SPECIAL REPORT N° 4/91 on the operation of the common organization of the market in the sugar and isoglucose sector together with the replies of the Commission (91/C 290/01)

(Observations pursuant to Article 206a (4) of the EEC Treaty) The first part of this report consists of a presentation of the common organization of the sugar market, whereas the second, third and fourth parts analyse the consequences of the way the organization that has been thus created operates.

Those readers who have not the time to read all of the report will find its conclusions set out in the fifth part.

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1. Presentation of the common organization of the market

Sugar and isoglucose in the Community: agricultural and industrial aspects

General matters

1.1. Sugar is traditionally a basic foodstuff. It corresponds to one of the four essential tastes, the others being acid, bitter and salty. Its widespread use dates back to the early 19th century, when the sugar beet was discovered and the industrial development of cane-sugar refining began. Whilst sugar consumption has reached saturation level in the developed countries, this does not apply to the poor countries where consumption is directly dependent on income and the price of sugar. The world average per capita consumption amounts at present to about 20 kg of white sugar a year. Total world consumption rose by more than 60 % between 1968 and 1988 and this upward trend is continuing, mainly because of increasing use in the developing countries. Average per capita consumption in the European Community is about 34 kg of white sugar a year, with the national averages ranging from 25 kg (in Spain) to 40 kg (in the United Kingdom). Overall, per capita sugar consumption is more or less stable in the Community, whereas more sugar substitute products are starting to penetrate the market. It is important to note that only some of the sugar consumed is sugar as such, the majority being incorporated into foodstuffs. The ratio between these two amounts varies according to the country but for the Community as a whole it is around one third for direct use and two thirds for consumption in the form of processed products. It is above all in the latter category that sugar substitutes are being used.

Agricultural aspect

1.2. Sugar (sucrose) is, chemically speaking, a disaccharide which is made up of equal parts of fructose and glucose and can be obtained from sugar beet in temperate regions and from sugar cane in tropical areas. Isoglucose is a liquid with the same chemical properties which can be manufactured from (preferably) maize starch or from wheat or even potatoes. Most of the sugar production in Europe is based on the sugar-beet crop, introduced by Napoleon at the time of the Continental System. Within a very short space of time, sugar-beet factories sprang up all over Europe. Since then, the world sugar economy has been characterized by the cane/beet duality, depending on the climate of the area, thus making sugar a truly international product. Today, about 63 % of world sugar production comes from sugar cane and 37 % from beet. Sugar beet is a plant which is sown in spring and harvested in autumn. The cane crop, by contrast, has a seven-year cycle. The yields from both crops are strongly influenced by climatic and weather conditions. Cane plantations are exposed to tropical storms and may be in the path of hurricanes. The yields of a beet crop, in terms of both the amount harvested per hectare and the sucrose content, depend firstly on the climatic area - the north of Europe giving better yields than the south - and secondly on the weather conditions. The latter factor may result in good or bad harvests, marked by a difference in yield of between 15 % and 20 %. The yield of the beet crop is steadily improving as a result of new developments in biotechnology and mechanization of farms. In the field of biotechnology, the introduction of monogerm seed (eliminating the laborious job of thinning-out) and the development of varieties which are resistant to some diseases have helped to improve yields considerably: over the last 20 years, the average increase in yield in the Community (expressed in terms of white sugar per hectare) has been in the order of 1,2 % per year.

Industrial aspect: a heavy industry

1.3. One of the main features of sugar is that the basic agricultural production has of necessity to be combined with an industrial process. Neither sugar beet nor sugar cane can be consumed in its natural state; both have to be converted into sugar by means of a relatively complex extraction and refining process, which requires specialized, technologically advanced, heavy-investment plant. A modern sugar-beet mill, processing about 10 000 tonnes of beet a day, represents an investment of some 150 Mio ECU. It is a heavy industry in the true sense of the word, i.e. complexes of large-scale technical plant. Furthermore, the raw material, beet, poses an economic problem relating to transport costs, because of the transportation of unnecessary weight (between 85 % and 90 % of low-value residue). Consequently, the sugar-beet factories have to be located near to the beet fields, at a distance of no more than 50 km or at the very most 100 km.

1.4. The final product - crystals of white sugar - resulting from the process of extracting and refining the beets is indistinguishable both physically and chemically from that obtained from sugar cane. Brown or unrefined cane sugar is an intermediate product, based on cane, which has undergone an initial refining on the spot so that it can be stored and which is then in most cases transported to the regions where it is to be consumed, for final refining. The reason for this division of the labour is threefold: raw sugar is relatively easy to transport in bulk; the cost of the plant needed for the final refining is high and special skills are required to operate it; and, traditionally, there has been a desire to exercise economic control. The refineries which process the raw cane sugar thus have a considerable economic advantage over sugar-beet factories insofar as they can run continuously whereas sugar-beet mills operate only during a 'season` lasting about three months per year. Brownish-coloured sugars for consumption, such as soft brown sugar or brown candy sugar, can be obtained either from beet or cane: they are refinery products which differ from white sugar only by their type of crystals and by the fact that they contain a small quantity of molasses (a syrupy, impure by-product).

1.5. The fact that an industrial complex forms an integral part of this basically agricultural sector of production has a number of important consequences:

a)firstly, the sugar factories represent a relatively small number of compulsory transition points. At present, the Community has no more than 200 sugar mills, belonging to fewer than 100 companies. This is a great advantage in the field of both physical and financial checks and consequently makes it easier to implement effective market-management instruments. But this arrangement means that it is easy for the companies to confer together in order to defend their common interests. This concentration has been increased in recent years by a trend towards mergers;

b)at the same time, technological changes are helping to modernize and enlarge the average size of the production units, thus allowing an increase in the industry's productivity. If to the latter one adds the improvement, mentioned in paragraph 1.2, of the technical agricultural yield, the overall increase in technical productivity in the sugar sector represents on average 1,4 % per year, for the Community countries, over the last 20 years;

c)with regard to isoglucose, the relationship between the industrial and the agricultural aspects is weaker: isoglucose is a product obtained from another product which is already intermediate (starch); it is only one of many other derivatives of starch, all of which are marketed. Moreover, the economic problem which is a feature of sugar beet - that of having to transport unnecessary weight (see paragraph 1.3) - does not apply to the same extent, with the result that there are far fewer restrictions applying to the geographic location of the factory in relation to the agricultural production land;

d)a further consequence of the role played by a high-investment industrial complex is the need for management planning: the level of production cannot be changed from one year to the next without creating economic problems for the firms. If production needs to be altered, these changes have to be made known several years in advance so that the companies can take account of them in their modernization and restructuring plans. A fitting comparison is that of sailing a super-tanker: in order to change course, manoeuvres have to be started well in advance;

e)the size of the investments also means that the sugar refineries are part of large companies, some of which are highly diversified, in the agri-foodstuffs sector. Especially in the last few years, these companies have increasingly been the target of transnational mergers.

Production and consumption in the Community

1.6. During the Eighties, total sugar consumption in the Community remained relatively stable: around 9,5 Mio t of white sugar prior to the accession of Spain and Portugal and about 10,9 mio t afterwards. Present production stands at nearly 14 Mio t, plus about 1,7 Mio t of imports. Given domestic consumption needs, these quantities result in exports of some 4,8 Mio t per year. Table 1 shows the sugar supply balances for the Community since 1981.

The common market in sugar and isoglucose

Setting-up of a common organization of the market

1.7. When the common organization of the market (COM) in sugar was set up in 1968, it replaced the national sugar policies of the Member States of that time. In order to do that, a major alignment was needed to bridge the differences between these national policies. Traditionally, in all the sugar-producing countries, this sector has always been highly regulated and protected by the national authorities. Since the natural conditions for beet production vary from one country to another, the regulating arrangements and, in particular, the institutional price levels differed considerably between the Member States concerned in 1968. For example, in Italy and the FR of Germany production was guaranteed at a price level that was much higher than for the production of other countries, the disparity being in some cases as much as 50 %.

Periodic reviews

1.8. The basic regulations governing the sugar market are subject to periodic reviews, in theory every five years, except for the first Regulation, which was to be reviewed after seven years. The second Regulation, of 19 December 1974, was to be renewed after five years, i.e. with effect from 1 July 1980. Because of the political difficulties which arose during the negotiations, the third sugar scheme was not able to start in 1980 and, after the 1975-1980 scheme had been extended for one year, came into force on 1 July 1981. The following review was carried out as planned in 1986, with the result that the next renewal of the basic regulations is due on 1 July 1991. On 6 August 1990, however, the Commission proposed for the most part to extend the 1986-1991 arrangements by two years. The Council accepted the principle of such an extension and adopted, for this purpose, Regulation N° 305/91 of 4 February 1991.

Accessions

1.9. The reviews of the sugar regulations have more or less coincided with the accession of new Member States to the Community, a fact which has not been without consequence. The second Regulation, dating from 1975, was heavily influenced by the accession in 1973 of Denmark, Ireland and above all the United Kingdom. The 1981 review coincided with the Greek accession and that of 1986 with the accession of Spain and Portugal. Similarly, the preparations for the scheme's renewal, planned for July 1991, took place just at the time when the territory of the former German Democratic Republic was being integrated into the area of application of the common organization of the market in sugar. In all these cases, the sugar sector has assumed considerable significance in the political negotiations and the organization of the market reflects the consequences of this.

