidies were almost equal to the total price of beet bought by the Carlow factory.

The situation has not changed today under the EU's sugar regime. The intervention price for white sugar in the EU is €632 per tonne, compared to a typical world price of €200 per tonne. The tariff and special safeguard duty on imported sugar amounts to over €500 per tonne.

Sugar beet production in Ireland continues only because of a rigid system of quotas which allocates an amount of supported EU sugar production to each member-state. The national EU sugar quotas are, in turn, allocated by governments to individual sugar companies.

Production quotas restrict the ability of the most efficient processors to expand, impose limits on the production of competing products such as isoglucose, and create barriers for new entrants. Sugar processing is a very profitable activity for those companies with access to quotas. In Ireland, Greencore makes 20 per cent of its profits from its sugar division, although it accounts for only 10 per cent of its turnover.

Consumers pay heavily for this, as a small calculation illustrates. Without the protection of the EU sugar regime, the cost of a standard 1kg pack of white sugar would be 45 cent cheaper. The sugar tax on an individual consumer basis does not seem high, at around €15 per person. However, spread over four million consumers it amounts to €60 million per year. The annual value of the beet crop to farmers is only slightly higher, at €70-75 million.

The European Commission has proposed changes to the sugar regime to help it adapt to a number of challenges. The EU has committed to open its sugar market without restriction to imports from the world's least developed countries after 2009. Further imports can be expected under bilateral trade agreements such as with Mercosur (Argentina, Brazil, Paraguay and Uruguay). New economic partnership Agreements with African countries will extend market access.

In the Doha round of trade negotiations, the EU has offered to phase out export subsidies under certain conditions, which would make it impossible to export surplus quota sugar. There will be pressure to reduce the very high tariff on sugar imports, and also to eliminate the special safeguard mechanism currently so effective in excluding third-country imports.

Another threat on the horizon is the complaint made to the WTO by Brazil, Australia and Thailand alleging that current EU sugar production and subsidies are illegal even under present trade rules. The initial panel ruling, currently under appeal by the EU, is that C sugar exports are effectively cross-subsidised by the market support offered for quota sugar and should be counted against the EU limits for subsidised sugar exports.

The panel also found that the subsidised re-export of preferential sugar imported from developing countries in Africa, the Caribbean and the Pacific should be counted against the EU's export subsidy limits. If the panel ruling is upheld on appeal, then a further drastic cut in EU quota production would be required, even going beyond the Commission's current proposals.

As it is, the EU has proposed a quota cut of 16 per cent and a cut in the sugar support price of 33 per cent. The quota system will be simplified and, to assist in making the industry more competitive, quotas would be allowed to be traded across countries. Compensation would be offered to farmers at a rate of 60 per cent of the reduction in sugar beet revenue.

The compensation package on offer is a generous one. It would protect farmers from the consequential income loss, given that the payment would be decoupled from production and farmers have the option of planting other crops on the land. It is important that producers in developing countries which currently benefit from preferential imports are also compensated in this way.

The Commission recognises that its proposals could mean the end of sugar production in less competitive regions of the EU. Ten countries, including Ireland, have written to the Agriculture Commissioner, acknowledging the necessity for change in the sugar regime, but arguing that reform should aim at maintaining the existing distribution of sugar beet production. For this to happen, the largest quota cuts would have to occur in the most efficient producers.

Producers and their political representatives will naturally fight to defend the status quo and to try to ensure that reform is delayed and less onerous. But sugar reform is not just an agricultural issue.

The stakes are high for the future outcome of the Doha round. Sugar, like cotton, has become a symbol of the extent to which developed countries are prepared to implement the liberal trade principles which they recommend to developing countries. Opposition to sugar reform could carry a heavier price than simply paying 45 cent per kilo more than is necessary in our supermarket baskets.

Alan Matthews is a research associate of the Institute for International Integration Studies and Jean Monnet Professor of European Agricultural Policy at TCD