Special Report No 20/2000 concerning the management of the common organisation of the market for sugar, together with the Commission's replies
Date: 2000-10-26
Institutions: European Court of Auditors
Subjects: common organisation of markets, report, sugar

15.2.2001

EN

Official Journal of the European Communities

C 50/1

I

(Information)

COURT OF AUDITORS

concerning the management of the common organisation of the market for sugar, together with
the Commission’s replies

SPECIAL REPORT No 20/2000

(pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2001/C 50/01)

CONTENTS

Paragraph

Page

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

METHODOLOGY USED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE EU AND WORLD SUGAR MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE COMMON ORGANISATION OF THE MARKET FOR SUGAR . . . . . . . . . . . . . . . . . . . . . .

MANAGEMENT BY THE COMMISSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commission proposals on quotas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Annual proposals for institutional prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Data used in preparing the price proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Taking account of the CAP objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The level of prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The price for ACP raw cane sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Management of the export programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The organisation of the tendering procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Self-financing arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Administrative, control and financial arrangements of the CMO . . . . . . . . . . . . . . . . . . . . . .

The Commission’s responsiveness to the various stakeholders and to events affecting the
CMO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REVIEW OF THE SUGAR REGIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Achievement of the objectives of the CMO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The costs of achieving the objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The mechanisms of the CMO for sugar, and in particular the level of production quotas
and price support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The CMO for sugar: the 1992 and Agenda 2000 reforms . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-5

6-9

10-14

15-16

17-67

17

18-31

32-45

32-36

37-38

39-41

42-45

46-54

53-54

55-58

59-63

64-67

68-98

68-70

71-77

78-86

87-92

93-98

3

3

4

4

8

8

8

8

9

9

10

10

11

11

11

12

12

12

13

13

13

14

14

15

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Paragraph

Page

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99-107

ANNEX I: Sugar CMO: expenditure and levies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX II: The EU and the world sugar market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX III: EU sugar supply balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX IV: EU sugar quotas 1995 to 2001 by Member State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

18

19

21

22

23

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EXECUTIVE SUMMARY

The objectives of the audit were to obtain assurance that the man-
agement by the Commission of the common market organisation
(CMO) for sugar is sound and to review the extent to which the
specific objectives of the CMO as well as the overall objectives of
the CAP have been achieved.

The audit examined key areas in the management of the CMO for
which the Commission could be held accountable. This report
also reviews the outcomes of the CMO.

Both the EU and world sugar markets are characterised by a level
of production which considerably exceeds demand. This has led
to a sustained period of low world market prices and rising stocks.

(e) the budgetary and GATT constraints have prompted the Com-
mission to set lower rates for export refunds; previous arrange-
ments, although transparent, had insufficient regard for
economy (see paragraphs 46 to 52);

(f) procedures for tendering and deciding on export refunds

should be reviewed (see paragraphs 53 and 54);

(g) the data used for the calculation of the production levies are
insufficiently sound and efforts should be undertaken to use
more reliable data as a basis (see paragraphs 55 to 58);

(h) there is no coherent strategy for the controls over sugar pro-
duction and storage and there is no guidance on good prac-
tices to be followed or minimum standards to be attained (see
paragraphs 59 to 63).

In 1999, the gross annual budgetary cost of the CMO reached
2 100 million euro, of which 1 200 million euro was recovered
through production and storage levies. There is a significant cost
borne by the consumer through the price of sugar.

The review of the outcomes of the sugar regime finds that:

(a) many of the CAP and CMO objectives are being achieved (see

paragraphs 71 to 77);

The basic principles of the CMO for sugar have changed little
since 1968 and the CMO was not included in the 1992 or Agenda
2000 reforms of the common agricultural policy (CAP).

(b) high prices are imposed on the EU consumer; there is a struc-
tural production surplus and a highly regulated industry with
little competition (see paragraphs 78 to 86);

The main findings on the Commission’s management are that:

(a) the Commission did not give adequate information justifying
its proposal for the continuation of the quota arrangements
in 1995, nor did it provide a comprehensive analysis of the
state of achievement of the CMO’s objectives despite the fact
that extensive, although not complete, information on this
was available to the Commission services; furthermore, the
Commission did not present the likely impact of their propos-
als compared with other options; there was no assessment of
the consequences of the regime for the consumer, nor of the
impact on the environment (see paragraphs 18 to 31);

(b) the Commission’s minimum beet price proposals are not
based on independently verified information on the process-
ing margin; the information which is used is not taken into
account in a transparent way; the proposals are not presented
in the context of information on the level of achievement of
the stated objectives (see paragraphs 32 to 38);

(c) although the Commission has information available, it did
not present an assessment of the likely consequences of the
price proposals, nor justify them in relation to alternatives
(see paragraphs 39 to 41);

(d) the economic importance to ACP countries, and in particular
Mauritius, of access to the EU market at special conditions has
created a strong dependence on the continuation of these
preferential arrangements; however, the Commission does not
properly consider the economic factors in its proposals for
the ACP guaranteed sugar price (see paragraphs 42 to 45);

(c) alternative support measures should be considered for reform-
ing the CMO to meet the aims of the 1992 and Agenda 2000
reforms (see paragraphs 87 to 92).