Isoglucose

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1.10. During the Seventies, isoglucose was introduced onto the market as a substitute sweetening agent, first in the United States and Japan and then in Europe. It was once a certain production capacity had been set up in Europe and isoglucose began to compete with sugar that restrictive measures against it were taken, in 1977 and then in 1979. Isoglucose was dissociated from the starch arrangements and incorporated instead in the common organization of the market in sugar. Since then its production has been restricted by the quota system.

The mechanisms by which the system is managed

Production quotas

1.11. From the outset (1968), a main feature of the sugar scheme was the limitation of the guaranteed prices, which made it unique at the time. This limitation takes the form of production quotas. These quotas are allocated in two stages. Firstly, a maximum quota is fixed for each Member State. These are recorded in the basic Regulation governing the COM. Secondly, the Member States allocate quotas to the companies in accordance with rules laid down for this purpose by the Council.

1.12. The maximum quota is made up of a basic or A quota and a specialization quota or B quota. In the first Regulation, that of 1967, the B quota was fixed at 35 % of the A quota. The B quota was intended at the outset to be a specialization quota and therefore its price level was lower, as a result of the charging of levies. This additional production was intended to compensate, where necessary, for a poor harvest in some regions of the Community or, usually, for export. It was supposed, logically, to be produced in the regions where it was economically profitable.

1.13. Quantities produced over and above each company's maximum quota (so-called 'C` sugar) do not receive any Community guarantee and have to be exported entirely at the expense of the company concerned within a period stipulated in the Regulation. This principle is nevertheless made more flexible by the possibility, provided for in the Regulation, of carrying over part of the C sugar to the following marketing year, thus enabling it to be entered in advance against the new year's production. The quantities in question then have to be stored for a period of twelve months. This facility is limited to 20 % of the company's A quota. It is combined with a permanent obligation imposed on sugar producers to keep a minimum stock of 5 % of their annual production of A sugar.

1.14. The production-quota mechanism described above was incorporated into the basic Regulation governing the first sugar scheme as a transitional provision. The first Regulation expressly stated that these transitional provisions were to be repealed on 1 July 1975. The quota system has, however, for the most part been prolonged (in 1975, 1981 and 1986) and still applies today. Isoglucose, since being incorporated into the sugar COM regulations, is part of the same system.

1.15. The basic Regulation provides for yet more flexibility, throughout the duration of the system, insofar as Member States may redistribute part of the sugar and isoglucose quotas amongst the companies in relation to the situation at the beginning of the period. This part, called the 'reserve quantity`, is at present limited to 10 % of the maximum quota.

The prices

1.16. The sugar scheme differs little from most of the other markets, with regard to the system of official prices. It has a target price, an intervention price and a threshold price. A special, fundamental feature, however, is that the price system is applied to the final product, sugar, in such a way that the price of the agricultural raw material, sugar beet, is derived from it. The cornerstones of the present system are as follows:

a)a target price for white sugar: this represents the level of market price considered by the Council to be the most desirable; it is fixed for the standard quality, ex-factory;

b)an intervention price for white sugar: this is 5 % lower than the target price and represents the price at which the intervention agencies have to purchase the sugar brought to them;

c)a derived intervention price for white sugar: in regions of the Community regarded as having a sugar deficit, a slightly higher intervention price is applied in order to take account of the transport costs from the regions having a sugar surplus to those with a deficit. In practice, this means three Member States: Ireland, Italy and the United Kingdom. In Spain and Portugal, a higher price has been applied as a transitional measure following their accession in 1986;

d)a threshold price: this is equal to the target price in surplus areas, plus transport costs, calculated at a flat rate, from the area having the largest surplus (northern France) to the most distant deficit area (southern Italy) and plus a lump sum taking account of the storage levy. This price is used mainly for fixing the levies and refunds referred to in paragraphs 1.17 and 1.18 below;

e)an intervention price for raw sugar: this is derived from the intervention price for white sugar by applying a uniform processing margin and a white/raw yield coefficient of 0,92;

f)a minimum price for beet: this is established on the basis of the intervention price for white sugar, by deducting from that price uniform rates for the processing margin and, where appropriate, for the costs incurred in delivering beets to factories, adding to it receipts from sales of molasses and taking into account a standard yield (130 kg of white sugar for one tonne of standard quality beets, i.e. with a 16 % sugar content). The beet growers and the sugar manufacturers are free to agree a higher price in their trade contracts. Also, instead of fixing a price for A beets and a price for B beets, they may fix a mixed price for the two combined. The Regulation stipulates that agreements within the trade and contracts concluded between buyers and sellers of beet must conform to outline provisions, in particular in respect of conditions governing purchasing, delivery, reception and payment of beets.

These prices are used as a basis for calculating the amounts of the levies, refunds and aid referred to in the following paragraphs. The prices are usually fixed before the beginning of each marketing year, which runs from 1 July to 30 June. The Regulation even lays down that the intervention price must be fixed prior to 1 August of the year preceding the marketing year beginning on 1 July of the following calendar year.

The other aspects

Rules on importation

1.17. Like the other products subject to a common market organization, sugar and isoglucose are protected at the Community frontiers from imports coming from third countries; this protection takes the form of a system of import levies. This levy is calculated as being the difference between on the one hand the threshold price and on the other a c.i.f. price representing the most favourable purchasing price on the world market. In practice, very little sugar is imported into the normal scheme in the Community. The same is not true for molasses, a syrupy residue from the manufacture of sugar, containing 40 % to 50 % of sugar and used mainly for cattle feed. The Community has a molasses deficit of about 3 million tonnes and on these imports a levy is charged. By contrast, there are major exceptions to the normal importing system: a quantity consisting chiefly of raw sugar to be refined in the Community, equivalent to around 1,3 million tonnes of white sugar, is imported every year from a number of ACP countries, without an import levy and at prices similar to the guaranteed Community prices (see the second part and paragraphs 3.21-3.22 of the third part of this report). In addition, a large quantity of raw sugar has been imported each year since 1986 at a reduced tariff rate, in order to guarantee supplies to the Portuguese refineries. This concession was granted in the Accession Treaty and during the 1989/90 marketing year the quantity imported under this arrangement amounted to 281 000 tonnes of white sugar equivalent.

Rules on exportation

1.18. As on the other markets, there are export rules intended to bridge the gap between the guaranteed Community price and the (usually lower) world price by means of export refunds or export levies in the (very rare) event of the world price being higher. For sugar, there are two procedures, designed to meet the needs of the trade: that of weekly invitations to tender (submission of tenders of proposed refund rates for given quantities with the lodging of a deposit in the Member States; decision on the maximum amount taken by the Commission in consultation with the Management Committee) and that of periodic fixing (i.e. a rate fixed by the Commission once or twice a month, with the possibility of adjusting it in between in keeping with changes in the world price). In practice, by far the majority of exports are subject to the weekly invitations to tender. Smooth running of operations is ensured by a system of export licences, issued by the competent authorities of the Member States and accompanied by the lodging of a deposit, to be released on presentation of proof that the goods have in fact been duly exported within the period of validity of the licence. A system of licences is also provided for in the case of C sugar, which, if no export refund can be claimed, must, however, be exported within a period of time laid down in the Regulation.

Food aid

1.19. As in other agricultural sectors, the Community may make white sugar available as food aid. This may be done under special arrangements, whose aim is primarily humanitarian and which are implemented according to rules applicable to all the agricultural sectors. There are no arrangements peculiar to sugar. On average, the Community spends around 2 Mio ECU a year on sugar food aid, although in 1990 and 1991 this amount was rising.

The system of production refunds for the chemical industry

1.20. A measure which is virtually comparable to the export provisions and at any rate serves the same purpose, i.e. the disposal of surpluses, has been implemented to subsidize the use of sugar by the pharmaceutical and chemical industries. This measure, which previously existed in another form, was reintroduced in 1986. Its aim is to put the manufacturers concerned on an equal footing with their competitors outside Europe, who are able to obtain their raw material at world prices; at the same time, within the Community, it aims to make sugar competitive with starch products. The amount of the refund is fixed every quarter and the calculation of the amount used to take account of the price of sugar, the price of maize, production aid granted to starch products and changes in the price of sugar on the world market. Since 1 July 1990 the system has been completely separated from the glucose market and refund rates are now calculated exclusively on the basis of Community and world sugar prices. The administrative implementation of the measure, by the competent authorities of the Member States, is based on a system of issuing refund orders accompanied by the lodging of deposits, which are released once it has been ascertained that the orders have been used properly.

Storage

1.21. The sugar scheme includes, in principle, an intervention mechanism in the form of public storage. Any sugar owner may offer quantities of sugar to an intervention agency designated for this purpose and the agency is obliged to buy it at the intervention price or the derived intervention price, depending on the case. In practice, however, operators use this measure only in very rare cases, since the sugar scheme has a unique compensation system for storage costs, which enables the operators to keep control of the sugar. This compensation system involves paying to sugar stock-holders situated in the circuit of the producing-processing industry and the wholesale trade monthly allowances for storage costs. The latter are financed by levies charged to sugar manufacturers for the quantities produced as part of their maximum quota. These storage allowances are also paid on quantities of C sugar carried over to the following marketing year, during their compulsory 12-month storage period. The amount of the allowance is fixed by the Council for each marketing year, taking into consideration the financial costs, insurance costs and technical storage costs as such. The amount of the levy is established by the Commission, for each marketing year, according to the Management Committee procedure, so that the estimated total sum of the allowances is equal to the estimated total sum of the levies, whilst at the same time eliminating any disparity between the two which may have arisen from the preceding period. Financially speaking and seen over a number of years, it is therefore a closed, balanced circuit.

