of Sweets Industries of the EU
THE EU SUGAR REGIME”
clearly has been a boon to Europe’s sugar industry. Yet the so-called
sugar regime also has had a severe negative impact on the European
economy. As a result of the regime, EU sugar prices are up to three
times higher than world sugar prices.
The regime hurts consumers by raising prices for sugar and
processed food products.
The regime puts the European Union’s fast-growing food
processing industry at a significant disadvantage in world markets. The
food-processing industries are increasingly reliant on foreign markets
for revenues, and sugar is a major input for many of these industries.
The regime, more than any other subsidy program,
constrains the European Union’s limited leverage to negotiate robust
foreign market access commitments in food and processed-food products.
· Extension of the current EU sugar regime to EU applicant countries in Central and Eastern Europe will only lead to further and substantial economic losses for the European Union.
European Commission and the European Union’s agricultural ministers
must be persuaded to overhaul Europe’s sugar subsidy program.
For the purpose of this project, I assume the
fictitious role of trade consultant to a fictitious industry
association, the Association of Sweets Industries (ASI), which
represents national associations from each of the 15 EU member states.
that sugar is a major input to ASI products, the association’s trade
division has decided to design a strategy aimed at persuading European
Union officials to reform the sugar regime.
attached proposal will be presented to ASI’s board of directors for
Structure of the Document
background section of this document presents the key features of the EU
sugar regime, the key elements of the European Union’s sugar
manufacturing industry, and current issues related to the regime. The
commercial and economic analyses respectively outline the interests of
the confectionery industry and the interests of the EU economy as a
whole. The project also includes an analysis of the political
environment in Europe and the stakeholders that have an interest in the
sugar regime, and it lays out both recommendations for action and a
dual-track strategy for carrying out the recommended actions.
The European Union’s price support system for
sugar is putting its food processors in an increasingly difficult
competitive position in the world market. As a result of this support
system, EU food processors pay two to three times the world market price
for sugar—one of their most important inputs.
Although processors receive some export refunds, these subsidies
do not cover the difference between the European Union’s internal
price of sugar and the world market price. Even if they did now, they
are subject to Uruguay Round reduction commitments and will soon be
phased out. EU officials need to recognize and rectify the detrimental
impact of sugar subsidies on the European food business’ ability to
compete in world markets.
EU’s sugar regime consists of a price support system, a quota system,
and a separate system for selling sugar to “third” (non-EU)
countries. Under the price support system, intervention boards buy up
all the sugar offered to them by EU producers at an annually set price.
The minimum price for sugar beets is also set annually, and both prices
are higher than the world market price.
Anti-competitive behavior on the part of sugar
processors pushes the price still higher. Indeed, the EU produces five
million tons more sugar annually than is required to meet domestic
demand. If the EU market were allowed to function properly, this
over-production would lead to downward pressure on prices and
production. In the EU sugar market, however, the opposite phenomenon
occurs. The only possible explanation for this is that sugar processors
keep the supply to local markets tight by off-loading sugar on the world
market and thereby creating an artificial shortage of sugar within the
EU. As a result, EU sugar prices are on average two to three times
higher than the government-set price.
date, the EU sugar regime has escaped every reform of Europe’s Common
Agricultural Policy (CAP), and it was left virtually untouched by the
Uruguay Round Agreement on Agricultural. One of the primary reasons for
this is that the regime is self-financing so it does not impact any EU
or individual state budgets. The costs involved in off-loading sugar
surpluses are born by EU sugar beet and refined sugar producers, who pay
a levy for this purpose.
Sugar currently accounts for up to 40 percent of the cost of the ASI industries’ products; it has a large impact on the industries’ profitability. The EU must reform its sugar regime in order to ensure that its exports of processed products do not become a loss-making business. Indeed, if food processors decide to move their businesses overseas where sugar and other production factors are cheaper, the EU would undoubtedly lose not only jobs in this sector but also sugar beet cultivation and processing jobs. Together, the industries represented by ASI are the EU’s largest consumer of refined sugar, accounting for 25 percent of total consumption (3 million tons).
sugar regime has several impacts on Europe’s economy:
· It hurts European consumers, who pay up to three times the world market price for their sugar—an annual “sugar bill” of seven billion Euros.
· It is increasingly placing the EU’s fast-growing food processing industry at a competitive disadvantage in the world market, which in turn jeopardizes the 1.5 million jobs supported by the industry.
· It encourages excessive and intensive sugar beet cultivation, which in turn encourages environmentally damaging pesticide and fertilizer use.