The report concludes that while the Commission services are gen-
erally considered to be competent and well-informed, at the stra-
tegic level significant weaknesses exist in the quality of the Com-
mission’s proposals, decisions and actions. The continuing high
cost to consumers and the overproduction in the EU have not
been tackled in successive renewals of the sugar CMO.

INTRODUCTION

1. The basic principles of the sugar CMO have remained virtu-
ally unchanged since its introduction in 1968. The CMO was not
affected by the reforms of the CAP in 1992 nor was it included in
the recent Agenda 2000 reform. Nevertheless, more and more
calls for change have been heard in recent years and pressures for
reform are likely to arise from the enlargement of the EU and the
prospects of further constraints on subsidised exports resulting
from negotiations under the World Trade Organisation (WTO).

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2. The market organisation in its current form remains in force
until 30 June 2001. The Council of Ministers has to decide on the
rules to be applied thereafter by 31 December 2000. The CMO’s
basic provisions are governed by Council Regulation (EEC)
No 1785/81 (1) as subsequently amended. These were recently
consolidated in Council Regulation (EC) No 2038/1999 (2).

3.
In 1999, the gross annual budgetary cost of the CMO reached
2 100 million euro, of which 1 200 million euro was recovered
through production and storage levies (see Annex I). There is also
a significant cost borne by the consumer through the price of
sugar. This is analysed in paragraphs 80 and 81.

4. The results of the Court’s last comprehensive audit were pub-
lished in 1991 (3). The main problems highlighted were the situ-
ation of structural over-supply and the high costs of the sugar
regime. Since then the Court has examined various aspects of the
CMO, notably in its work for the annual Statement of Assurance
(DAS).

5. The objectives of the present audit were to obtain assurance
that the management by the Commission of the sugar CMO is
sound and to review the extent to which the specific objectives of
the CMO as well as the overall objectives of the CAP have been
achieved.

METHODOLOGY USED

6. For the Commission’s management of the CMO, the audit
scope was developed with the aim of identifying explicitly the
activities for which the Commission could reasonably be held
accountable. Six key activities were identified (paragraph 17).

7. The assessment criteria in respect of these activities were
determined as:

(a) the quality of the inputs (the availability of sound informa-

tion);

(b) the quality of the throughputs (the analysis and use made of

the information);

(c) the quality of the outputs (the proposals made and the deci-

sions and actions taken).

8. Sound information on the outcomes (i.e. the state of achieve-
ment of the objectives set) is a key input for proper management
and is therefore within the Commission’s management responsi-
bility. However, the extent to which the CMO and CAP objectives

(1) OJ L 177,1.7.1981, p. 4.
(2) OJ L 252, 25.9.1999, p. 1.
(3) OJ C 290, 7.11.1991.

have been achieved depends on factors such as improvements in
productivity which are beyond the Commission’s control and for
which it cannot be held accountable.

9. The analysis of the outcomes was based on a review of data
and interviews with a wide range of stakeholders (4). In addition,
studies and research material from outside bodies were taken into
account.

THE EU AND WORLD SUGAR MARKET

10.
In Annex II a brief description of the EU and world sugar
market is given. It shows that, in the last five years, the world mar-
ket has been characterised by considerable overproduction and a
rising level of stocks. World stocks are now at a historically high
level, which has had the effect of depressing prices.

11. World production of sugar in 1999/2000 is estimated at
135 million tonnes and consumption at 127 million tonnes. Stocks
have doubled to an estimated 62 million tonnes (49 % of annual
consumption) from 31 million tonnes (28 % of consumption) in
1989/1990, as shown in the following chart (Chart 1).

In the EU, production also considerably exceeds demand and
12.
high stocks exist. Annex III shows that in 1998/1999 the EU pro-
duced 18,1 million tonnes of sugar, of which 14,2 million tonnes
were within the production quotas (5), 2,2 million tonnes in excess
of quotas and 1,7 million tonnes from refined cane sugar (prefer-
ential imports). In the same year, EU consumption was 12,7 mil-
lion tonnes. However, the resulting surplus has no effect on EU
prices due to the operation of the CMO price-support mecha-
nisms and export programme.

13. The chart below (Chart 2) shows the extent to which the
EU-guaranteed sugar supply, represented by the beet quotas and
preferential cane sugar imports, exceeds consumption. EU quotas
are currently more than 3 million tonnes above the level at which
the EU sugar supply would equal consumption.

14. The following chart (Chart 3) shows that the guaranteed sup-
ply (represented by the columns) exceeds the consumption in
each Member State with the exceptions of Spain, which has a sig-
nificant deficit, and Finland and Sweden which have small deficits.