The COM's financial and budgetary system

Budgetary nomenclature

1.22. In the Community budget, there are specific headings for sugar in both the revenue part and the expenditure part. For 1990 and 1991, the part of the budget devoted to sugar was presented as described in Table 2. To be complete, this table ought to include import levies in the revenue section and export refunds for the sugar content of processed products in the expenditure section, but these items cannot be identified separately in the accounts. It should, moreover, be noted that the remark relating to budget heading 1119, expenditure for 'other intervention`, is incorrect. It mentions denaturing premiums, a measure which has not been used for a long time. What is in fact booked to this heading is aid, in particular aid for refining.

Financing provisions

1.23. After the quota system described in paragraphs 1.10-1.14, the second major original aspect of the scheme, which has been a feature of it since the very outset, is the principle of co-responsibility of producers for financing the costs engendered by disposing of surplus production. Unlike the disposal of C sugar, the costs of which are borne by the individual manufacturers themselves, there is a true sharing of the costs arising from the production of quota sugar destined for export, therefore roughly speaking B sugar. To this end, the Member States charge the sugar manufacturers production levies, the unit amount of which is calculated by dividing the overall cost of disposing of the surplus by the quantities produced, without, however, exceeding a maximum. The amount of the levy varies as a rule from one marketing year to another. It is calculated provisionally for each marketing year and then adjusted in accordance with actual changes in the quantities and costs. The sugar manufacturers bear 40 % of the levies themselves and pass on 60 % to the beet growers by means of the price actually paid for the beets.

1.24. The detailed rules of this system have changed over the years. Initially, only quantities produced over and above the basic Community quota, within the limit of the companies' maximum individual quotas, were concerned, i.e. B sugar. The amount of the levy, in the Regulation governing the 1968-1975 system, was subject to an upper limit of 40 % of the intervention price. The second sugar Regulation brought this ceiling down to 30 %.

1.25. Furthermore, when imports of sugar (whether or not preferential) enter the Community to supply the common market, either on conditions that treat them as equivalent to Community-produced sugar (usually more than 1 300 000 tonnes) or at the reduced tariff rate (almost 300 000 tonnes) or at the normal tariff rate (negligible quantities compared with total market volume), these imports have the effect of increasing by a similar amount the quantities to be exported from the Community, which is already more than self-sufficient in sugar. But these exports are not - rightfully - taken into account when charging the production levies and their costs are therefore borne by the budget.

1.26. The provisions relating to the levies have subsequently changed in accordance with the detailed rules analysed below in paragraph 2.19 onwards.

The audit's objectives and detailed arrangements

The Court's earlier observations

1.27. In the past, the Court has made observations on the sugar market, in particular in its annual reports on the financial years 1985, 1986 and 1988. In its 1985 and 1986 reports, the Court examined the situation with regard to the self-financing by producers of the costs of disposing of surplus production, a mechanism which was provided for in the 1981 sugar Regulation but which was not achieving its objective. The Court pointed out that a considerable deficit had accumulated in this sector and stressed the need for immediate measures to ensure that this deficit was rapidly covered by adequate levies, that new deficits did not arise and that the specific financial situation was shown clearly in the budget and accounts. In its report on the financial year 1988, the Court presented its observations following an examination of, firstly, the procedures implemented by some Member States with regard to the management and checking of export refunds and, secondly, the Commission's expenditure and revenue accounts. On the first subject, the Court found that there were disparities between the systems implemented by the different Member States and that there were shortcomings in Community checks. Furthermore, the Court presented an evaluation of the cost to the Community budget of exports of French or Belgian sugar which pass through Dutch ports and are declared at the Dutch paying agency, thus giving the operator an advantage stemming in particular from exchange rate differences. With regard to the central accounting system, which was examined in particular from the point of view of the self-financing objective, the Court found that the accounting system, in its present form, did not lend itself to an ex post facto check on whether the objective was being met. In order to comply with the request made by the Council in its recommendations on the 1988 discharge and with the Parliament's resolution on this discharge, the latter problem will be dealt with in more detail in this report.

The audit's objectives

1.28. Bearing in mind that the COM is now more than 20 years old and that the fourth scheme is drawing to an end, the Court decided to carry out an audit of the whole of the scheme in order to assess 'whether the financial management has been sound` (in accordance with Article 206a(2) of the EEC Treaty). The purpose of the audit was, more particularly, to examine the economic effectiveness of the organization of this market, with particular reference to the principles set out in Articles 39 and 40 of the Treaty and those concerning the control of surpluses in the agricultural sector, and the related expenditure, which emerged during the 1980s. It drew the conclusions that followed, as far as the Community finances are concerned, from the characteristics thus brought to light. In view of the forthcoming periodic review of the system (in principle planned for 1991 but now, after the decision to grant a two-year extension, postponed until 1993), it is essential in this context to establish what lessons can be learnt, for the purpose of determining the new scheme, from the practice followed in the past and from the present situation which has thus arisen.

Arrangements for the audit

1.29. In order to take stock of the present state of the market and how it actually operates, the Court staff visited all the Community's sugar-producing countries, i.e. all the Member States except Luxembourg. During these visits, they interviewed representatives of all the parties involved, i.e. the beet-sugar manufacturers and cane-sugar refiners, the isoglucose manufacturers, the beet growers, the sugar traders and exporters, the representatives of the agri-foodstuffs industry which uses sugar and/or isoglucose, and of the chemical industry which uses sugar in return for production refunds, the consumers' unions, the national departments responsible for the management of the market at national level and the competent departments of the European Commission. They also consulted representatives from university circles and from international organizations, such as the ISO (International Sugar Organization). Statistical and economic analyses are mainly based on data gathered from the European Commission, the CEFS (European Committee of Sugar Manufacturers), the FIRS (Fonds d'Intervention et de Régularisation du marché du Sucre, the French managing body) and the ISO. Furthermore, the Court commissioned the Institute of Agricultural Economics of the University of Kiel to make an in-depth study of the economic aspects of C sugar.

2. The internal macro-economic consequences of the Community scheme

Background to the quota system

The first sugar scheme (1968-1975)

2.1. With the institution of the first sugar scheme, which entered into force in 1968, a system of production quotas was devised in order both to limit the price guarantees to producers in quantity terms and to demarcate the various production areas. In its introduction to the Regulation of 18 December 1967 the Council stated that during previous years Community production had exceeded consumption on several occasions and that the world market situation was one of large surpluses. It had concluded from that that provision should be made for measures to limit production and promote regional special ization. A limit on production was ensured by laying down basic quantities, determined specifically for each Member State in the Regulation.

2.2. These quantities were based on past production, on the one hand and on negotiations, including the offsetting of the effects of agreements concluded in other sectors, on the other hand. As a result, some countries, in particular Belgium and Italy, were granted quotas that exceeded the mathematical level of their reference production quantities. It was then up to the Member States to establish the following:

a)for each factory or for each undertaking producing sugar on their territory, a basic quota (or A quota), established by applying a formula to calculate the ratio of each factory's or undertaking's average annual production over a reference period to the Member State's total production, as well as to the latter's statutory basic quantity (3). These quotas benefited from the intervention price guarantee;

b)secondly, each Member State was to fix a maximum quota for the factories or the undertakings for which it had fixed a basic quota by applying a coefficient which was initially set at 1,35 and which would consequently be adjusted in the light of the actual trend of production from the point of view of specialization and marketing opportunities.

2.3. Quantities produced by each producer that were in excess of its basic quota but which did not exceed its maximum quota (so-called B quota quantities) were subject to the production levy. This levy was calculated globally, on the basis of the disposal costs of the quantity that was produced in the Community in excess of the guaranteed quantity but within a certain ceiling. Moreover, this levy was supposed to be passed on, in part, to the cane or beet growers. In this way a principle of limited co-responsibility was introduced into the system.

2.4. Any quantities produced beyond the maximum quotas (C sugar) would not benefit from any guarantee, except where a grower wished to carry forward that part of his production which was outside the basic quota to the following marketing year. In that case it would be counted as part of the basic production of that marketing year. This facility was, however, limited in the 1967 Regulation to 10 % of the basic quantity.

2.5. In this first scheme the quantities produced outside the guaranteed quantity were seen as 'specialized production`. This part of production was supposed to be concentrated in those regions where it was possible to produce profitably, taking into account the deduction of the levy from the sales proceeds.

2.6. Given that the basic quantities, and therefore the maximum quantities, were fixed Member State by Member State, they had the effect, besides limiting production, of giving each Member State, and in fact each undertaking in a Member State, the right to produce, at the guaranteed price, at least its basic quantity, which depended on the level of its previous production. This statutory apparatus thus consisted in consolidating the existing situation prior to the creation of the common market organization, and then adding to it a facility for increasing production, the disposal of which was to be financed, at least in part, by the producers of the additional quantities. Throughout the duration of the first scheme the specialized quantity allowed varied between 30 and 45 % of the basic quantity.

