Brian Gardner's Blog

SUGAR: THE UNFINISHED REFORM

The recently published Court of Auditors critique of the European Union’s reform of the sugar market regime, enlightening in many ways, failed to emphasise the most important lacuna in the Council’s 2005 reform agreement – the failure to deal with the implicit plot against the consumer inherent in the EU’s sugar production quota system. The quota system is a gift to sugar refiners intent on maintaining their prices well above the marginal cost level which should result in the lowest price to the consumer.

Any close study of the workings of the EU sugar market over the last five decades inevitably brings to mind that famous quote from Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise the prices”. Except that in the case of the EU sugar regime, they do not even need to “conspire”, since the European Commission rigs the market for them.

The EU sugar quota system does all those things which the would-be monopolist seek to achieve on their own initiative: domination of both raw material supply and of the market for the finished product, combined with the most important element of any monopolistic situation: maintenance of effective barriers against any new entrants to the industry. The sugar CMO has all these elements. Strictly speaking the EU market is effectively controlled by a slightly lesser breed of market manipulators – the oligopolists. In oligopolistic markets, “independent suppliers (few in numbers and not necessarily acting in collusion) can effectively control the supply, and thus the price, thereby creating a seller’s market”.

The gift from the EU to the sugar monopolies is the quota system. Quotas are allocated on a national basis and cannot be transferred from one country to another. This in itself is bad enough, since it is a complete denial of Single Market principles.(never forget that thanks to articles 38-47 of the Rome Treaty, normal competition rules do not apply to the CAP – watch current dairy policy developments on this one!) But to make matters worse, the beet sugar production quotas are allocated to sugar processors and refiners – not the producers of the raw material. Thus there can be no competing new entry to the industry.

In fact the 2005 reform has intensified this dominance of the EU sugar market by even fewer giant firms who not only control all production in each country, but also control even larger shares of the total market through pan-European mergers. Only ten companies now control three quarters of EU25 beet sugar supply and the same proportion of the supply of sugar to the market. As a result, sugar prices for consumers and sugar users have not fallen in line with the scheduled reductions in support levels set in the reform programme, but remain firmly above the EU reference price and the world market price.

Unless the quota system is rapidly phased out or at least made more transferable this market distortion will continue. EU legislators would do well to bear in mind the thoughts of the master when making future decisions on agriculture policy: “The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”

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