Required Report - public distribution

**Date:** 10/25/2004

**GAIN Report Number:** E34087

E34087

**EU-25**

**Sugar**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Norval Francis

U.S. Mission to the EU

**Prepared by:**

Peter Talks

**Report Highlights:**

EU-25 sugar production for MY 04/05 is estimated at 19.684 MMT.

In July 2004, the Commission proposed to reform the EU sugar regime with
a 2.8 MMT quota cut and price cuts of roughly one third, partially
compensated with direct payments to beet growers. The reform is likely
to be phased in from 2006/07. In September 2004, a WTO Panel ruled that
the EU was in breach of its export subsidy commitments. Both ACP/India
re-exports and over quota production that must be exported (C sugar)
should be counted against the EU\'s subsidy commitments, which currently
they are not.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Brussels USEU \[BE2\]

\[E3\]

Table of Contents

[**Executive Summary 3**](#executive-summary)

[Production 4](#production)

[EU-25 Production 6](#eu-25-production)

[New Member States Production 8](#new-member-states-production)

[Consumption 9](#consumption)

[Trade 9](#trade)

[Policy 10](#policy)

[WTO Panel on EU sugar export subsidies
10](#wto-panel-on-eu-sugar-export-subsidies)

[Reform of the Sugar Regime 11](#reform-of-the-sugar-regime)

[Annex One - Balance Sheets for EU-15, NMS-10 and EU-25
14](#annex-one---balance-sheets-for-eu-15-nms-10-and-eu-25)

**Note**

All figures are given in raw sugar equivalents unless otherwise
mentioned.

This report provides a PSD data and information for the EU-25 for
marketing year (MY) 2004/05. Unofficial estimates for the New Member
States 10 (NMS) and EU-25 are provided for Marketing Years (MY) 02/03 to
03/04 for informational purposes. However, intra-EU-25 trade has not
been netted out of the trade estimates (trade between, for example,
Germany and Poland which would disappear from EU-25 extra-EU trade
estimates) and the footnotes to the EU-25 PSDs should be referred to.

Following EU enlargement on May 1, 2004, FAS has switched to reporting
an EU-25 number, however USEU Brussels will continue in the meanwhile to
provide EU-15, NMS-10 and EU-25 balances for comparison purposes.

USEU Brussels would like to thank FAS/Warsaw for contributions towards
compiling this report.

**Visit our website:** our website
**[www.useu.be/agri/usda.html]{.underline}** provides a broad range of
useful information on EU import rules and agricultural policy and allows
easy access to USEU reports, trade and other practical information.

E-mail: <AgUSEUBrussels@usda.gov>

Related reports from USEU Brussels and other EU Posts:

  --------------- ---------------------------------------------------------------------- ------------------
  **Report No.**  **Title**                                                              **Date Released**

  PL4032          [Poland, Sugar                                                         9/28/2004
                  Update](http://www.fas.usda.gov/gainfiles/200409/146107641.doc)        

  E24066          [EU Sugar                                                              4/8/2004
                  Annual](http://www.fas.usda.gov/gainfiles/200404/146105979.doc)        

  E24032          [EU extends ban on duty free Serbian sugar                             2/24/2004
                  imports](http://www.fas.usda.gov/gainfiles/200402/146105485.doc)       

  E24014          [EU Accession: \'Excess\' sugar stocks to be                           1/23/2004
                  taxed](http://www.fas.usda.gov/gainfiles/200401/146105290.doc)         

  E23237          [ACP Countries Weigh in on EU Sugar                                    12/10/2003
                  Reform](http://www.fas.usda.gov/gainfiles/200312/146085353.doc)        

  E23220          [LDC's Prefer Fixed                                                    11/20/2003
                  Quotas](http://www.fas.usda.gov/gainfiles/200311/146085194.doc)        

  E23194          EU [Sugar                                                              10/15/2003
                  Semi-Annual](http://www.fas.usda.gov/gainfiles/200310/145986395.doc)   
                  Report                                                                 

  E23181          [EU Commission Proposes Reforms for Sugar, Cotton, Olive Oil and       9/24/2003
                  Tobacco](http://www.fas.usda.gov/gainfiles/200309/145986141.pdf)       
  --------------- ---------------------------------------------------------------------- ------------------

These reports can be accessed through our website
[www.useu.be/agri](http://www.useu.be/agri) or through the FAS website
<http://www.fas.usda.gov/scriptsw/attacherep/default.asp>

# Executive Summary

In Marketing Year (MY) 04/05, estimates of the area planted to sugar
beet show a EU-25 wide reduction of 2% to 2.158 million hectares,
compared to MY 03/04. The EU-25 sugar beet yield is estimated to have
risen marginally to 8.97 MT/ ha. (Metric tons per hectare) from 8.86
MT/ha. in 2003/04. EU-25 beet sugar production estimates for 2004/05 are
revised to 19.349 MMT, to give a total EU-25 sugar production (including
sugar produced from beet, cane and molasses) of 19.684 MMT, 119,000 MT
lower than in 2003/04.