(4)

Interested parties, including growers, processors, sugar traders, indus-
trial users, consumers representatives, Member States and ACP rep-
resentatives.

(5) The total quota for which the intervention guarantee is applicable is
divided into A and B quotas. For the A quota a maximum production
levy of 2 % is charged, whereas for the B quota the levy is up to
37,5 %. No intervention guarantee applies to production of beet sugar
in excess of the quotas, known as C sugar, which may not be sold on
the EU market and so is exported without export refunds.

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Official Journal of the European Communities

15.2.2001

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THE COMMON ORGANISATION OF THE MARKET FOR
SUGAR

MANAGEMENT BY THE COMMISSION

15. The basic Regulation of the CMO specifically states that the
objectives in Articles 33 (overall objectives of the CAP (1) and 131
(to contribute to the harmonious development of world trade) of
the Treaty establishing the European Community apply. It also
contains the specific objectives of:

(a) ensuring that the necessary guarantees in respect of employ-
ment and standards of living for Community growers of sugar
beet and cane are maintained;

(b) ensuring a fair balance of rights and duties between proces-

sors and growers;

(c) making the CMO self-financing for the disposal of that part
of EU sugar production under quota which is surplus to inter-
nal consumption;

(d) enabling the outlets for sugar and isoglucose on the internal

market to be enlarged;

(e) achieving a steady and even flow of raw sugar to the EU refin-

eries.

16. The main features of the CMO are:

(a) a production quota scheme applied to the finished product
(white sugar) rather than the basic agricultural products (beet
and cane); the main quotas are called ‘A’ quotas and there are
additional ‘B’ quotas to which lower prices apply; quotas are
set for a specific period, usually of five to seven years, by the
Council on a proposal from the Commission; (see Annex IV
for the quotas currently in force);

(b) a price system in which beet prices and an intervention price
for white sugar are fixed annually by the Council, based on a
proposal by the Commission;

(c) an export programme through which quota and refined pref-
erential cane sugar not sold on the EU market is exported
with export refunds; the Commission manages this pro-
gramme by deciding weekly on the refund rates based on
offers made by sugar traders;

(d) an import programme for cane sugar at preferential rates;

(e) production levies to recover from the sugar industry the cost
of the export refunds (less an amount equivalent to the pref-
erential sugar imports) and storage levies to recover the pay-
ments made to companies storing sugar (see paragraph 55).

(1) These can be summarised as follows; to increase productivity by tech-
nical progress and rational development of production; thus to ensure
a fair standard of living for the agricultural community; to stabilise
markets; to assure the availability of supplies; to ensure that consum-
ers are supplied at reasonable prices.

Introduction

17.
In this section the Commission’s management of the CMO is
assessed in terms of the inputs (information) and outputs (regula-
tions, decisions and proposals). The main Commission activities
are covered; the proposals for production quotas, annual propos-
als for institutional prices, decisions on the export programme
and the ‘self-financing’ system. The extent to which the Commis-
sion has assurance that the CMO is functioning well is also exam-
ined, along with how the Commission responds to events affect-
ing the CMO and to the different stakeholders.

Commission proposals on quotas

18. The quota arrangements, a central element of the CMO, were
introduced in 1968 for a transitional period and subsequently
renewed on several occasions and most recently in 1994 for the
period 1995 to 2001. The Commission quota proposals for 1995
to 2001 (2) were assessed to determine whether the level and allo-
cation of the quotas were proposed in a way consistent with the
efficient and effective achievement of the CAP and CMO objec-
tives.

In its proposals the Commission put forward three basic

19.
questions.

(a) Is it necessary for the production quota system to continue?

(b) If so, at what level should the quotas be set?

(c) Is it necessary to modify the present instruments for the self-

financing of the CMO?

20. The Commission’s analysis was that the medium-term pros-
pects on the world market were uncertain and that no significant
and lasting effects on prices were foreseen. Taking into account
the need to control guaranteed production, in particular to meet
the GATT commitments, it concluded that the production quota
system should be maintained, with quotas kept at their existing
levels.

21. The Commission proposal did not address the extent to
which the CAP objectives were being achieved, did not present
any analysis of the economic effects of the CMO and did not con-
sider possible reforms or alternatives. In particular, there was:

(a) no assessment of the improvements in productivity achieved,
nor consideration of whether the development of the sector
was rational;

(b) no analysis of the incomes of beet growers;

(c) no consideration of whether the prices borne by consumers

were reasonable.

(2) COM(94) 439 final, 16.11.1994.

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In fact, the only information presented on the state of the
22.
EU’s beet growing and processing activities was a table showing
that the EU quotas led to a surplus each year of between 1,3 and
1,5 million tonnes. This supply balance sheet was rather mislead-
ing, however, as it only showed half of the structural surplus by
not including imported sugar refined in the EU, even though the
import of 1,3 million tonnes of cane sugar from the ACP coun-
tries is a legal obligation.