2.7. This aspect of the first scheme was intended to be a transitory arrangement which would make it possible, over a seven-year period, to align and harmonize the sugar economies of the founding Member States. Article 22 of the Regulation stipulated expressly that 'the provisions concerning national basic quantities (and) their distribution between factories or undertakings (....) shall be repealed with effect from 1 July 1975`.

2.8. Harmonization was facilitated by a common price level which was clearly advantageous for producers in most of the Member States, and it was accompanied by the authorization, which was also temporary, to grant national aid for cases where this price still posed a problem, i.e. in Italy.

The second sugar regulation and the first enlargement of the Community (1975-1981)

2.9. When the time came, in 1973 and 1974, to prepare the renewal of the scheme, which was planned for 1975, the market situation was quite unusual, in that it was characterized by the coincidence of two significant factors: the enlargement of the Community to include Denmark, Ireland and the United Kingdom and a serious world-wide sugar shortage.

2.10. The accession of the three new Member States not only posed a problem as to the geographical distribution of production and consumption in Europe, but also brought with it the problem of the traditional imports to the United Kingdom of raw cane sugar, mainly from a number of Commonwealth countries. Two-thirds of sugar consumption in the U.K., i.e. approximately 1,8 Mio tonnes, were supplied by British refineries, which processed raw sugar imported largely from former colonies, and companies in this sector wished to continue to do so after accession.

2.11. During the same period there was a sugar shortage. At the end of a succession of marketing years (beginning in 1971), during which world sugar production was lower than consumption, end-of-year stocks were considerably lower than their usual level (approximately 30 % of consumption, which came down to 20 % in 1973/1974). The market reacted with a sharp price increase, which reached five times its normal level in November 1974. The upward trend was given a further twist by the United States' policy of purchasing on the world market. At that time, the USA imported 5 to 6 Mio tonnes of sugar per year and had no intention of reducing consumption merely on account of high prices. As a result, the exporting countries sold to the highest bidders, so that part of the quantity that was to be supplied to the United Kingdom in accordance with the 'Commonwealth Agreement` was not delivered. There ensued a shortage on the European market which had to be made up for at the very high prices then prevailing on the open market.

2.12. The revision of the sugar scheme in 1975 was greatly affected by the supply crisis mentioned in 2.11, which was, in fact, exceptionally severe (see the graph for the world sugar price in Table 9). The experts, however, are well aware that the world market is prone to brief crises at regular intervals. The initial Commission proposal took account of the fact that the Commonwealth imports would be continued in the form of preferential imports in accordance with a protocol established for this purpose within the framework of the Lomé Convention. With the exception of Australia, the former suppliers were authorized to make physical deliveries, in their capacity as ACP countries, of quantities of low-grade sugar to British refineries up to a limit of about 1,3 Mio tonnes of white sugar equivalent per year.

2.13. Moreover, the Commission, in its memorandum of July 1973 and in its proposal of July 1974, respectively, abandoned the idea of scrapping the quota system, which had however been originally intended. It wanted to make use of it in order to bring production under control - in particular, in the context of an international agreement on sugar that was then being negotiated. The memorandum of July 1973 was particularly restrictive: it allowed for an A quota of 8,4 Mio tonnes (equal to internal consumption of 9,8 Mio tonnes minus 1,4 Mio tonnes of import commitments), a B quota equal to 15 % of the A quota and abolition of the right to produce C sugar. In this way the Community would have become a net importer of 600 000 tonnes of sugar. The proposal submitted by the Commission in July 1974 was more favourable to producers. It allowed for an A quota of 8,54 Mio tonnes, a B quota equal to 25 % of the A quota and limits on the production of C sugar only in the event of a surplus on the world market, along with compulsory direction of production to supply domestic needs in the event of a shortage.

2.14. The world market crisis, failure to deliver sugar by certain Commonwealth countries, the effective defence of its interests that was put up by the European sugar industry and over-optimistic estimates of consumer trends by certain experts had the effect of overturning these initial proposals. The new scheme decided upon by the Council was the opposite of the Commission's proposal: an A quota of over 9 Mio tonnes, together with a B quota of 45 %, without any statutory limitation on the quantity of sugar that could be produced outside the quota. The distribution of quotas between the Member States was made on the basis of their production between 1968 and 1973. Considering the large overall increase (+17 %), none of the Member States suffered a net loss. At the same time, the target price, which had just been raised by 12,3 % in 1974 in order to take account of the rise in energy costs, was increased by 15 %, which resulted in an overall increase in the price level of 29 %. Lastly, it was decided that ACP sugar imports would have the benefit of the Community institutional price, delivery expenses being charged to the exporters.

2.15. At the same time as the problem of traditional imports of raw cane sugar into the United Kingdom had been settled by means of the award of preferential Community import quotas to ACP countries, an additional quantity was included in the beet sugar production awarded to Denmark, to ensure that the latter continued to supply, as of tradition, the Norwegian market. Prior to its accession to the Common Market, Denmark in fact supplied Norway with approximately 50 000 t of sugar per year. Since it had been expected that Norway would also join the Common Market, provision was made during the negotiations on accession that Denmark would continue to supply this quantity to Norway. The Danish quota was thus fixed accordingly, which meant, for the Danish sugar industry, that these deliveries, which had always been made at prices that were roughly comparable to world prices, would from then onwards be made at the Community guarantee price. When, following the referendum, Norway did not after all join the Community, the Danish quota was not corrected to reflect this new situation and Danish exports to the non-Member State that Norway had become were able to benefit from export refunds, thus giving the Danish sugar industry an advantage corresponding to the difference between the world price and the guaranteed Community price (see paragraph 3.3) on the 50 000 tonnes in question.

The third sugar regulation and the second enlargement (1981-1986)

2.16. In 1979, the Commission again put forward restrictive proposals with a view to revising the scheme, which was planned for 1980. These proposals fell within the context of the reform of the Common Agricultural Policy, and aimed to reduce surpluses of Community agricultural production. The Commission proposed one final renewal of the quota system, for a period strictly limited to the following five marketing years, and, at the same time a reduction of the maximum quota by 11 %. This represented an amount of production which exceeded consumption by 9 %, not counting the preferential imports, which represented 14 % of consumption. These two figures together indicated a structurally planned surplus of 23 %. At the same time, a redistribution of quotas between Member States was proposed, to be carried out on the basis of their reference production, including a redistribution of B quotas, which would concern approximately 20 % of the A quota for the whole Community, but would vary, depending upon the Member State, between 0 and 25 %. Meanwhile, isoglucose production had also been included in the quota system, but since the maximum quantity guaranteed had been established definitively at the starting level for this industry, as regards the question of financing the disposal of sugar surpluses, it was proposed to place a ceiling on the B sugar production levy at a rate of 40 % of the intervention price. Moreover, it was intended to use 10 % of the quotas initially granted for the purpose of restructuring the market by redistributing this reserve quantity between undertakings (see paragraph 1.15) (this was to be managed by the Commission), to abolish the quantitative limit on the carry-over of C sugar to the following marketing year and to allow the quantities carried over the benefit of the storage allowance, to authorize the granting of national subsidies in Italy and France (for the ODCT) and finally to abolish the practice of regionalized prices for areas in deficit.

2.17. The above-mentioned proposals provoked so heated a debate that it was not possible to introduce the new scheme in 1980: all that could be done, initially, was to extend the arrangements in force under the existing scheme. Subsequently, discussions again coincided with a shortage, together with high prices on the world market, with the result that between April 1980 and March 1981 the Community was able to sell its sugar surpluses at higher prices than the official Community price, thereby receiving export levies, which compensated for a part of the former disposal expenditure.

2.18. This being the situation, the Council finally adopted a new Regulation in April 1981. The latter also covered Greece, a new Member State, which was granted a maximum quota equivalent to its own consumption, which also corresponded roughly to the level of its production in previous years.

2.19. In general, the new regulation provided for a consolidation of the A quotas and a redistribution of the B quotas, implying increases and reductions at national level but bringing the average down to 23,5 % of the basic quota compared with the previous average of 27,5 %. The only exception of note was Italy, which not only retained its existing maximum quota but also had the benefit of the conversion of not less than 90 000 tonnes of its B quota into an A quota. Otherwise, the new B quotas were calculated on the basis of the actual production of B sugar, with a floor equal to 10 % of the A quota. Total B quotas were reduced by 12 % and the overall maximum quota by 1,8 %. The main innovation of the 1981 Regulation was the introduction of the principle that producers should bear the full cost of the disposal of their excess production. To this end, the production levy was extended to include A sugar, with a percentage of 2 %, and the 30 % B levy already existing was increased by this 2 %, plus a supplementary 7,5 % as from 1982/1985, making a total of 39,5 %. In addition, provision was made for it no longer to be compulsory to store C sugar, and for the national aid granted to Italy to be differentiated by region and completed by an authorization to grant aid to alleviate the financial costs of storage. A reserve quantity was introduced into the legislation, but it was not conceived of as a Community redistribution instrument: the 10 % was to be distributed by each of the Member States with, moreover, the possibility of converting sugar quotas into isoglucose quotas, or vice-versa.