· It limits the EU’s leverage to negotiate robust market access commitments in food and processed-food products.
extension of the current EU sugar regime to the applicant countries of
Central and Eastern Europe would lead to tremendous economic losses for
the EU and would be a significant blow to these countries economic
The need for reform of Europe’s sugar regime is becoming more urgent in light of EU enlargement and the impending start of the Millennium Round of trade negotiations. However, achieving sufficient support for such a change will not be easy. Past attempts to reform the EU sugar regime have all failed for lack of political support. Subsidy reforms for other products such as cereals and dairy products have succeeded primarily because of their large burden on the EU budget. Because the sugar regime is self-financed, there is no budgetary pressure for reform. Sugar production has also not been a focus of concern for Europe’s politically powerful environmental groups. Although sugar price supports encourage intensive agriculture, but sugar beets are usually grown in mixed farming enterprises and therefore have not been among environmentalists major agricultural concerns.
negotiations concerning reform of the EU sugar regime are set to start
next January. In order to ensure a desirable outcome from these
negotiations, ASI should form a broad-based coalition of consumer,
business, and environmental interests to put pressure on the European
Commission to reduce support prices by a percentage similar to past (and
future) export subsidy reductions. A measure to decrease incentives for
sugar producers’ anti-competitive behavior should also be sought.
In an effort to persuade the EU to reform the sugar regime, ASI has formulated a dual-track strategy: a strategy to be carried out in each of the fifteen EU member states, and a strategy to be carried out in Brussels. The member state strategy aims at influencing member states’ agriculture ministers, who together make up the EU Council. The Brussels strategy is designed to put pressure on the Council, the Commission, and the various interest groups and processes that participate in EU policymaking.
Together, the two strategies have the potential to push the Council to actually look beyond the narrow interests of sugar producers and beet farmers and undertake meaningful reform of the sugar regime.
The Common Agricultural Policy for Sugar
The European Union’s sugar regime was
established in 1968 and has been left virtually untouched since then. It
is designed to support the production of sugar within the Community, in
order to “maintain employment and standards of living for EU growers
of beet sugar.”
The last revision of the sugar regime was completed in May 1995, when
the Council decided to extend the regime until the 2000/2001 marketing
regime—which is essentially a price support system—each member state
is allocated two quotas, an “A” quota and a “B” quota. The total
A quota equals, in principle, the Community’s annual sugar
consumption. The B quota is intended to provide a surplus, so that
demand can be met even in the event of crop failure. Any sugar
production above the A and B quotas is referred to as “C” sugar,
which must be either sold on the world market or stored and used as part
of the following year’s A and B quotas. The Council determines what
portion of the total A and B quotas will be assigned to each member
state. The quotas allocated to each country are then divided among
national sugar producers by individual country governments.
is responsible for managing the price support system for A and B sugar.
Each year the Council fixes an “intervention price,” which is the
price at which any manufacturer may sell A and B sugar to national
intervention boards. In practice, however, intervention boards pay not
the intervention price but rather an “effective support price,”
which is the intervention price plus 1) a storage levy that covers
annual storage expenses; 2) an allowance for transportation costs; and
3) regional premiums for high-cost countries. The intervention price is
set with the aim of making sugar beets sell at a price known as the “target
price,” which is also set by the Council and regarded as the “optimum
price a farmer should receive.” The Council also fixes minimum prices
that processors must pay to beet growers for A and B beets (two separate
Most imports of sugar into the European Union are
subject to a tariff, which ensures that imported sugar is more expensive
than domestically produced sugar. An exception is made for sugar
imported from former British and French colonies. These countries
receive their own quotas and are treated in a manner parallel to EU
In reality, the A and B quotas plus preferential
imports always exceed domestic demand. This “C” sugar is not
eligible for price support assistance, but the European Union does offer
export subsidies to enable sugar producers to sell “C” sugar on the
world market. These subsidies, set by tendering with producers, make up
the difference between the world price and the intervention price. C
sugar receives no export refunds.
Export subsidies are paid for by a production levy
on sugar producers. The levy is limited to two percent of the
intervention price for A quota sugar, but it fluctuates with exports up
to 37.5 percent of the intervention price for B quota sugar. Because
production levies cannot be fixed until the end of the marketing year,
producers pay an estimated levy at the beginning of each production
year. If in a particular year total subsidy expenses are not fully
covered by the estimated levies, an additional levy is charged to fully
Structure, Competition, and Profitability within the European
Sugar Processing Industry
Structure of the European sugar processing industry
The E.U. sugar processing industry is
characterized by an oligopolistic structure. In some countries, the
industry is even monopolistic. Ten companies control about 70 percent of
the E.U. sugar market, and just four (Südzucker, Eridania Béghin-Say,
Saint-Louis Sucre/ Eurosucre, British Sugar) control approximately 50
percent of the market. 
The largest companies mostly operate in just one
or two markets:
Although official policy states that processors
of beet sugar may sell A and B sugar freely throughout the Community,
the institutional structure of the regime prevents competition in the
sector. Since national A quotas (set by individual governments) equal
national consumption, there is limited competition at best (B quota),
and manufacturers only have significant market positions in countries
where they have production. There is competition for C sugar sales, but
these only occur outside the E.U. market.
Given this market structure, sugar processors are
able to keep sugar supplies in their own markets artificially tight and
thereby create an upward pressure on prices—pressure that pushes
prices an estimated 10 to 15 percent higher than the already high target
Indeed, the European Union produces five million tons more sugar than is
needed to meet internal demand every year.