Consumption of sugar in the EU-25 is estimated to remain static at
17.635 MMT in 2004/05, barely changed from the two previous campaigns.

Import estimates for 2004/05 for the EU-25 are revised upwards from
2003/04 from 2.065 MMT (EU-15) to 2.370 MMT to take into account the
reestablishment of Serbian sugar exports to the EU, which had been
suspended since May 2003. In October 2004, the European Commission
announced that quotas for sugar exports from Serbia, Albania and Bosnia
expected to total 177,000 MT would be introduced. Additional quotas may
in future be set for Croatia and Macedonia. Assuming a normal carry-over
of stocks at the end of 2004/05, the EU-25 is forecast to export just
4.374 MT of sugar in 2004/05. This assumes C sugar exports of around 1.8
to 2.0 MMT.

In July 2004, the European Commission published proposals for the reform
of the EU's sugar regime. The main thrust of the proposals is for a 2.8
MMT quota cut and a price cut of around one third, partially compensated
by direct payments to beet growers. Formal legislative proposals are
expected in the spring of 2005. It is expected that the new regime will
enter into force in July 2006 when the current regime expires. One of
the most controversial areas is whether quotas can be traded across
Member State boundaries. This could effectively mean the end of sugar
production in the EU's least competitive beet growing areas such as
Greece, Italy and Ireland and Portugal.

In September, a WTO Panel ruled against aspects of the EU's system of
sugar export subsidies. The Panel found that the EU has been in breach
of its WTO export subsidy limitations as it is exporting up to 1.6 MMT
of sugar annually with subsidies, an amount equivalent to its ACP
preferential imports, without counting them against its export subsidy
limits. In addition the Panel found that C sugar exports are effectively
cross subsidized, thus also receiving export subsidies. The EU has
already indicated that it will appeal against the Panel's findings. The
appeal is likely to be completed by the spring of 2005. A likely
timeframe for compliance is difficult to establish at the moment.

These rulings complicate the sugar reform debate: on the one hand they
ensure that the reform is politically easier for the Commission to get
accepted by Member States but the Panel results would suggest that the
proposed reforms need to be deepened or altered to meet the panel's
findings as the EU could continue to be in breach of its WTO export
subsidy commitments post-reform. It is not yet clear how the Commission
will adapt the sugar reform proposals to take into account the WTO Panel
-- while the quota cut brings production closer to EU consumption
levels, thus reducing the need for subsidized exports, the Commission
may have to consider abolishing C sugar.

The medium term implications of sugar reform and the WTO Panel are that
the EU production will decline and exports will be significantly
reduced. Reduced production will clearly lead to some rationalization
within the industry. Commitments to the ACP and Least Developed
Countries (LDC) will be maintained, though at a post reform price of EUR
329/MT (raw cane sugar), the EU becomes a much less attractive market.

# Production

  ------------------- --------------- ------------- ---------- -------------- ---------- -------------- ---------
  **PSD Table**                                                                                         

  **Country**         **European                                                                        
                      Union-15**                                                                        

  **Commodity**       **Centrifugal                                           (1000 MT)                 
                      Sugar**                                                                           

                      **2003**        **Revised**   **2004**   **Estimate**   **2005**   **Forecast**   UOM

                      USDA Official   Post Estimate USDA       Post Estimate  Post       Post Estimate  
                      \[Old\]         \[New\]       Official   \[New\]        Estimate   \[New\]        
                                                    \[Old\]                   \[Old\]                   

  **Market Year                       08/2002                  08/2003                   08/2004        MM/YYYY
  Begin**                                                                                               

  Beginning Stocks    2717            2717          3864       3732           3256       3256           (1000 MT)

  Beet Sugar          18405           18405         16211      16211          16209      16007          (1000 MT)
  Production                                                                                            

  Cane Sugar          266             266           295        295            295        288            (1000 MT)
  Production                                                                                            

  TOTAL Sugar         18671           18671         16506      16506          16504      16295          (1000 MT)
  Production                                                                                            

  Raw Imports         1613            1613          1750       1820           1750       1820           (1000 MT)

  Refined Imp.(Raw    471             423           250        245            250        550            (1000 MT)
  Val)                                                                                                  

  TOTAL Imports       2084            2036          2000       2065           2000       2370           (1000 MT)

  TOTAL SUPPLY        23472           23424         22370      22303          21760      21921          (1000 MT)

  Raw Exports         3               3             3          3              3          3              (1000 MT)

  Refined Exp.(Raw    5278            5278          4700       4613           4700       4171           (1000 MT)
  Val)                                                                                                  

  TOTAL EXPORTS       5281            5281          4703       4616           4703       4174           (1000 MT)

  Human Dom.          14316           14400         14400      14420          14400      14485          (1000 MT)
  Consumption                                                                                           

  Other Disappearance 11              11            11         11             11         11             (1000 MT)

  Total Disappearance 14327           14411         14411      14431          14411      14496          (1000 MT)

  Ending Stocks       3864            3732          3256       3256           2646       3251           (1000 MT)

  TOTAL DISTRIBUTION  23472           23424         22370      22303          21760      21921          (1000 MT)
  ------------------- --------------- ------------- ---------- -------------- ---------- -------------- ---------

Figures in 1,000 MT of raw sugar equivalent

Notes: When converting from white to raw sugar, a conversion factor of
1.087 is used. Sugar produced in French Overseas Departments are
included in production data and excluded from trade data.
Sugar-containing products are excluded from trade data. Therefore,
domestic consumption includes an additional 0.354 MMT to account for net
trade in sugar-containing products (0.54 MMT is used for MYs 02/03, and
04/05. For MY 03/04, the value is 0.281 MMT).