2.20. All in all, the Council rejected the Commission's restrictive proposals three times. On the other hand, the principle of full co-responsibility was indeed introduced in the Regulation, by means of levies to be collected from the producers, but the latter were passed on to the institutional price and thus ultimately borne by the consumers.

The fourth sugar regulation and the third enlargement (1986-1991)

2.21. Once again, when the five-year scheme came to an end in 1986, its revision coincided with the enlargement of the Community: the sugar scheme was in fact due to be renewed with effect from 1 July 1986 and Spain and Portugal joined the Common Market as from 1 January 1986.

2.22. Spain, which produced more or less as much as it consumed, but at a very high institutional price on account of economically unfavourable production conditions, was allocated a quota equal to its own consumption, including a minimum B quota of 4 % and an intervention price 15,9 % higher than the common intervention price, which was to be aligned with the latter over a transitional period of seven years. This period also applied to the national aid granted under the Treaty of Accession.

2.23. The Portuguese negotiators pointed to the precedent of British accession and obtained the right for the Portuguese refineries to be able to continue to import raw cane sugar at greatly reduced import levy rates, at least for the seven-year transitional period.

2.24. Besides a small such quota for the autonomous region of the Azores, Portugal also received a beet sugar quota of 60 000 tonnes, so that it could develop cultivation of a crop which was previously unknown in continental Portugal.

2.25. Spain and Portugal obtained higher isoglucose quotas than the rest of the Community since an industry producing this sugar substitute had meanwhile been set up in these countries.

2.26. These provisions, which appear in the Treaties of Accession, were automatically incorporated into the new sugar regulation, which, moreover, renewed the scheme as such, without even redistributing either the A or B quotas. The B quotas were thus in effect institutionalized, or rather, nationalized. The only innovation was the institution of the absorption levy: given that ceilings of 2 and 39,5 % of the intervention price for A and B sugar were placed on the production levies, and that the costs of disposing of surpluses had been so high during the period 1981-1986 that the levy proceeds could not cover them, it was not possible to comply with the principle of full co-responsibility, which had been introduced in the 1981 Regulation. The Council decided that an amount of 400 Mio ECU should be recovered to reduce the accumulated deficit, by means of a linear increase in the levies collected. This ad hoc supplementary levy was called an 'absorption levy` and was to be spread over the duration of the 1986-1991 scheme.

2.27. One year afterwards, when the authorities noticed that a new deficit was beginning to accumulate in respect of the marketing years covered by the new scheme, a special absorption levy was introduced with the aim of achieving a balance, from one year to another and over all the marketing years of the five-year scheme, between expenditure on the disposal of surplus production and the revenue intended to finance that expenditure. The production level was thus maintained, but the budgetary consequences were neutralized by the system of levies and prices.

The extension of the scheme decided upon in 1991

2.28. The present arrangement has just been renewed. According to Council Regulation N° 305/91 of 4 February 1991, the scheme will essentially be renewed for a period of two years, with effect from 1 July 1991. Once again, renewal of the scheme coincided with the enlargement of the Community. During the period of preparation of the revision of the scheme, political events in Eastern Europe led to the unification of Germany in 1990. The former German Democratic Republic's sugar sector was characterized by very low technical yields, obsolete industrial plant and a relatively high level of per capita consumption. At the end of the political negotiations on the conditions for including the former GDR in the common market organization, it was decided to increase the German maximum quota of 847 000 tonnes. This increase may be broken down into 647 703 tonnes of A quota and 199 297 tonnes of B quota, i.e. the same proportion as that which existed in the Federal Republic prior to unification.

General assessment of the evolution of the quota system

2.29. The history of the system of production quotas for sugar shows that it has been used as an instrument designed for satisfying the industrial and national interests that are at stake in this market, rather than as a means of guiding production. Indeed, the system has consolidated the situations existing prior to the creation of the common organization of the market or before the accession of new Member States. Long-term application of this system, which was not originally intended, has created production rights for holders of quotas, both at the level of industrial undertakings and farms and that of Member States. The various adjustments to and extensions of the system have resulted in the preservation and maintenance of vested interests, whether production was efficient or not, and whether it was a case of processing domestic agricultural production or imported raw materials, or even a substitute product similarly based on specific domestic agricultural production (isoglucose), the development of which has not been made possible.

Evolution of market supply conditions

The supply surplus

2.30. Table 3 shows for the Community, in its successive forms, the evolution of the specific components of supply on the sugar market. It can be seen that the third scheme (1981-1986) holds the supply record, with an average of 154 %, including the absolute record of 173 % for the marketing year 1981/1982. The average for the last ten years amounts to 148 %. These percentages show that the sugar market has the highest surplus of all agricultural markets. In the second part of Table 3, (columns 6 to 13), surplus supply is calculated and analysed according to its origin: quota sugar production (A+B), imports and sugar produced outside the quota (C sugar). By comparing the figures in the first and fourth columns (production and consumption figures, respectively), it may be seen that throughout the existence of the sugar CMO there have been only two years during which the Community was not self-sufficient: in 1973/1974 and 1974/1975, i.e. at the time of the accession of the United Kingdom, a traditional importer of raw sugar. After the 1981 revision this 'shortfall` was more than made good and the Community had a surplus for the remainder of the period. While the surplus may vary depending upon climatic and economic conditions, it results first and foremost from a structural discrepancy between the guarantee production and internal consumption (see column 9 = 11,2 % in the first five years of the first scheme, 11,8 % in the second scheme, 21 % over the 1981/1986 period and 15,8 % since 1986). Other contributory factors are imports, in particular preferential imports (amounting to a practically constant figure of 16 % since 1975) and, lastly, the production of C sugar, which varies significantly, but nearly always represents a considerable and sometimes very large proportion. It should be pointed out that the quantities given for A+B production and ex-quota production, respectively, are quantities adopted after the carry-overs of C (or, in some cases, B) sugar as A sugar for the following marketing year. The figures therefore also reflect the use made of the carry-over mechanism by the producers.

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Security of supply

2.31. It may be asked where the error lies in the planning of production, disregarding this institutional context. In other words, when the Community sugar beet growers make their decisions, on the basis of contracts with the sugar manufacturers, to sow a part of their land, how much surplus do they all together sow? To put it another way, by how much would it be possible to reduce the amount of land sown with cereals in the Community without endangering the security of market supply?

2.32. Three factors should be taken into consideration in this respect:

a)the legislation governing preferential imports provokes a preliminary question: do these imports form part of the structural supply of the market or not? First of all, they have been agreed upon within the context of the Lomé Convention since 1975; moreover, the provisions of this protocol provide for sanctions in respect of supplying countries which do not deliver their quota (redistribution of the latter amongst the other contracting parties), so that the shortcomings which arose in 1974 will not occur again so easily; finally, these imports are in fact treated as equivalent to European production as far as price conditions are concerned. They may therefore be considered to be a structural element in supplying this market. This conclusion does not prejudice the economic assessment of this arrangement, which will be discussed later. The Portuguese imports are not considered to be a structural element of the market, insofar as they are defined less precisely and appear as a temporary measure in the Accession Treaty. The ACP imports are therefore treated within the context of the Lomé Conventions;

b)climatic risks, which have a considerable influence on the volume of production, should also be taken into consideration;

c)account should also be taken of a constant increase in yield due to progress in bio-technology and industrial technology.

2.33. Bearing in mind the statistical data for the last 20 years, it would appear realistic to take as a basis a safety margin of 8 %, in order to take account of the climatic factor, coupled with a constant increase in yield of 1,5 % per year. Table 4, which compares production achieved by the application of the actual annual yields by area calculated on the basis of the actual consumption for the same year, shows that sowing could in any case be reduced by 20 % without endangering security of supply. The application of these rules would even result in an almost permanent production surplus, and the few shortfalls that arose could be made good by carry-over and strategic stocks.

The rational development of production, the distribution of quotas and the attitude taken by the trade The concept of specialization

2.34. One of the objectives of the Common Agricultural Policy - indeed, the first objective mentioned under Article 39 of the EEC Treaty - is to increase agricultural productivity, by, amongst other things, ensuring the rational development of production. This corresponds to the idea that in a Community, all the Member States together will benefit from an organization of production which directs the various productive activities towards the most efficient areas, and in particular towards those areas that are most suited for a given crop. Thus, in Europe, crops which specifically need light and heat would be best located in the South, whereas those which are more dependant on humidity should be cultivated in the North. This regional specialization allows considerable savings to be made for the whole of agricultural production, insofar as each area concentrates on those activities which it does best and gives up its less efficient production activities.

Application to sugar beet cultivation and the creation of specialization quotas

2.35. The sugar beet is a plant that requires a humid climate, exposure to the sun and a very fertile soil. It is therefore considered to be a typical Northern European crop or, more precisely, typical of the areas north of the Loire. The best technical yields (expressed globally in tonnes of white sugar per hectare, or in its constituent parts, tonnes of beet per hectare, sugar content and degree of extraction) are therefore to be found in France, the Netherlands and in Belgium, followed by the United Kingdom and the Federal Republic of Germany. Certain areas of Southern Europe may, however, fulfil the conditions required for reasonably efficient production at the technical level. This is true of Greece, for example.

