The Hagstrom Report

Agriculture News As It Happens

U.S. sugar industry warned to avoid EU-style reform



STOWE, Vt. — The European Union’s sugar reform has caused such supply shortages and price volatility that the United States should be leery of any proposal that would reduce domestic production and make the country dependent on sugar from developing countries that may not be reliable suppliers, European sugar analysts and executives say.

The European Union sugar reform since 2006 as been “a recipe of disaster,” Stefan Uhlenbrock, a commodity analyst with German firm F.O. Licht, said at the American Sugar Alliance International Sweetener Symposium, a U.S. growers' group meeting here last week.

The EU reform, Ulhenbrock said, reduced production and made the EU dependent on imports while maintaining a “prohibitive” tariff on sugar from some countries and allowing duty-free access from former colonies and least developed countries “that cannot deliver the quantities needed or chose not to do so.”

The EU reform reversed almost 200 years of policies to subsidize the beet sugar industry to ensure a supply of sugar. Cane sugar arrived in Europe during the Middle Ages and went from being a luxury to a staple. When European countries colonized the Caribbean islands, England, France and the Netherlands made those islands centers of sugar production and sugar flowed back to Europe.

A French agronomist discovered in the 1600s that certain beets could produce a syrup and crystals similar to the sugar from cane that was grown in the tropics, but no one cared much about the phenomenon until the early 1800s, when the British cut off French sugar supplies from the Caribbean during the Napoleonic wars.

In 1811, Napoloeon ordered the planting of sugar beets in France and subsidized the construction of processing facilities. The sugar beet industry soon spread to other European countries.

After World War II, European concern about food production led to the development of a sugar regime as part of its Common Agricultural Policy.

Beginning in 1968, the EU guaranteed sugar farmers such a high official or “reference” price that overproduction ensued and the EU subsidized sugar exports. By the 1990s economists, trade officials and economic development advocates charged that the EU sugar regime had led to high consumer prices in Europe and hurt developing countries that could produce cane sugar more efficiently.

In 2006, as one element in a larger CAP reform, the EU reduced its official “reference” price by 36 percent and opened its doors to all sugar from former colonies and from the least developed countries in the world. The reform was undertaken on the theory that there would always be an overproduction of sugar in the world and that developing countries would be thrilled to export to the European countries.

The result has been different. With the reduced production in Europe, increasing demand in Asia and weather and other production problems in some countries, the supply of sugar has been tight and prices have risen. Meanwhile, some of the former colonies and least developed countries have declined to export sugar to Europe, saying that they cannot afford to ship sugar there at the prices offered and can make more money exporting to closer countries.

“The EU experience of a sugar reform was a real shock to the system," said Marie-Christine Ribera, an official with the European Committee of Sugar Manufacturers, in an interview after the meeting.

“In a record time — three years — we had to reduce our output by one third — minus 6 million tons — not to mention the reference price which was also down — minus 36 percent from 631 to 404 euros [per ton] — and the job losses!,” Ribera said.

“One factory out of two literally closed in this period and over the last 10 years we lost 60 percent of our production capacity,” she said. “One thing I would not wish our American friends is to go through such a drastic reform. We were told at that time, we were not competitive enough. But now, in the current context of tight world supply, we are clearly seeing that being, as a result of our drastic reform, a net sugar importer is making us more dependant on extremely volatile and more expensive imports! Our system is proving to be the most reliable to our customers and to consumers, which is in the end, as for the American system, the aim of our policy: ensure stable high quality supply at reasonable prices to consumers.”

“We have opened our borders (duty free quota free) to the sugar of the least developed countries in the world as the EU is willing to help these countries,” Ribera added. “This year these countries have not sent all the sugar they promised they would.”

As a result, Ribera said, the European Commission agreed to the industry’s request to release sugar supplies that were on hand and to increase imports from Brazil.

Domestic prices have risen, encouraging an increase in European production, but this has been a slow development because sugar is usually bought on a year-long contract, a European sugar executive said.

“Domestic prices are catching up and we are happy like in the U.S., but we do know that hard times will come back,” Ribera said. “What we need, as the Americans, is an efficient safety net to manage volumes and ensure a fair market balance. What the current situation — where food security is high on the political agendas— is showing is that we need these tools to balance the market. Free trade is not helping in protecting consumers against extreme prices. It is certainly not the moment to get rid of what works.”

Susanne Langguth of Suedzucker Ag, a European sugar producer based in Germany, said in an interview that “we are looking from the EU perspective quite positively towards the U.S. sugar program.”

“I cannot judge on all aspects but the idea to give priority to national production seems to be the right answer to the growing instability of commodity markets,” she said. “Volatility is controlled best when one is to a great extent independent in the supply. Now Brazil has become such a world power in sugar that everyone notices how much the world market is influenced by them in either direction. This needs to be smoothened by an program that seeks independence to a certain extent.”

One positive development is that the reform has made the remaining EU sugar industry more efficient, Langguth noted, saying that “The EU sugar industry is doing fine, as prices are quite high.”

The EU is expected to review the sugar regime in 2015. The sugar executives who attended the meeting were unwilling to speculate on what action the EU might take at that time.

Analysts have speculated that the European Commission and Parliament, which would decide the policy for the coming years, will not be willing to encourage more production in Europe because that would be an admission that the reform was unwise, but may be willing to reduce tariffs on sugar imported from Brazil and other major producers.