Please see Annex One for unofficial FAS/USEU Centrifugal Sugar and Sugar
Beet PSD estimates for the New Member States-10 and EU-25 for 02/03,
03/04 and 04/05.

  ------------------- --------------- ------------- ---------- -------------- ---------- -------------- ---------
  **PSD Table**                                                                                         

  **Country**         **European                                                                        
                      Union-25**                                                                        

  **Commodity**       **Centrifugal                                           (1000 MT)                 
                      Sugar**                                                                           

                      **2003**        **Revised**   **2004**   **Estimate**   **2005**   **Forecast**   UOM

                      USDA Official   Post Estimate USDA       Post Estimate  Post       Post Estimate  
                      \[Old\]         \[New\]       Official   \[New\]        Estimate   \[New\]        
                                                    \[Old\]                   \[Old\]                   

  **Market Year                       08/2002                  08/2003                   08/2004        MM/YYYY
  Begin**                                                                                               

  Beginning Stocks                                                            4339       4699           (1000 MT)

  Beet Sugar                                                                  19614      19396          (1000 MT)
  Production                                                                                            

  Cane Sugar                                                                  295        288            (1000 MT)
  Production                                                                                            

  TOTAL Sugar                                                                 19909      19684          (1000 MT)
  Production                                                                                            

  Raw Imports                                                                 1757       1820           (1000 MT)

  Refined Imp.(Raw                                                            500        550            (1000 MT)
  Val)                                                                                                  

  TOTAL Imports                                                               2257       2370           (1000 MT)

  TOTAL SUPPLY                                                                26505      26753          (1000 MT)

  Raw Exports                                                                 3          3              (1000 MT)

  Refined Exp.(Raw                                                            5225       4371           (1000 MT)
  Val)                                                                                                  

  TOTAL EXPORTS                                                               5228       4374           (1000 MT)

  Human Dom.                                                                  17600      17635          (1000 MT)
  Consumption                                                                                           

  Other Disappearance                                                         27         27             (1000 MT)

  Total Disappearance                                                         17627      17662          (1000 MT)

  Ending Stocks                                                               3650       4717           (1000 MT)

  TOTAL DISTRIBUTION                                                          26505      26753          (1000 MT)
  ------------------- --------------- ------------- ---------- -------------- ---------- -------------- ---------

# 

# EU-25 Production

Estimates of sugar production in the EU-25 for MY 04/05 are revised down
to 19.396 MMT beet sugar production and a total EU-25 sugar production
(beet, cane and sugar from molasses) of 19.684 MMT (18.108 MMT in white
sugar equivalent). This is due to yield estimates being revised down
from 9.07 MT/ha. (Post's April estimate) to 8.97 MT/ha.

The European Commission has not made any cuts to the 2004/05 sugar
production quotas as their current estimates for the 2004/05 see the EU
just inside it's WTO export subsidy limits.

[Beet Sugar Production in the EU (in 1,000 MT raw value)]{.underline}

  ----------------- ----------------- ----------------- -----------------
                    **2002/03**       **2003/04**       **2004/05**

  Austria           471               394               474

  Belgium           1108              1118              992

  Denmark           561               535               480

  Finland           177               148               151

  France - beet     5106              4313              4108

  Germany           4355              4068              4126

  Greece            322               223               240

  Ireland           215               243               226

  Italy             1532              978               1096

  Netherlands       1112              1166              1098

  Portugal          85                65                69

  Spain - beet      1302              987               1084

  Sweden            470               452               404

  UK                1548              1484              1413

  Total EU-15       18361             16174             15960

                    **2002/03**       **2003/04**       **2004/05**

  Czech R.          574               554               517

  Estonia           0                 0                 0

  Cyprus            0                 0                 0

  Latvia            91                72                76

  Lithuania         150               119               136

  Hungary           378               274               427

  Malta             0                 0                 0

  Poland            2250              2071              2000

  Slovenia          25                22                33

  Slovak R.         200               192               200

  **Total NMS-10**  3559              3304              3389

  **Total EU-25**   21920             19478             19349
  ----------------- ----------------- ----------------- -----------------

Note: In addition to sugar produced from beet, there is some production
of sugar from molasses in both Germany (9,750 MT in 2003/04) and Austria
(23,800 MT in 2003/04). This is accounted for in the centrifugal sugar
PSD where it is added to the Beet Sugar Production line, but is not
reflected in the above table.