In 1994, following the Uruguay Round Agreement the Com-
27.
mission made its proposal for the renewal of the quota system for
a six-year period. This proposal concentrated on the minimum
adjustments to the regime necessary for compliance with the
GATT and measures to ensure that the Community’s refining
industry had adequate supplies of raw sugar.

23. From discussions with various stakeholders in the Member
States it is clear that the following issues warranted consideration
by the Commission:

28. There were also some relatively minor proposals to tackle
certain areas where the CMO was not functioning as intended,
namely the payment of storage aid on sugar produced in excess
of quotas (C sugar) carried forward, national aids in Italy, and the
production refund for the chemical industry.

(a) the economic cost of the surplus production and high prices;

(b) the effect on world prices and developing countries’ incomes

of the subsidised exports;

29. For these issues that were included in the proposal, the
explanatory memorandum gave a good description and well-
reasoned arguments which were based on thorough studies and
assessments of the alternatives and the implications.

(c) the dependence of growers on the processors and the extent
to which progress in beet production and processing tech-
niques justified a review of the grower/processor share of rev-
enues;

(d) the barriers to entry for new beet growers;

(e) the relative profitability of beet compared to other crops;

(f)

the justification for continuing the storage aid arrangements;

(g) the environmental impact, in particular of the surplus pro-

duction;

(h) the effects of the fixed national quotas in limiting specialisa-

tion and competition.

24. Although these concerns were not addressed in the Com-
mission’s 1994 proposals, an analysis of Commission working
files showed that in 1992 its services prepared a thorough assess-
ment of the operation of the sugar regime, its impact and the
challenges it faced. An internal working group considered a wide
range of options for reform, some of them quite radical. Most of
the issues listed above were considered, to varying degrees. They
concluded that there should be a significant cut in prices over a
seven-year period.

30. However, the preparatory work by the Commission services
on analysing issues such as growers’ incomes, processing industry
margins and concentration, alternative uses of sugar and quota
transferability was again not presented to the decision-makers (1).
There was no information given on the desirability of reform in
the light of the CAP reforms and the single market. The concerns
of consumers and industrial users were not addressed.

31.
It is clear from the above that the Commission did not present
all the appropriate information to justify the continuation of the
quota arrangements for 1995 to 2001, nor did it give a compre-
hensive analysis of the state of achievement of the CMO’s objec-
tives. At the same time it was noted that extensive, although not
complete, information was available to the Commission services.
Furthermore, the Commission did not present the likely impact
of their proposals compared with other options and there was no
assessment of the consequences of the regime for the consumer,
nor of the impact on the environment.

Annual proposals for institutional prices

Data used in preparing the price proposals

25. However, in the end, the Commission simply proposed that
the existing regime be continued unchanged for one year while
the effects of the 1992 reform of the CAP for the other main
arable crops, and of the newly introduced single market, were
assessed.

32. Regulation (EC) No 2038/1999 requires the Commission to
propose an intervention price for white sugar and a basic price for
beet. The Regulation is specific only about the calculation of the
basic beet price: it is to be based on the intervention price less the
costs of processing and transport plus receipts from molasses (2).

26. Again in 1993 the Commission proposed a one-year exten-
sion, this time pending the results of the GATT negotiations.

(1) The Council, after consultation with the European Parliament and the

Economic and Social Committee.

(2) Molasses is a by-product of refining sugar (whether from beet or cane)

and is used in the EU primarily in animal feeds.

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In practice, the Commission has not reviewed the elements
33.
of this calculation for many years and analysis of the basic docu-
mentation for 1999/2000 showed that it disposes of insufficient
information. For the main part, concerning the cost of process-
ing the beet into white sugar, the Commission only has data pro-
vided by the body that defends the interests of the processing
industry (1). These data are not in sufficient detail to enable the
processing costs to be verified.

the need to guarantee a fair standard of living for the farming
community and ensure that supplies are available and that prices
to the consumer are reasonable. It adds that the balance between
the prices of the principal agricultural products should be main-
tained. However, the Commission presented no information on
these elements in its proposal. Furthermore, there was no analysis
of growers’ incomes and employment or the impact on consum-
ers in the Commission’s preparatory files.

34. The usefulness of this information is questionable. For
example, depreciation figures, which are by far the largest single
element in the processing costs given, are based on replacement
value rather than actual costs. The data provided imply that the
processing costs in 1996/1997 and 1997/1998 were 25 % higher
than the amount allowed for in the beet price calculation yet most
processing companies continue to be highly profitable. However,
the Commission does not have the data checked by independent
financial experts and does not have alternative sources of infor-
mation on processing costs. Although the Commission does not
actually use the information to calculate the beet price each year,
its unreliability means that it is not in a position to demonstrate
that the prices are reasonable.

35. Some elements of production costs have undergone consid-
erable changes over the years. For example, improvements in cul-
tivation techniques have allowed production periods to be pro-
longed in some countries, thereby optimising the use of capital
investment; interest rates have fallen and there has been extensive
rationalisation with the closure of smaller inefficient factories.
These changes have not been reported on by the Commission in
the price proposals.