2.36. In the first sugar regulations (see paragraph 1.12 of this report), the B quotas were meant to be specialization quotas. The quantities produced under this quota were subject to the co-responsibility levies with the dual objective of guiding production towards those areas where it would still be profitable at a lower price and of financing at the same time the cost of disposing of the surplus. The initial idea was clearly one of 'migratory quotas`, the practical implementation of which would move to those regions where it could be carried out in the most favourable conditions.

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The actual distribution of quotas

2.37. As has been shown above (see paragraph 2.29), production quotas have turned into real, individualized rights. If account is taken, moreover, of the fact that the institutional prices are fixed at a generous level by the Community authorities, it is clear that the specialization mechanism planned for in theory has obviously lacked selectivity in reality. The wish of the parties directly concerned, and of the national political authorities, to obtain and conserve the highest possible quotas stems understandably from a concern to safeguard the considerable investments they have made in this area and from the idea that such a basic consumer need should be satisfied at all times. Over the years, during the successive revisions of the scheme, a situation has gradually come about where the stabilization of A quotas per Member State was followed by a comparable 'nationalization` of the B quotas, as shown in Table 5. This trend has resulted in the common market in sugar having a totally compartmentalized structure, like a collection of national markets. The A+B quotas are completely immovable as between the Member States, and even, within the majority of the latter, as between undertakings. This situation of total immobility is preventing production from reaching its economically optimum position at Community level.

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The 'nationalization` of quotas

2.38. The compartmentalization of the market has consequences that run counter to the initial spirit of the Community legislation. Thus, a good example of the national conception of the organization of this market may be seen in the protests of certain Member States who complain of the fact that the ratio between their A quota and their B quota does not correspond to the ratio between their national consumption and their exports, this latter representing a smaller share of their production than their B quota. They therefore consider that they are financing the export costs of the other States through their B levies. If we push this logic to its limit, the process of nationalization of sugar policy would be complete if the Community stopped collecting production levies to finance exports and left the job of financing the cost of exporting the share of production exceeding national consumption to the Member States themselves. There would then no longer be any kind of common market.

The other general provisions affecting economic effectiveness

Mixed prices

2.39. The basic regulation lays down that minimum prices should be fixed each year for A beet, as for B beet. These minimum prices are calculated on the basis of the basic price for beet, by applying coefficients fixed, in principle, at 98 % and 68 % respectively. The basic price is in turn derived from the intervention price for white sugar. In the contracts between the beet-growers and the factories for the delivery of beet, a distinction should in principle be made between the quantities of beet intended for the production of A sugar, B sugar or sugar other than A or B.

2.40. However, an inter-trade agreement may, with the approval of the Member State, derogate from this obligation. Such a derogation may, in practice, result in the application of a single price to the entire quantity of beet provided for by the contract. In that case the beet-grower receives the same price, the so-called 'mixed price`, for its A and B beet and the distinction between the two disappears and, with it, the option of deciding whether or not to produce specialization quantities. Of course, in situations where the price of B beet would in any case have been a sufficient incentive, it would not have made any difference. In the case of economically marginal farms, however, this practice may lead to the production of B beet that otherwise would not have been produced.

2.41. Such is a fortiori the case if the possibility of including a quantity of C beet is explicitly (for example, in the form of a percentage) or implicitly (by reference to the area sown or the quantity of beet) provided for in the contract, or if a sliding-scale price schedule is applied to production beyond the basic quantity. This system of mixed prices is convenient both for the manufacturers and for the growers, insofar as the cost for the former or the income for the latter remains the same for each unit delivered within the limit of the contractual estimate, and in that it protects growers from awkward questions about the relative profitability of one or the other constituent part of this production.

2.42. Nevertheless, it does encourage additional production in the case of economically marginal farms, and above all in cases where a C constituent part has been included. That was the reason why the first sugar regulations provided for an automatic reduction in the B quota for countries applying the system of mixed prices. At that time, only Belgium and the Netherlands applied a mixed price. Since the waiver of the automatic reduction rule in 1981, practically all the countries concerned (except for Den- mark, Germany and France) applied mixed prices for beet, several of which included a section for C sugar.

2.43. Even if it is difficult to quantify this mechanism's impact on production, it is obvious that it constitutes a factor which runs counter to the principle of specialization. Insofar as the mixed price for beet conceals the element of differentiation between the three levels of guarantee price represented by categories A, B and C, it reduces the dissuasive effect that the differentiated price schedule is supposed to have on less efficient producers. It results in sugar being produced which, in accordance with Community economic logic, should, for economic reasons, not be produced.

Regionalized prices

2.44. Since the setting-up of the common organization of the market in sugar, the legislation has provided for a geographical differentiation of the intervention price (see paragraph 1.16). For those areas considered as having a sugar deficit, a so-called 'derived` price is fixed, representing the common intervention price plus 1,21 ECU/100kg (for Ireland and the United Kingdom) or 1,94 ECU/100 kg (for Italy), if the intervention price of 53,01 ECU/100 kg, which is applicable during the 1990/1991 marketing year, is used as a basis. A separate derived price is also fixed for the French ODTs. The initial objective of this regionalization of the intervention price was to encourage a trade flow that would bring sugar from the surplus areas to the deficit areas. Consequently, the amounts of the price increases were supposed to reflect the cost of transport from one to the other. In fact, if the figures for national production and consumption are compared today, the countries in question are no longer (Ireland) or hardly ever (Italy) in deficit, or are only in deficit if no account is taken of the structural satisfaction of a part of demand (United Kingdom) by preferential imports (see Table 6). Ultimately therefore, this price supplement has had the effect, by distorting the cost-benefit ratio, of promoting production in areas where it is economically less viable.

National aid

2.45. While the first basic regulation considered that the attainment of a single market based on a common price system would be jeopardized by the granting of certain forms of aid and that it was therefore necessary to prohibit all forms of aid that were incompatible with the common market, it provided for an authorization, exceptionally and on a temporary basis, of national aid in Italy. It was expressly stipulated in the regulation itself that these subsidies would be abolished on 30 June 1975, and therefore at the end of the first scheme. Nevertheless, the second regulation merely repeated the recital set out in this connection in the first regulation, in particular as regards the temporary granting by Italy of national aid, which from that time on was known as 'adaptation subsidies`. Pursuant to this regulation, the authorization applied to the marketing years 1975/1976 to 1979/1980.

2.46. The 1981 Regulation, which defines the third scheme, lays down that national aid should be permitted, adding the case of the French ODTs to that of Italy, and interest-cost subsidies related to storage to the existing Italian adaptation subsidies. When the scheme was renewed in 1986, which mainly involved an extension of the existing arrangements, this provision was maintained, and even extended to include national aid awarded to the United Kingdom for the refining of sugar cane, together with a Community contribution of 25 %. Moreover, in the Treaty of Accession, provision was made for Spain to grant national adaptation subsidies to beet-growers during the period from 1 January 1986 to 31 December 1995. The national subsidies granted in respect of the French ODTs are currently considered to be part of a wider programme of aid for regional restructuring and it is planned to transfer them from the sugar legislation to the Poseidom set of regulations.

2.47. It is impossible not to conclude from all the above that, on the one hand, the practice of national subsidies, which was originally a temporary exception, has been perpetuated, and that, on the other hand, such practices have tended to multiply as new Member States have joined the Community. What started out as nothing more than a temporary exemption, designed to allow the areas concerned to catch up, has, with time, become a structural element of the scheme. In this way the sugar industry is being kept artificially viable in certain areas, which will be illustrated in more detail in the following paragraphs. The prevailing situation is therefore no longer one of progressive adaptation to the operations of the market, which was the initial objective of the authors of the Community legislation, but is rather an obstacle to a more rational operation of the sugar market at Community level.

Call for sugar-beet quotas

2.48. Following the recent trends towards concentration and internationalization in the sugar industry, certain beet-growers are afraid that sugar production will disappear from their regions. In view of the geographical link between the production of the raw material and the processing plant, this involves a risk for them of losing their livelihoods as beet-growers. In order to avoid such a development, they recommend replacing the sugar quotas with beet quotas, at the level of the market regulation. Since these are, more especially, cases of production in areas less suited to this crop, such a way of thwarting any relocation of production factors would obviously tend to keep the less efficient producers in business.

Specific problems in some Member States

Restructuring in Italy

2.49. The Italian sugar sector benefits from three special measures which have been mentioned already, namely: a 3,5 % increase in the intervention price under the regional pricing system; national aid to make up the difference between the true rate of interest and the flat rate included in the statutory storage compensation in cases where the difference is more than 3 %; and national conversion aid. In the case of the latter, the basic regulation that is currently in force provides that the maximum amount of aid shall be 23,64 % of the intervention price for white sugar. The level of aid is being reduced, however, by one tenth per annum with effect from the 1988/89 season. The aid is granted in the form of a production subsidy. Under the current system, 73 % of this amount is passed on to the beet growers and the remaining 27 % is paid to the industry.

2.50. The conversion aid was authorized by a series of regulations because climatic conditions in Italy were not suitable for beet and sugar production and there were problems with applying modern production methods to a form of beet production which has not kept pace with technological developments. In fact, the amount of aid which was authorized initially was intended to make up the difference between the institutional prices applied before and after the establishment of the common market in sugar (this is why, in 1968, the guaranteed price in Italy was 50 % higher than the guaranteed price for France).