**[EU Sugar from beet, crop area and yields]{.underline}**

+-----------+--------+--------+--------+--------+--------+--------+
|           | ###### |        |        | #      |        |        |
|           | # Area |        |        | ###### |        |        |
|           |        |        |        |  Yield |        |        |
|           | (      |        |        |        |        |        |
|           | 1000's |        |        | (MT    |        |        |
|           | hec    |        |        | raw    |        |        |
|           | tares) |        |        | beet   |        |        |
|           |        |        |        | su     |        |        |
|           |        |        |        | gar/he |        |        |
|           |        |        |        | ctare) |        |        |
+-----------+--------+--------+--------+--------+--------+--------+
|           | **200  | **200  | **200  | **200  | **200  | **200  |
|           | 2/03** | 3/04** | 4/05** | 2/03** | 3/04** | 4/05** |
+-----------+--------+--------+--------+--------+--------+--------+
| Austria   | 44     | 43     | 45     | 10.70  | 9.16   | 10.00  |
+-----------+--------+--------+--------+--------+--------+--------+
| Belgium   | 98     | 92     | 91     | 11.30  | 12.02  | 10.90  |
+-----------+--------+--------+--------+--------+--------+--------+
| Denmark   | 55     | 50     | 48     | 9.67   | 10.78  | 10.00  |
+-----------+--------+--------+--------+--------+--------+--------+
| Finland   | 32     | 30     | 29     | 5.53   | 5.01   | 5.21   |
+-----------+--------+--------+--------+--------+--------+--------+
| France    | 409    | 361    | 347    | 12.48  | 11.75  | 11.84  |
+-----------+--------+--------+--------+--------+--------+--------+
| Germany   | 459    | 444    | 438    | 9.49   | 9.16   | 9.42   |
+-----------+--------+--------+--------+--------+--------+--------+
| Greece    | 41.5   | 41     | 33     | 7.75   | 5.37   | 7.26   |
+-----------+--------+--------+--------+--------+--------+--------+
| Ireland   | 31     | 31     | 31     | 6.95   | 7.85   | 7.28   |
+-----------+--------+--------+--------+--------+--------+--------+
| Italy     | 246    | 215    | 180    | 6.23   | 4.55   | 6.09   |
+-----------+--------+--------+--------+--------+--------+--------+
| Ne        | 109    | 106    | 99     | 10.21  | 11.05  | 11.09  |
| therlands |        |        |        |        |        |        |
+-----------+--------+--------+--------+--------+--------+--------+
| Portugal  | 9      | 7      | 8      | 9.42   | 8.72   | 8.62   |
+-----------+--------+--------+--------+--------+--------+--------+
| Spain     | 114    | 100    | 110    | 11.42  | 9.87   | 9.85   |
+-----------+--------+--------+--------+--------+--------+--------+
| Sweden    | 54     | 50     | 48     | 8.70   | 9.04   | 8.42   |
+-----------+--------+--------+--------+--------+--------+--------+
| U.K.      | 148    | 140    | 136    | 10.46  | 10.60  | 10.39  |
+-----------+--------+--------+--------+--------+--------+--------+
| **Total   | 1850   | 1710   | 1643   | 9.93   | 9.46   | 9.71   |
| EU-15**   |        |        |        |        |        |        |
+-----------+--------+--------+--------+--------+--------+--------+
|           | **200  | **200  | **200  | **200  | **200  | **200  |
|           | 2/03** | 3/04** | 4/05** | 2/03** | 3/04** | 4/05** |
+-----------+--------+--------+--------+--------+--------+--------+
| Czech R.  | 78     | 76     | 70     | 7.41   | 7.29   | 7.39   |
+-----------+--------+--------+--------+--------+--------+--------+
| Estonia   | 0      | 0      | 0      | 0.00   | 0.00   | 0      |
+-----------+--------+--------+--------+--------+--------+--------+
| Cyprus    | 0      | 0      | 0      | 0.00   | 0.00   | 0      |
+-----------+--------+--------+--------+--------+--------+--------+
| Latvia    | 16     | 14     | 14     | 5.72   | 5.14   | 5.44   |
+-----------+--------+--------+--------+--------+--------+--------+
| Lithuania | 29     | 26     | 25     | 5.14   | 4.58   | 5.44   |
+-----------+--------+--------+--------+--------+--------+--------+
| Hungary   | 55     | 48     | 67     | 6.87   | 5.71   | 6.38   |
+-----------+--------+--------+--------+--------+--------+--------+
| Malta     | 0      | 0      | 0      | 0      | 0      | 0      |
+-----------+--------+--------+--------+--------+--------+--------+
| Poland    | 301    | 286    | 298    | 7.49   | 7.23   | 6.35   |
+-----------+--------+--------+--------+--------+--------+--------+
| Slovenia  | 4      | 5      | 6      | 5.68   | 4.40   | 5.44   |
+-----------+--------+--------+--------+--------+--------+--------+
| Slovak R. | 31     | 32     | 35     | 6.45   | 6.00   | 5.7    |
+-----------+--------+--------+--------+--------+--------+--------+
| **Total   | 514    | 487    | 515    | 6.93   | 6.78   | 6.58   |
| NMS-10**  |        |        |        |        |        |        |
+-----------+--------+--------+--------+--------+--------+--------+
| **Total   | 2363   | 2197   | 2158   | 9.28   | 8.86   | 8.97   |
| EU-25**   |        |        |        |        |        |        |
+-----------+--------+--------+--------+--------+--------+--------+

Note: Area does not include sugar beet grown for other purposes than for
sugar, for example, alcohol, but this production is included in the
Sugar Beet PSD.