36. This lack of information, which makes it difficult for the
decision-makers and other interested parties to judge the basis for
the Commission’s price proposals, has been strongly criticised by
the Commission’s Consumers Committee (2) and by the industrial
users of sugar. The industrial users have made their own estimates
of processing costs and concluded that the existing margin allowed
in the intervention price is too high (3).

Taking account of the CAP objectives

37. While the Regulation gives no guidance on how white sugar
prices are to be set, it is stated in the preamble to the Commis-
sion’s price proposals that when sugar prices are fixed, account
should be taken of the objectives of the CAP and in particular of

(1) CEFS: European Committee of Sugar Manufacturers.
(2) Opinion by the Consumer Committee on the reform of the CAP,

Brussels, 14 June 1999.

(3) CIUS, proposal on the reassessment of the institutional manufactur-

ing margin, 22 December 1998.

38. Nevertheless, growers’ incomes in this period have been
affected by increasing yields, resulting from mechanisation and
concentration, use of more effective herbicides, pesticides, etc. In
addition, prices for other crops have been reduced substantially
since 1992. The Commission’s Consumer Committee (4) declared
that sugar prices were ‘increasingly out of line with other arable
crops’ and that ‘an effort should be made to reduce the very high
consumer burden and trade distortion effects of the sector’. These
issues have not been addressed in the Commission’s proposals.

The level of prices

39. The Commission has not proposed any changes to the white
sugar and beet prices since 1991. It has not presented its propos-
als in terms of the likely impact on growers’ incomes and con-
sumer prices. Only the budgetary impact has been presented.

40. However, when examining the Commission files, it was
noted that price cuts had been seriously considered in previous
years and notably in 1992, when the Directorate-General (DG) for
Agriculture prepared a proposal for a 15 % cut over seven years
analogous with the cuts decided for the cereals sector. This fol-
lowed an internal Commission working group analysis of the
impact of various options. They concluded that an uncompen-
sated reduction of 15 % to 20 % would not lead to major prob-
lems for the sector and could reduce EU surplus sugar produc-
tion by between 2 and 3 million tonnes and produce a gain for
consumers of up to 650 million euro. The economic analysis ser-
vice of the DG for Agriculture concluded that price cuts of 25 %
to 30 % would be required to align the profitability of beet grow-
ing with that of cereals. As described above, neither this informa-
tion nor the price reduction proposals was put by the Commis-
sion to the decision-makers.

41. The Commission services therefore did not present an assess-
ment of the likely consequences of their proposals, nor justify
them in relation to alternatives, despite having the information
necessary to do so.

(4) Consumer Committee, opinion on the reform of the common agri-

cultural policy, Brussels, 14 June 1999.

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The price for ACP raw cane sugar

42. The guaranteed price for ACP raw cane sugar is not part of
the EU price proposals but is negotiated separately under the
Sugar Protocol (1). This allows considerable room for manoeuvre
in the setting of prices, requiring simply that the price to be paid
to the ACP countries be negotiated within the range of prices
obtaining in the EU, taking into account all relevant economic
factors. To this end, the ACP sugar-producing countries cooper-
ate each year to produce a memorandum on economic factors.

47. The Commission calculates each week the ‘theoretical export
refund’. From this it used to deduct an arbitrary amount of
0,2 euro per tonne. All tenders for export licences that were below
this amount were accepted. Only exceptionally, especially towards
the end of the marketing year, was a different approach followed.

48. Sugar-trading companies knew that their tenders would nor-
mally be successful if they were below the theoretical refund less
0,2 euro per tonne, so there was little incentive for them to com-
pete for export licences by submitting lower offers.

43. The country benefiting most from the special conditions
under the abovementioned arrangements is Mauritius. Almost all
of the Mauritius sugar crop (630 000 tonnes in 1998) is sold
under preferential arrangements; over 95 % of 1998 sales went to
the EU under the Sugar Protocol and special preferential sugar
(SPS) (2) arrangements and a further 3 % to the USA under the
import quota. Just 0,7 % of sales were on the world market, these
being entirely sales of bagged speciality sugars.

49. However, the export programme is now constrained by the
GATT Agreement on both the quantity and value of sugar exported
with refunds, and by pressures on the agricultural budget. Until
the 1999/2000 marketing year the impact was limited because
carry-forwards were allowed under the GATT arrangements. How-
ever, for 2000/2001 budgetary expenditure for exports is limited
to 499 million euro and the Commission estimates that quota
cuts of up to 500 000 tonnes could be required.