In properly functioning markets, this over-production would lead to
downward pressure on prices. In the EU sugar market, however, the
contrary phenomenon occurs, even in areas where supply is 50 percent
greater than demand. The only possible explanation for this phenomenon
is that sugar processors create an artificial shortage of sugar in their
own markets by off-loading excess sugar on the world market, and in
fact, in the past five years, several sugar-processing corporations have
been heavily fined by the Commission for creating cartels designed to
extract high prices from shoppers.
At the beet growers level there is no competition either. Because each farmer’s production allotment and price guarantee is linked to a specific sugar-producing factory, individual farmers have no choice but to deliver their crops to their pre-assigned processors.
With input and output prices fixed and production volumes guaranteed, it follows that gross margins are guaranteed. According to a report produced by the ABN-AMRO bank in November 1995, the theoretical gross margin for sugar manufacturers is 28 percent. However, this measure allocates the sugar beet cost over sugar sales only. It does not take into account by-products from sugar production, such as beet pulp and molasses. The sales from these by-products (usually for animal feed or alcohol) are treated more or less as a credit that boosts the gross margin considerably. In addition, this theoretical model does not take into account the fact that EU sugar prices are in reality well above the intervention price. The study concludes that these two factors “could well lead to more than doubling of actual gross margin over theoretical gross margin.”
2.4 E.U. exports to the world market
As seen above, the profitability of the E.U. sugar processing industry is generated by the high sales volumes and high margins in its protected domestic market (A quota) and the partially protected market (B quota). Exports to the world market (B and C sugar) generate substantially lower prices. These are often about a third of the domestic market price.
Although the CAP was intended to support farmers, it is helping sugar processors make profits that would be unattainable in a competitive market. Because these profits are a drag on the food processing industry, which uses large quantities of sugar, the CAP should be modified.
Sugar under past CAP reforms
The sugar regime has been bypassed by every CAP
reform to date. In 1992, the MacSharry agricultural reforms were
instituted in response to deregulation pressures and budgetary
constraints, but sugar was not affected. The Agenda 2000 reform package
repeated this pattern; dairy, cereals and beef were included, but sugar
Sugar under the Uruguay Round (UR) Agreements
The Uruguay Round Agreement on Agriculture (AoA) disciplined agriculture via three main mechanisms: market access, domestic support and export subsidies. Nonetheless, it left the fundamentals of the sugar regime unchanged.
EU enlargement and the sugar regime
A report published in December 1997 by the
UK-based economic consulting firm NERA (National Economic Research
Associates) argues that the EU’s planned enlargement to the East makes
rapid reform of the sugar regime imperative because the prospect of
extending the current regime to the applicant countries of Central and
Eastern Europe (CEECs) is hindering those countries’ efforts to
liberalize their sugar industries. 
The problem is particularly acute in Poland and
Hungary, which are both major sugar producers.
During the early reform years, states the report, these countries began
dismantling their state-run sugar monopolies. Since they began making
moves toward joining the EU, however, they have been reversing their
The NERA report finds that the CEEC’s
combination of low average incomes and huge unsatisfied demand for goods
and services makes their economies particularly unsuited to the price
fixing provisions of the EU sugar regime. The regime would aggravate
overproduction problems, and the inevitable price increases that
accompany the sugar regime would seriously delay the development and
structural adjustment of the CEEC sugar sector. The report estimates
that bringing the applicant countries into the EU sugar regime will cost
Europe three million Euros.
The essential message of the NERA report is that waiting to reform the sugar regime will only complicate and increase the price of market liberalization in the applicant countries.
 For details on the leading sugar trading nations and largest sugar producers, see Exhibit 17.
 For details on the key features of the EU sugar regime, see Exhibit 26.
 Council Regulations (EEC) 1785/81 and subsequent legislation based thereupon.
 For details on the structure of the EU sugar industry, see Exhibit 14.
 Committee of Industrial Users of Sugar, “Sugar and the Single Market: The Differential in Prices and Availability within the Union,” 1998.
 See Exhibit 15 for details on the European sugar market 1998/1999.
 These include British Sugar, Tate & Lyle and Irish Sugar. In addition, anti-trust regulators are investigating Südzucker and Danisco for abusing their dominant positions to raise the price of sugar.
 ABN-AMRO HOARE GOVETT, “The Reinvestment Dilemma: A Comparison of the European Sugar Manufacturers,” 1995.
 For details on the recent reforms of the CAP, see Exhibit 2.
 For details on the Uruguay Round Agreement on Agriculture, see Exhibit 1.
 The maximum cut for any commodity is 36 percent and the minimum 15 percent.
The EU has a price safeguard on white sugar of Euros 531/ton. At the
current exchange rate (Euro/Dollar=1.133), this price translates
into a white sugar price of $601.92/ton. Below this price (i.e.
always), the EU is able to enact special safeguard measures.
 NERA, “The Economic Costs of Extending the EU Sugar Regime to Central and Eastern European Countries,” 1997.
 After the collapse of Communism, producer and consumer subsidies to the sugar industry in Hungary ceased. In 1991, for the first time, no minimum sugar prices or production quotas were set. See OECD (1994) Review of Agricultural Policies in Hungary.