## New Member States Production

For MY 04/05, sugar output in the New Member States is revised
fractionally down to 3.389 MMT from 3.405 MMT estimated in April. This
is around 175,000 MT higher than the combined A and B quotas for the
NMS-10. Most of this over quota production is in Poland -- with
production estimated in 074/05 at 2.0 MMT compared to a quota level of
1.817 MMT. As a consequence, exports of C sugar are forecast to be
200,000 MT, although this sugar could be carried over[^1]. Subsidized
exports are included in the EU-15 balance sheet for 04/05.

  ----------------------------------- ------------ ----------- -----------
                                      **NMS-10**               

                                      02/03        03/04       04/05

  Beginning Stocks                    1527         1501        1443

  Beet Sugar Production               3559         3305        3389

  Cane Sugar Production               0            0           0

  TOTAL Sugar Production              3558         3305        3389

  Raw Imports                         7            7           0

  Refined Imp.(Raw Val)               305          339         0

  TOTAL Imports                       312          346         0

  TOTAL SUPPLY                        5397         5152        4832

  Raw Exports                         70           10          0

  Refined Exp.(Raw Val)               560          460         200

  TOTAL EXPORTS                       630          470         200

  Human Dom. Consumption              3250         3223        3150

  Other Disappearance                 16           16          16

  Total Disappearance                 3266         3239        3166

  Ending Stocks                       1501         1443        1466

  TOTAL DISTRIBUTION                  5397         5152        4832
  ----------------------------------- ------------ ----------- -----------

Source: FAS/USEU and FAS/NMS Posts estimates.

Note: NMS trade includes trade between different acceding EU countries.

# Consumption

Consumption of sugar in the EU-25 is estimated to remain static at
17.662 MMT in 2004/05, barely changed from 17.670 MMT and 17.678 MMT in
the two previous campaigns. The EU-15 domestic sugar consumption
estimates have risen from 14.400 MMT in 2002/03 to 14.485 MMT in 2004/05
due to higher net exports of sugar containing products, which are
included in domestic consumption[^2]. This is offset by an expected
marginal reduction in sugar consumption in the NMS-10 due to higher
sugar prices following their accession to the EU in May 2004.

# Trade

In October 2004, the [European
Commission[^3]](http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/1309&format=HTML&aged=0&language=en&guiLanguage=en)
announced that it would be introducing quotas for sugar imports from
Serbia, Bosnia and Albania. Sources in Brussels indicate that the quota
levels will be 150,000 MT for Serbia, 12,000 MT for Bosnia Herzegovina
and 1,000 MT for Albania. No further details on implementation and
timing have currently been published. It is also expected that quotas
for sugar exports from Croatia and Macedonia to the EU will be created.
However, at the moment no indication as to the size of these Tariff Rate
Quotas (TRQs) has been circulated. If the Commission propose quotas that
are comparable to total sugar production in these countries, they may
face opposition from Member State governments in the Council. It is
likely that the Member States would prefer to see TRQs granted that are
similar in size to the net export capacity of these countries.

EU-25 imports of refined sugar have been revised upwards from 250,000 MT
to 550,000 MT on the assumption that these TRQs will be opened during MY
04/05. European Commission working balance sheets for MY 2004/05 assume
imports of 500,000 MT (white sugar equivalents) from the Western Balkans
region.

Based on Commission estimates of the EU sugar balance sheet for 04/05,
the EU would need to export 1.078 MMT of sugar with subsidies (white
sugar equivalents)[^4]. With the export subsidy level in September being
EUR 458/MT, if this level of sugar is exported with subsidies, then the
EU will be very close to its export subsidy value limits of EUR
499.1m[^5]. If either the world price should drift downwards or the Euro
continues to strengthen against the US Dollar, then the Commission may
need to revise whether they would need make any quota cuts.

Following EU enlargement, the 10 New Member States (NMS) now have the
same tariff regime as the rest of the EU. No significant changes were
made to the EU's system of preferential imports due to enlargement,
therefore when comparing the current EU-25's level of imports against
previous years, figures from the EU-15 should be used.