44. The cost of production of Mauritius sugar exceeds the prices
that can be obtained for raw or white sugar on the world market
(although speciality sugars can be sold profitably). The Mauritius
sugar industry therefore depends heavily on its access to the EU
market at guaranteed EU prices. Production costs in Mauritius are
more than double those of the more efficient ACP countries
(Malawi, Zimbabwe, Swaziland, etc.) because of the high labour
costs and the hilly and rocky terrain, which reduces possibilities
for irrigation and mechanisation. Mauritius imports white sugar
(36 000 tonnes from South Africa in 1998) for local consump-
tion in order to maximise the exports of its own raw sugar under
preferential arrangements.

45. The economic importance of access to the EU market at spe-
cial conditions has created a strong dependence for Mauritius and
other ACP countries on the continuation of these arrangements
and the prices obtained. However, the Commission has always
proposed that the guaranteed price (3) for Protocol sugar be sim-
ply equal to the raw beet sugar intervention price and this has
remained unchanged for many years. In practice, there is no nego-
tiation or consideration of the economic factors by the Commis-
sion.

Management of the export programme

46. The annual cost to the EU budget of exports of surplus sugar
is some 1 500 million euro, of which 800 million euro is recov-
ered through the production levy.

(1) Protocol 3 on ACP sugar of the Lomé Convention, 28 February 1975.
(2) Arrangements for the import of preferential sugar in addition to the
Sugar Protocol to ensure that the Community’s refining industry has
adequate supplies of raw sugar.
(3) CIF: cost, insurance and freight.

50. Moreover since the March 1999 Berlin summit there is
increased pressure on the Commission to remain within the bud-
getary allocation and to take a more active role in managing the
export programme in order to control the sugar budget. At the
same time, world market prices have fallen, increasing the cost of
each tonne of sugar exported.

51. A weekly meeting is held in the DG for Agriculture at which
the tenders are considered in the light of the prospects on the
world market, which the Commission officials monitor carefully,
and the impact on the available budget. There is no longer any
predictable refund below which tenders will be accepted. This has
had the effect of increasing competition for export licences with
consequent budgetary savings.

It was only in the face of budgetary constraints that the

52.
Commission acted to obtain lower rates for export refunds.

The organisation of the tendering procedures

53. The tendering procedures were examined in various Mem-
ber States and at the Commission and it was found that the Man-
agement Committee does little more than rubber stamp the Com-
mission proposal, which is very rarely changed in the light of the
Committee’s deliberations.

54. Significant savings could be made by accepting fewer offers
for export licences when world market prices are low, and increas-
ing the issue of licences when prices are high. However, given the
uncertainty of the world market this approach presents consider-
able risks which the Commission has not been willing to under-
take. The Commission could consider transferring this risk by
holding a limited number of tenders each year rather than one
each week. The Commission should evaluate the possible improve-
ments from alternative arrangements for tendering and deciding
on export refunds.

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Self-financing arrangements

55. Production levies are charged to compensate for the costs of
exporting approximately half of the surplus production. Storage
levies are charged in order to recover the payments made to reim-
burse storage costs. This system of levies is often referred to as the
‘self-financing’ arrangements, which the Court commented on in
its 1988 annual report (1) and in its 1991 special report (2).

56. The quantity of exports to be taken into account in the pro-
duction levy calculation continues to be based on the difference
between quota production and internal consumption (as laid
down in the Regulation). The Commission sugar unit derives the
consumption figure from data sent in by the Member States on
production and trade in accordance with Regulation (EC) No 779/
96 (3). However, no checks are carried out by the Commission to
verify the reliability of these data.

57.
In comparing data on intra-EU trade from several Member
States significant differences were noted. A total of 171 000 tonnes
of white sugar in 1998/1999 are shown as delivered to other EU
Member States but not recorded as received. The main differences
concerned German deliveries (492 000 tonnes in 1998/1999
according to the German data) which were recorded as receipts
only of 379 000 tonnes by the other countries. Similarly, French
data
shows deliveries of 965 000 tonnes whereas only
901 000 tonnes were recorded as receipts. Deliveries from all EU
countries to Spain amounted to 406 000 tonnes whereas Spain
only recorded receipts of 333 000 tonnes.

spot verification of production and stocks was undertaken dur-
ing the last five years by DG Agriculture, Clearance section. How-
ever in 1999 it did investigate sugar export refunds in some Mem-
ber States for the first time in many years. No overall monitoring
strategy has been developed, and the Sugar unit is not involved in
assessing the risks.

61.
In the Member States that the Court visited it was noted that
the Commission had not issued guidance on best practice in the
design of control mechanisms. This has led to the development
of very different control frequencies and a wide range of control
strategies. For example, physical checks on bulk sugar are per-
formed every month on all stocks in one Member State but not
at all in another. The methodologies followed vary from sophis-
ticated checks with laser equipment, to measurement using ropes,
to simple reconciliations of stock records at the time of emptying
storage facilities.

62.
In most Member States visited it was noted that almost total
reliance is placed on sugar production records prepared by the
companies but that the information systems that create these
records are not audited by the Member States’ inspectors and the
records are not reconciled to the companies’ financial accounts.