2.51. In 1983 there was a general recession in the Italian sugar sector. In view of the relative advantages of alternative crops, the Italian government implemented a restructuring plan which was to be financed from the national budget with the aim of reorganizing the sector and making it more competitive. One of its main objectives was to reduce the number of factories whilst increasing the capacity of the remaining plants and thus improving their economic efficiency. This plan was implemented in the period 1984-1988. The main objective of the operation, namely to reach an average processing capacity of 60 000 tonnes per factory per season (on average, the season lasts for 64 days), was not achieved. Furthermore, as the industrial aspect is an important feature of the sugar industry, the plan was also affected by the national industrial policy guidelines, which specified a particular geographical distribution for the plants. In this way the treatment accorded to the Italian sugar industry, which was already in a special position compared with other areas of the Community, was also differentiated within the country. More particularly, the price thus increased by the various components was differentiated by region: North, Central or South. The guaranteed price is in fact highest in the South, the region least suited to this type of crop, and lowest in the North, the area which is most suitable, with the Central area lying between the two. Whereas the average yield for the whole of Italy is 5,7 tonnes of white sugar per hectare (compared with 7,0 Community-wide), it is 6,1 t/ha in the North, 5,1 t/ha in the Central region and 4,5 t/ha in the South. The breakdown for total production is 70 % in the North, 15 % in the Central area and 15 % in the South.

2.52. The regulatory maximum for the conversion aid to Italy (23,64 % of the intervention price for white sugar) was finally reduced to 90 % of the initial limit for the 1989-1990 season and 80 % for the 1990-1991 season. In its proposals for the revision of the system for the 1991-1992 and 1992-1993 seasons, the Commission suggested that the aid should continue to be reduced gradually and that the ceilings should be set at 70 % and 60 % respectively of the initial amount of the exemption granted for the 1988-1989 season. Council Regulation No EEC/305/91 of 4 February 1991 has finally opted for a ceiling of 70 % for the two years in question.

2.53. Despite the limited success of the national plan for restructuring the beet and sugar sector, the Italian authorities are at present launching a second five-year programme, more or less on the same lines as the first. In view of the fact that, despite all its efforts, Italy is still one of the least efficient sugar-producing countries in terms of production costs, the question arises as to whether such guidelines should be perpetuated, given that they are seemingly contrary to the principle of rational expansion of production and also, to a certain extent, affect the Community's finances. In particular, it must be asked whether the consolidation and reorganizational aspects of the restructuring ought, perhaps, to be targeted on the percentage of production, which is fairly small in terms of present levels, that could be economically viable in the Community context.

The transitional arrangements for Spain

2.54. The situation in the Spanish sugar market at the time of Spain's accession to the Community in 1986 was, in some ways, similar to that which existed in Italy when the common market in sugar was established in 1968. Spain is a south European country and therefore unsuited to sugar-beet production. Structures on the farms where beet is grown are old-fashioned and the level of modernity in the processing industry is variable. The global average yield is 5,3 tonnes of white sugar per hectare, significantly lower than the European average (7,0). In most of the country multigerm seed is used, requiring very intensive use of manpower to thin out the seedlings in the beet fields. (In other countries this factor is markedly less important, due to the use of monogerm seed).

2.55. Before Spain joined the Community, the official Spanish price was almost 16 % higher than the official Community price. The Treaty of Accession granted Spain an intervention price plus the above difference. The difference was to be phased out over a transitional period of seven years by means of a total price freeze, on the assumption that the Community intervention price would increase, as was normal at that time. There is, however, provision for the transitional period to be extended by a further three years should any difference still remain at the end of the initial period. This possibility cannot be ruled out, as the Community intervention price is no longer increasing year by year at the same rate as it did prior to 1986.

2.56. In addition, the Treaty of Accession authorized substantial grants of aid for the conversion of agricultural holdings, subject to a ceiling of 23,64 % of the beet base price. This exemption applies until 31 December 1995. Finally, Spain was given a quota for A and B sugar which was slightly in excess of domestic consumption. In view of the Italian example, the Community authorities could take care to prevent a similar tendency occurring in Spain, as it could pose something of an obstacle to the optimum development of the sugar market.

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Supplies to the Portuguese market

2.57. Portugal has traditionally imported raw cane sugar from its former colonies and, more recently, from the world free market, for home refining. The autonomous region of the Azores were self-sufficient in sugar due to a small local beet-growing industry. On accession Portugal invoked the precedent of the United Kingdom in order to claim the right to continue to import raw sugar to supply its refineries. Under the terms of the Treaty of Accession, Portugal is authorized to import the quantities of raw sugar needed to meet its requirements at a reduced import levy rate to the extent that the necessary raw sugar is not available in the Community (around 300 000 tonnes per year).

2.58. The Treaty provisions, which cover a period of seven years from 1 January 1986, provide authorization for the importation of 75 000 tonnes per annum from four specified ACP countries in the first instance. Since supplies of raw sugar of Community origin (mainly from the French overseas departments and a small amount from metropolitan France) are somewhat limited in terms of the demand that has to be met, a substantial amount still has to be bought on the free world market, again at a price that is reduced by the import levy. In so far as this arrangement merely perpetuates the main aspects of the supply situation which existed in the Portuguese market prior to that country's accession, it does not improve the organization of the Community sugar economy in any way.

2.59. Portugal's accession was accompanied by another concession: the allocation of a quota of 60 000 tonnes for beet sugar. This amount was intended to cover the expected increase in national consumption, which in fact is far from having been achieved. Sugar beet has never been grown in continental Portugal, however, and the industry will therefore have to start from scratch with the construction of a processing plant. The only sugar-beet produced in Portugal is in the autonomous region of the Azores, where production has declined in recent years because dairy-farming holds out better prospects for local farmers. Attempts to start beet production in continental Portugal are proving particularly difficult. Current production amounts to only a few thousand tonnes, which are sent to Spain by rail for refining and then freighted back to Portugal. The project for the construction of a plant is temporarily in abeyance while the national authorities study the possibility of using Community structural funds to alleviate the financial burden. All things considered, it is clearly lacking in realism to grant a sugar beet quota to continental Portugal.

Sugar-beet production in Greece

2.60. Greece's accession to the Community took effect in 1981, coinciding, more or less, with the change of government which took place that year. It was allocated a quota of 319 000 tonnes, which corresponded approximately to the level of national consumption. Although Greece is a Mediterranean country, its performance figures are more akin to those of a typical northern area than to those of the other Mediterranean countries. As can be seen from Table 7, Greece is top of the table in terms of tonnes of beet production per hectare and is slightly above the average in terms of sugar yield per hectare, with levels very comparable to those of the FRG and ahead of Denmark and the United Kingdom.

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2.61. This situation can be explained by a combination of structural factors on the one hand and the specific organization of this agro-industry on the other. The sugar beet is grown in a number of deltas in the north of the country, which typically have very fertile soils, suitable irrigation infrastructure and a continental-type micro-climate. The sugar sector in Greece is a fairly recent innovation and has been organized rationally as part of an agro-industry development programme which was launched in 1960. Both the industrial technology and the farming methods were researched systematically abroad before they were introduced into the country. The sector is characterized by the very close relationship between farmers and the industry in respect of advisory services, seed, fertilizers and pesticides, disease prevention and mechanization. This highly coordinated approach has made it possible to achieve the performance figures referred to above.

2.62. On the economic side, the real level of performance is more difficult to identify, because the Greek sugar industry is in fact owned by the State through the agency of the national agricultural bank, so that the economic and financial conditions under which the industry operates do not make it possible to establish conclusively whether it is operating profitably. As regards the terms offered to Greek beet farmers, it was found that, in addition to the agronomic and logistical support mentioned above, the price they receive for their beet is 15 % to 20 % higher than the minimum regulation price (fixed as specified in 1.16(f) above). Consequently it is difficult to form any clear opinion as to the true level of economic efficiency of Greek sugar production.

The situation with regard to isoglucose

2.63. The technology of isoglucose manufacture is now so advanced that this substitution product can be obtained from cereals of European origin. When the process was introduced in the 1970s, the basic raw material was still quality maize, which had to be imported from the United States. The process is based on a Japanese invention and was perfected in the United States which at that time was importing 5 million tonnes of sugar, mainly from the countries of Central and South America. The manufacture of isoglucose from maize, which was (and still is) in surplus in the United States, made it possible for the latter to reduce its imports of sugar, where there was a shortfall, from four million tonnes to one million tonnes.

2.64. Isoglucose is used in the manufacture of food products which require a liquid sweetener, such as soft drinks, yoghourt, jam, ice cream, etc. In the United States these products represent between 30 % and 40 % of sweetener consumption. In Europe they represent between 20 % and 30 % of the market, the equivalent of approximately 2,5 million tonnes of sugar. In the United States this market share is effectively held by isoglucose, which makes it possible to avoid imports and to use the maize surpluses profitably. In Europe in the 1970s the situation was exactly the reverse: the Community had a sugar surplus and had to import American quality maize in order to be able to produce isoglucose. Nevertheless, the ratio between the prices of these two commodities made the manufacture of isoglucose profitable even at that time. The technology was later developed to the point where it was possible to base production on other, lower-grade cereals. Nowadays, for example, one of the largest producers, Belgium, uses only Belgian wheat, with costs considerably lower than those for sugar. The choice is therefore reduced to a choice between two commodities of European agricultural origin.