# Policy

## WTO Panel on EU sugar export subsidies

In September, a [WTO
Panel](http://www.wto.org/english/tratop_e/dispu_e/265r_e.pdf) requested
by Brazil, Australia and Thailand concerning EU export subsidies for
sugar found against the EU[^6]. The Panel focused on two issues --
ACP/India re-exports and C sugar. The WTO Panel found that the 1.6 MMT
of ACP sugar that the EU imports per year and exports a corresponding
level with subsidies should be counted against its export subsidy
commitments. On C sugar, the Panel found that this benefits from a cross
subsidization from A and B quota sugar, so that it is effectively a form
of export subsidy. This argument draws on the precedent created by the
WTO Canada Dairy case.

The European Commission has already announced its intention to appeal
against the panel's findings. It is likely that the appeal will be
completed by the Spring of 2005. The Panel does not set out how the EU
should bring itself into compliance with WTO rules. This remains to
either be negotiated with the complainants or could require a WTO
compliance panel.

The one aspect of the Panel which did not go against the EU's interests
was that no ruling was made as to whether the EU was in breach of the
Subsidies and Countervailing Measures (SCM) Agreement. If the Panel had
found the EU to be in breach of this, then it would have required the EU
to bring itself into compliance in a short timeframe.

Under the current sugar regime, all EU sugar exports would be counted
against the EU's WTO export subsidy volume limitations of 1.273 MMT
(white sugar equivalent). However, the EU currently exports up to 1.6
MMT of ACP/India equivalent sugar, up to 1.2 MMT of sugar with export
subsidies and 2 to 3 MMT of C sugar, totaling 4.8 MMT to 5.8 MMT.
Clearly, the EU will have to reduce significantly reduce the quantities
of sugar it exports to bring itself into line with its WTO commitments.

EU Agricultural Commissioner Franz Fischler
[stated](http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/915&format=HTML&aged=0&language=EN&guiLanguage=en):
"We are dissatisfied with this ruling and will appeal it. But the EU's
appeal will not prevent the EU to plough on with a radical overhaul of
its sugar regime. This reform is necessary for internal reasons. It will
make the EU sugar sector more competitive and trade friendly."[^7]

## Reform of the Sugar Regime

In July, 2004, the European Commission published
[proposals](http://europa.eu.int/comm/agriculture/capreform/sugarprop_en.pdf)
for the reform of the EU's sugar regime[^8]. The proposals call for
price and quota cuts, with beet growers partially compensated for lower
beet prices with direct payments. Key aspects are as follows:

**Timing**

> Formal legislative proposals are expected to be tabled towards the end
> of Spring 2005 once the WTO sugar panel appeal has been finalized. The
> July proposals call for a three year reform phase-in starting in MY
> 2005/06. However, this is likely to be pushed back to 2006/07, which
> coincides with when the current sugar regime expires in June 2006. The
> three year phase is felt by some operators to be too rapid, so
> pressure may build to prolong the phase in over perhaps five years.
> However, with imports from EBA countries due to be fully liberalized
> in 2008/09, the Commission is likely to try and resist any calls for
> extending the phase in period[^9].

**Price Cuts**

> The current intervention price will be replaced with a reference
> price[^10]. Currently the intervention price is EUR 631.90/MT for
> white sugar and EUR 523.70/MT for raw sugar. The new reference price
> will be EUR 421 for white sugar by the end of the reform process. The
> cut is calculated by the Commission as a 36% price cut based on the
> current market price of EUR 725 minus sugar levies of EUR 54/MT.

**Quota Cuts**

> The Commission has proposed quota cuts of 2.8 MMT (white sugar
> equivalent). A and B quotas will be merged and the reductions applied
> on a pro-rata basis. This would reduce the EU-25 A and B quotas from
> 17.4 MMT to 14.6 MMT. In addition, around 400,000 MT of sugar
> currently used in the chemical and pharmaceutical industries will be
> removed from the sugar regime.

**Compensation**

> Beet growers will be offered direct payments equivalent to around 60%
> of the beet price reductions they will face. The average level of
> direct payment will be EUR 555 in the EU-25, with the EU-15
> compensation level averaging EUR 585, and EUR 457 for the New Member
> States[^11]. The total cost of these direct payments will eventually
> be EUR 1.34 bn for the EU-25. The compensation is likely to be added
> to the Single Farm Payment (SFP) direct payments introduced with the
> 2003 CAP Reform. However, it is not clear whether Member States will
> be able to maintain part of this beet compensation coupled to beet
> production. In addition, in countries where the SFP will eventually
> paid at an equal rate for all types of production, then beet farmers
> could potentially lose out as beet compensation per hectare is higher
> than the average SFP.

**Quota Transfer**

> One of the most controversial aspects of the reform is to enable the
> cross border trading of sugar quotas. If quota can be transferred from
> the least competitive regions of Europe such as Greece and Finland to
> the lowest cost producers such as France and Germany, then several
> Member States would effectively cease to produce sugar. At the moment
> no details have been set out as to how this would operate, so it is
> difficult to make an assessment of the impact of this proposal. In
> addition, the issue of whether quotas are owned by processors or beet
> growers may need some further clarification.

**2008 Review**

> There is a proposal to review the levels of prices and quotas in 2008.
> While it is standard procedure for reforms to have review clauses, it
> also gives the Commission the possibility to continue the reform in
> several years.