63. But all Member States visited emphasised that whatever tech-
nique is used to check bulk stocks, none can give accurate results.
Reliable stock records are of key importance for the calculation of
the production, as well as storage levies. For this reason the Com-
mission should develop a coherent control strategy and give guid-
ance on good practices and minimum standards.

58. The unreliability of these data could significantly affect the
amount of the production levies. Efforts should therefore be made
to use more reliable data, for example by using export and import
certificates to establish the net exports.

The Commission’s responsiveness to the various stakeholders
and to events affecting the CMO

Administrative, control and financial arrangements of the
CMO

59. Member States have clear responsibilities for administration
and control of the CMO, but the Commission has overall respon-
sibility to ensure that these arrangements function well.

60. Responsibilities within the Commission for monitoring the
administrative and control arrangements are divided. For both
sectors involved (DG Agriculture, Clearance section, for expendi-
ture and DG Budget for receipts), the key controls centre on the
accuracy of the stock records. However, while both use risk analy-
sis, the methodology followed in assessing the risks differs.
Whereas DG Budget’s checks are performed frequently, no on-the-

(1) OJ C 312, 12.12.1989, p. 93.
(2) OJ C 290, 7.11.1991.
(3) OJ L 106, 30.4.1996.

64. Stakeholders generally considered that the Commission ser-
vices were competent, knowledgeable and approachable. How-
ever, industrial users of sugar and the final consumers’ representa-
tives were of the opinion that insufficient account is taken of their
interests.

65. For two major events affecting the CMO in 1999, the sound-
ness of the Commission’s management was criticised. The first
related to the fixing of export refunds on processed products con-
taining sugar, where the Commission put forward proposals for
cuts of 10 % to the Non-Annex 1 Management Committee at the
last moment, without notice and with no written justification.

66. These initial proposals were not based on an economic
analysis or other valid supporting data and were met by strong
protest from exporting companies and Member States. In the end
the Commission presented a well-based proposal for a lower level
of cut in the export refunds and adaptations of the conditions for
allocating the refunds to those processed products most in need,
although this was rejected by the Management Committee.

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In the second case the Commission did not consult the Man-
67.
agement Committee on the terms of reference for a major evalu-
ation of the CMO for sugar.

(a) a good revenue, per hectare, for beet growers is ensured (up

to twice that from alternative crops);

REVIEW OF THE SUGAR REGIME

Introduction

68. As indicated under paragraph 8 the Court considers that it
is a fundamental management responsibility of the Commission
to obtain and disseminate sound information on the outcomes of
the policy. The Commission launched an evaluation of the policy
in the sugar sector in March 1999, the first since the CMO was
introduced in 1968. The terms of reference of the evaluation focus
on the relevance of the measures in force, as well as their effec-
tiveness and efficiency. At the moment of drafting this report
(June 2000) the Court did not have access to the results of this
evaluation. It is therefore not in a position to judge the quality of
the evaluation or to take note of the results.

69. However, there are four key questions that should be
addressed.

(a) To what extent have the objectives of the CMO been achieved

(is the policy effective)?

(b) At what costs have these objectives been achieved (is the policy

efficient)?

(c) Are the mechanisms of the CMO for sugar, and in particular
the level of production quotas and price support, still appro-
priate?

(b) the market is stable (no significant price fluctuations);

(c) supply is guaranteed (no shortages even in years of poor har-

vests);

(d) productivity has improved (increased beet yields, sugar con-
tent, extraction rates, mechanisation); this development has
not been entirely rational, however, as national quotas have
prevented production moving to the most efficient areas; the
high prices of sugar beet in relation to other crops have
affected the allocation of resources.

In regard to the fifth CAP objective, a reasonable price for
73.
consumers, only in Japan and Switzerland are sugar prices higher
than in the EU. At the time of the audit, the EU institutional prices
were more than three times world market levels. The Commis-
sion’s reply indicates that high prices exist in many other coun-
tries. However, it does not address the issue of whether the EU’s
prices are reasonable.

74.
In respect of the Treaty objective of contributing to the har-
monious development of world trade, the considerable expansion
of EU quota production in the 1970s and 1980s (see Chart 2) has
had an impact on the world market and the world market price
has been influenced by subsidised EU exports and high produc-
tion of C sugar. Equally, preferential prices for cane sugar imports
have led to a high degree of dependence in some ACP countries
(see paragraphs 42 to 45).

75. The specific CMO objectives have largely been achieved:

(d) Are the measures still in line with the CAP following the 1992

and the more recent Agenda 2000 reforms?

(a) employment is guaranteed for the 4 % of EU farmers who
have contracts with a quota-holding processing company;

70. The Court’s review of the sugar regime in this chapter focuses
on these questions. The Court has based its review on available
data and interviews with stakeholders.

(b) the CMO is self-financing to the extent provided for by the

Regulation;

(c) there is a steady and even flow of raw sugar to EU refineries.

Achievement of the objectives of the CMO

71. An assessment of the policy outcomes is made difficult
because no quantified objectives have been set by the Commis-
sion, despite this being a requirement of Article 2 of the Financial
Regulation.