2.65. In 1979, after a number of restrictive measures had been taken, the advocates of protection for the sugar industry succeeded in getting isoglucose incorporated into the common market organization for sugar. A production quota was fixed on the basis of a reference level of production achieved in the preceding years, without taking into account the production capacity represented by the plants which were then under construction. Isoglucose production was thus limited to around 2 % of the global maximum quota (A + B, sugar and isoglucose), which is well below its potential. Isoglucose was also made part of the system of production levies, even though there are practically no exports of this product. When Greece, and then Spain and Portugal, joined the Community, the isoglucose quotas allocated to them were proportionately slightly higher, because the reference production level had been achieved under the pre-Community system. The present distribution of isoglucose quotas, compared with sugar quotas, is shown in Table 8.

2.66. It is easy to understand the advantage, for the sugar industry, of keeping the level of isoglucose production as low as possible: the 'sweetening power:production costs` ratio for this product is far more favourable than that of sugar, for which it represents a dangerous competitor. If this is true in the case of Belgium, a country which is eminently suitable for sugar-beet growing and less so for the production of high-grade cereals, how much greater is it in the case of the countries of southern Europe, which are generally less suitable for beet growing, but far more able to produce quality cereals (maize for example). From a macroeconomic standpoint, it might therefore be expected that in the south of Europe cereal-based isoglucose production should be encouraged and that the aim should be to substitute that product for beet sugar, which is economically less profitable.

2.67. In fact, however, the quotas not only did not evolve in this direction but on occasions when the system has been revised, the national authorities have not even made use of their reserve quantities of 10 % of the sugar quotas which they are allowed to convert into isoglucose quotas (see paragraphs 1.15, 2.16 and 2.19) as a way of promoting this type of production. It is an observable fact that the responsible authorities in the countries most suited for developing such a product in fact do nothing to make it possible. In some cases, even, their attitude is the reverse. The Greek government, for example, has effectively blocked for a period of more than two years part of the Greek isoglucose quota which became available following the failure of the undertaking which held it, by refusing initially to allocate it to the other Greek isoglucose producer, which has surplus production capacity, and awarding it instead to the Greek sugar producer, which does not have the necessary plant, so that this isoglucose quota has since remained unused. Isoglucose thus typifies the way in which obstacles are wilfully put in the way of rational development of the market.

Conclusion

2.68. The various factors detailed in this chapter illustrate how far we are from the principles of market stabilization and rational development of production set out in Article 39 of the EEC Treaty. Furthermore, the common market principles which are laid down in Article 40 of the same Treaty have in fact been defeated. In this way the system of national quotas has become an end in itself: it creates production rights when there is no real need for the product, resulting in the development of an economically barely viable form of production. This involves clear consequences for consumer prices and the financial equilibrium of the system, that is, ultimately for its proper financial management. Before drawing the consequences, we must examine the external aspects of the system.

3. INTERNATIONAL MACRO-ECONOMIC ASPECTS AND THE WORLD SUGAR MARKET

The world market

Characteristics of the world market

3.1. In recent years world sugar production has amounted to approximately 105 million tonnes of raw sugar. Roughly speaking, three quarters of the sugar produced is consumed in the country of production, leaving some 27 million tonnes to be traded on world markets. Part of this takes place under bilateral preferential trade agreements, between the USSR and Cuba, the United States and South and Central America and between the EEC and the ACP countries, for example. After deduction of this trade, the world free market accounts for approximately 18 million tonnes of raw sugar per year. The world market is split more or less equally between raw sugar and white sugar. The commodity is traded on three exchanges, New York, Paris and London. These are futures markets, which means that the total volume of trades is substantially larger than the actual volume of the commodity that is ultimately delivered.

3.2. As on all free markets, the price is determined by the relationship between supply and demand. A large part of the supply consists of surplus production from the producer countries which operate a protectionist system whereby they supply their own needs and subsidize exports of quantities produced in excess of their own requirements. Of course, some of these exports do not have the benefit of official pricing; but exporters usually consider them profitable because they base their calculations exclusively on the marginal cost.

The market price is thus not the prime factor which determines the volume of such exports. Due to the residual nature of the market, the price may even drop below the level of the production costs of an efficient producer who is supplying the world market. The market is also residual in terms of demand: the producer countries use it to make up any shortfall, which may occasionally create temporary price surges. In consequence, the free world market is very volatile and bears very little relationship to production costs.

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3.3. Only a very few exporter countries, such as the ones with the lowest production costs (e.g. Australia), deliberately produce for this market because they can obtain a profit from it. The most efficient producers' costs are between 10 and 12 US cents per pound of raw sugar, which at current dollar prices is between 185 and 215 ECU per tonne of white sugar. At the moment the Community intervention price is 530 ECU per tonne. Table 9 shows the movement in the world price against the EEC intervention price. On average, over the last ten years, the European price has been almost double the world price. This comparison is an important one because export refunds are calculated on the basis of the difference between these two prices.

The Community's place in the world market

3.4. The two more or less equal halves into which the world sugar market breaks down, namely, raw sugar and white sugar, are relatively independent of each other. Nevertheless, there is a link insofar as if there is a substantial increase in the price of white sugar, for example, it becomes worthwhile to process more raw sugar into white. Conversely, it may be preferable not to process the raw sugar into white. The Community, for its part, is concerned primarily with the white sugar market. The Community of Six was already a net exporter of white sugar. It went into a slight deficit, very briefly, at the time of the United Kingdom's accession and since then has expanded to become the world's leading exporter of white sugar, holding more than half the world market and thus accounting for some 25 % of the total free market. Table 10 shows the composition of this market on both the import and the export side.

Table 9 - Comparative figures for the world price and the intervention price

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3.5. By virtue of their volume (an average of 4,8 million tonnes per year), the Community's white sugar exports necessarily affect the balance of world supply and demand on the free market. It is of course very difficult to estimate the level at which the price would be situated if the Community surpluses had no effect on the market. It is not even possible to determine the extent to which this source of supply would be replaced by increased production in other countries if it were to diminish to any great extent. It is only possible to make theoretical calculations dealing with hypothetical trends. In the studies that have been carried out on this subject, there are some analyses, which are already out of date (they refer to the situation before 1982), but they lead to the conclusion that the world price would be approximately 12 % higher if Community exports were to be unsubsidized.

3.6. As regards the economic effects of Community sugar exports on third countries, a distinction must be made between sugar importer and sugar exporter countries. In the case of the importer countries there is an advantage inasmuch as they are able to buy their sugar at a lower price due to the presence of 4,8 million tonnes of European sugar. These include the countries which import their sugar on non-preferential terms, i.e. from the free world market, namely African and Asian countries. On the other hand, for the exporter countries, insofar as they sell on non-preferential terms, there is a loss of revenue. To these must be added the importer countries with a level of self-sufficiency just below 100 %, which could step up production and become exporters if the price were higher.

Food aid

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3.7. Intervention on the Community market in order to absorb surpluses is not the aim of food aid. In any event, in the case of sugar, the amounts are very small: of the order of 6 000 tonnes per year on average.

The economic impact of C sugar

The relative importance of C sugar production

3.8. The basic idea of the system of production quotas in the sugar market is to allow any amount of sugar produced within the limits of quotas A and B to receive the guaranteed intervention price and to put any amount produced in excess of a maximum quota up for sale on world market conditions. A manufacturer may, however, decide to carry an amount of C (or B) sugar equivalent to a current maximum of 20 % of his A quota over to the following year as future A sugar by storing that amount for one year. In this way he does, of course, reduce his authorized capacity for A sugar production in the new year by an equivalent quantity, and that amount is, in fact, shifted to B or C. Apart from this reserve quantity, any manufacturer left with C sugar is obliged to export it at his own expense at the external market price before 31 December of the year in which the production season ends.

3.9. Over the last ten years, the world price for white sugar has corresponded, on average, to 53 % of the Community intervention price. If this difference were, in fact, prohibitive in economic terms, C sugar production would be the natural consequence of harvests which exceeded the seed-time forecasts as a result of exceptionally favourable climatic conditions. As Table 11 shows, however, over the last ten years there has been an average of 1 348 000 tonnes of C sugar produced each year - the equivalent of 14,1 % of the basic quota (quota A). If this is compared with the current supply level of 142 % (see Table 3), i.e. a surplus of 42 %, this means that Community exports of white sugar - the commodity for which the Community is the premier international exporter - break down into one third C sugar and two thirds quota sugar.

3.10. It must be concluded, therefore, that the phenomenon of C sugar production is both too significant and too constant for it to be attributable to mere random meteorological events. It is in fact possible to demonstrate statistically on the basis of the trend of yields and the areas actually sown that it is inevitable that the maximum quota will be exceeded.

Economic conditions for non-quota production

3.11. One reason that is frequently put forward as an explanation for systematic production in excess of the maximum quota is producers' fears of losing their shares of quota when the next reallocation takes place, on the assumption that the next quota will be based on the amount produced in a previous reference period. According to this theory, manufacturers would conclude contracts for a manufacturing volume and the growers would provide the sowings to ensure that they would at least meet their respective individual quotas under any circumstances and climatic conditions would merely determine the extent to which the quota was exceeded. This line of reasoning is incomplete, however, as will now be demonstrated.

3.12. In the case of France, a country which alone produces almost half the Community's C sugar, there is a statistical correlation