**International Aspects**

> The proposals maintain the commitments to ACP and LDC countries,
> though the guaranteed minimum price for raw sugar will eventually be
> reduced to EUR 329/MT. At this price, the EU will be a much less
> attractive market. It is doubtful whether may of the ACP countries
> could export sugar to the EU at this price without reforming their
> sugar sectors. The reduced EU sugar price means that these countries
> will lose significant benefits from their current concessions. The ACP
> countries are currently actively lobbying the EU. The EU is unlikely
> to compensate the ACP producers directly, though there may be some
> form of development aid channeled to help restructuring and
> diversification in the ACPs.
>
> The EBA countries[^12] have asked that the current raw sugar quota be
> maintained until 2015/16 and that a second TRQ be opened in 2004/05
> for 466,033 MT, rising by 15% per year to reach a maximum of 1,425,033
> by 2012/13. This would replace the EU's commitment to fully liberalize
> imports from EBA by 2008/09.

**Industry Aspects**

> For beet processing factories which will close within the first five
> years of the reform, EUR 250/MT of sugar quota will be provided
> through joint financing between the EU and Member States. Their quota
> would then be cancelled. This is to fund the costs of redeploying the
> workforce and restoring the 'good environmental condition' of the
> factory site. Processing industry sources have criticized this figure
> as being way below actual costs that could be incurred.

**Isoglucose**

> Isoglucose, i.e. High Fructose Corn Sweetener (HFCS), quotas would be
> allowed to increase from the current level of 500,000 tons by 100,000
> tons for three consecutive years. While sugar quotas are maintained,
> the EU will likely continue to limit Isoglucose production,
> particularly as if this sector were to be liberalized it would provide
> significant competition to the sugar sector.

**Budget costs**

> The reform package will have to be more or less budget neutral, which
> means that the only money available is that already spent on the sugar
> regime, currently EUR 1.7 bn.

**Sugar Expenditure in the EU Budget, 2004 Appropriations, Euro
Millions**

  -------------------------------------------------- --------------------
  Export refunds for sugar and isoglucose            1,285m

  Production refunds on sugar used in the chemical   194m
  industry                                           

  Refunds on non-Annex 1 Products (sugar)            183m

  Measures to aid the disposal of raw sugar          18m

  Adjustment aid for the refinery industry           41m

  **Total**                                          **1,721m**
  -------------------------------------------------- --------------------

> For the 2005 budget, EUR 1,815 m has been allocated to sugar, an
> increase of 5.5% (EUR 94m) over 2004. The increase is linked to
> enlargement and higher expected export subsidies.

**Commission estimates of the impact of the sugar reform, EU-25**

  -------------------------- ---------- ----------- ----------- ----------- -----------
                             **Base**   **05/06**   **06/07**   **07/08**   **08/09**

  **Prices, EUR**                                                           

  Cumulated price cut                   20%         20%         33%         33%

  Reference Price            631.9      506         506         421         421

  **Quantities, MMT**                                                       

  Consumption                16.3       16.1        16.1        16.1        16.1

  Quota                      17.4       16.1        15.6        15.1        14.6

  EU production under quota  17.3       16.0        15.5        15.0        14.5

  **Total Imports**          1.9        1.9         1.9         2.0         2.4

  ACP/India                  1.3        1.3         1.3         1.3         1.3

  EBA/SPS                    0.2        0.2         0.2         0.3         0.7

  MFN                        0.1        0.1         0.1         0.1         0.1

  Balkans                    0.3        0.3         0.3         0.3         0.3

  **Exports**                2.9        1.8         1.3         0.9         0.8

  Non Annex 1                0.4        0.4         0.4         0.4         0.4

  With Subsidies             2.5        1.4         0.9         0.5         0.4
  -------------------------- ---------- ----------- ----------- ----------- -----------

Source: European Commission

Note: All quantities are in white sugar equivalents. C sugar is not
represented in the above balance sheet, which only represents in quota
production. In recent years, C sugar production in the EU-15 has been
around 2 to 3 MMT, which is then exported without subsidies. The above
estimates are based on assumptions that the Doha Round will lead to
similar tariff and export subsidy reductions to the Uruguay Round -- 20%
tariff cuts and 36% reduction in export subsidy expenditure. Non-Annex
One products are processed food products, so this accounts for sugar
exported in, for example, biscuits.

# Annex One - Balance Sheets for EU-15, NMS-10 and EU-25

**Centrifugal Sugar Balance Sheets for EU-15, NMS-10 and EU-25**

  --------------- ----------- ------- ------- ------------ ------- ------- ----------- ------- -------
                  **EU-15**                   **NMS-10**                   **EU-25**           

                  02/03       03/04   04/05   02/03        03/04   04/05   02/03       03/04   04/05

  Beginning       2717        3732    3256    1527         1501    1443    4244        5233    4699
  Stocks                                                                                       

  Beet Sugar      18405       16211   16007   3559         3305    3389    21964       19516   19396
  Production                                                                                   

  Cane Sugar      266         295     288     0            0       0       266         295     288
  Production                                                                                   

  TOTAL Sugar     18671       16506   16295   3558         3305    3389    22230       19811   19684
  Product'n                                                                                    

  Raw Imports     1613        1820    1820    7            7       0       1620        1827    1820

  Refined         423         245     550     305          339     0       728         584     550
  Imp.(Raw Val)                                                                                

  TOTAL Imports   2036        2065    2370    312          346     0       2348        2411    2370

  TOTAL SUPPLY    23424       22303   21921   5397         5152    4832    28822       27455   26753

  Raw Exports     3           3       3       70           10      0       73          13      3

  Refined         5278        4613    4171    560          460     200     5838        5073    4371
  Exp.(Raw Val)                                                                                

  TOTAL EXPORTS   5281        4616    4174    630          470     200     5911        5086    4374

  Human Dom.      14400       14420   14485   3250         3223    3150    17650       17643   17635
  Cons'n                                                                                       

  Other           11          11      11      16           16      16      27          27      27
  Disappearance                                                                                

  Total           14411       14431   14496   3266         3239    3166    17678       17670   17662
  Disappearance                                                                                

  Ending Stocks   3732        3256    3251    1501         1443    1466    5233        4699    4717

  TOTAL           23424       22303   21921   5397         5152    4832    28822       27455   26753
  DISTRIBUTION                                                                                 
  --------------- ----------- ------- ------- ------------ ------- ------- ----------- ------- -------

Note: For 2002/03 and 2003/04, NMS trade includes trade among different
acceding EU countries, as well as trade between the EU-15 and the NMS
for the EU-25. For 2004/05, trade between the EU-25 and the rest of the
world has been allocated to the EU-15, apart from 200,000 MT exports
from the NMS-10 equivalent to the predicted level of B and C sugar
production in the NMS-10. It is also assumed that all EU-15 and NMS-10
occurs with third countries, i.e., there is no intra-EU trade recorded
in the above estimates.

**Sugar Beet Balance Sheets for EU-15, NMS-10 and EU-25**

  --------------- ----------- -------- -------- ------------ ------- ------- ----------- -------- --------
                  **EU-15**                     **NMS-10**                   **EU-25**            

                  02/03       03/04    04/05    02/03        03/04   04/05   02/03       03/04    04/05

  Area Planted    1900        1781     1668     514          494     499     2413        2275     2167

  Area Harvested  1900        1781     1668     514          494     499     2413        2275     2167

  Production      117681      100972   102437   22954        19751   21937   140635      120723   124374

  TOTAL SUPPLY    117681      100972   102437   22954        19751   21937   140635      120723   124374

  Utilization for 114297      96974    98567    22954        19751   21937   137251      116725   120504
  Sugar                                                                                           

  Utilizatn for   3385        3998     3869     0            0       0       3385        3998     3869
  Alcohol                                                                                         

  TOTAL           117681      100972   102437   22954        19751   21937   140635      120723   124374
  UTILIZATION                                                                                     
  --------------- ----------- -------- -------- ------------ ------- ------- ----------- -------- --------

Source: FAS/USEU Estimates

[^1]: Producers can 'carry-over' up to 20% of the amount of their A
    quota from one MY to the next. In practice, this means that C sugar
    (sugar exported outside of the EU without subsidies) becomes the
    first slice of A quota sugar for the following MY. This obviously
    reduces the amount of A quota available and would be expected to
    lead to reduced production in that MY.

[^2]: Sugar consumption, excluding net exports of sugar containing
    products, continues to be stable in the EU-15 at around 14.0 to 14.1
    MMT.

[^3]: http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/1309&format=HTML&aged=0&language=en&guiLanguage=en

[^4]: This does not include the 1.6 MMT of ACP/India equivalent sugar
    that the EU exports with subsidies.

[^5]: 1,077,807 MT of expected exports multiplied by a subsidy rate of
    EUR 458 equals EUR 493.6m.

[^6]: http://www.wto.org/english/tratop_e/dispu_e/265r_e.pdf

[^7]: <http://europa.eu.int/rapid/pressReleasesAction.do?reference=IP/04/915&format=HTML&aged=0&language=EN&guiLanguage=en>

[^8]: http://europa.eu.int/comm/agriculture/capreform/sugarprop_en.pdf

[^9]: See GAIN Report E23149 for more details on the EBA scheme.
    http://www.fas.usda.gov/gainfiles/200308/145985702.pdf

[^10]: Intervention purchases (The Commission buying up sugar at a set
    price) has never really been used, so removing this possibility
    reflects current practice. An as yet unspecified private storage
    scheme could be set up to replace intervention.

[^11]: Source: European Commission. These calculations assume that
    compensation is paid on all sugar beet production, including C
    sugar.

[^12]: EBA -- or Everything but Arms -- is a package to provide tariff
    free access to EU markets for all goods, except armaments. The
    beneficiaries are the 48 Least Developed Countries, generally the
    poorest, small (under 75 million population) countries who are
    dependant on no more than one commodity for the bulk of their
    exports.