76. There are few serious conflicts between growers and proces-
sors, which indicates that both parties are satisfied with the prices
they receive. However, as it is the processor that holds the quotas,
beet growers must obtain a contract with the factories in order to
be able to benefit from the CMO minimum beet prices.

72. However, on the basis of the information available it can be
concluded that for the general CAP objectives for the CMO as set
out in the Treaty:

77. The above review shows that many of the CAP and CMO
objectives are being achieved. However, these achievements must
be viewed in the light of the associated costs, which fall largely on
the consumer.

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The costs of achieving the objectives

78. The costs of achieving the CAP and CMO’s objectives can be
seen in several negative outcomes:

(a) a structural surplus in the production of sugar;

(b) a high level of internal prices in relation to world market

prices;

(c) a high level of stocks;

(d) a highly regulated framework which does not encourage com-

petition;

(e) the need for costly administration and controls.

79. Whilst the audit did not identify reliable independent assess-
ments of all of these costs, it is possible to establish basic indica-
tors that give a reasonable view of their magnitude.

80. The net annual cost of the structural surplus to the EU bud-
get is 800 million euro in the 2000 budget, being the total cost
of exporting surplus sugar (approximately 1 600 million euro)
less the levies on production. But there is an additional cost to
consumers. Under the self-financing system, processing compa-
nies pay production levies to cover the cost of exporting approxi-
mately half of the surplus. Given the low elasticity of demand for
sugar, the processing companies are able to pass on these levies
in the price of sugar and so the 800 million euro cost of this part
of the surplus is ultimately borne by the EU’s consumers.

81. The economic cost of the high level of EU prices can only be
established through detailed studies. Several are available but their
independence has been questioned. The simplest measure of the
cost is the difference between the EU support price and the world
market price, which would indicate a maximum annual cost to
the EU consumer of around 6 500 million euro (1). However, the
current low world market price cannot be considered a fully
objective indicator. Nevertheless, this simple calculation illustrates
the possible magnitude of the cost.

82. An indication of the cost of the high level of stocks can be
obtained on the basis of the average stocks over the last five years;
around 2 million tonnes of white sugar. This represents 14 % of
quota production, whereas the Commission has established a level
of 3 % (around 0,4 million tonnes) as the minimum necessary to
cover unexpected shortages (2). The annual costs of storage are

(1) Based on the Commission’s revised estimates for the 2000 budget.
(2) Commission Regulation (EC) No 1436/1999 (OJ L184, 24.7.1996,

p. 27).

calculated by the Commission at 20 euro per tonne. These are
collected from the processors in the storage levy and passed on
to consumers in the same way as the production levies (see para-
graph 80). This simple calculation of the stocks held above the
minimum necessary multiplied by the storage costs gives an
annual cost to EU consumers of over 30 million euro.

83. The economic costs of regulating the sugar industry cannot
be determined within the scope of the audit. The scheme provides
for a fixed buying-in price of the raw material (beet or cane) and
a guaranteed selling price of the final product, white sugar, and
allocates production quotas to processing companies. Currently
just five companies hold over 50 % of the total EU quota. Further-
more, in 10 of the 14 sugar-producing Member States (3), the
entire national quota is in the hands of only one or two compa-
nies. As a result, normal competitive forces do not operate and in
several cases sugar companies have been fined for abuses of com-
petition (4).

84. Experience in other developed countries indicates that if
there were no EU quotas on alternative sweeteners (5) these latter
would enjoy a much larger share of the overall sweeteners market,
at the expense of sugar, as they are cheaper and more suitable for
some food products (6). The EU’s production restrictions are in
this sense constraining rational economic development.

85. The quantification of the costs of administration and con-
trols over the sugar industry is only possible in an indicative way;
Member States retain a percentage of the production and storage
levies to cover their costs, estimated at 290 million euro annu-
ally (7).

86. The above analysis confirms the findings of the Court in its
1991 Special Report that the CMO for sugar leads to substantial
costs for the EU budget and for the consumer.

The mechanisms of the CMO for sugar, and in particular the
level of production quotas and price support

87. The processing industry and growers’ organisations are
strongly in favour of maintaining the main features of the current
CMO and the existing levels of price support and quotas. They
consider that the current regulation of the industry guarantees a
secure supply of high-quality sugar to EU consumers and that the
price to consumers is reasonable while ensuring good, but not
excessive revenues for the industry and growers.

(3) United Kingdom, Netherlands, Denmark, Sweden, Finland, Greece,

Ireland, Portugal, Spain, Austria.

(4) For example, Commission Decisions 97/624/EC (OJ L 258, 22.9.1997)

and 1999/210/EC (OJ L 76, 22.3.1999).
Isoglucose and inulin syrup.

(5)
(6) Rabobank, The World of Sugar and Sweeteners, 1999, p. 35.
(7) This figure corresponds to 25 % of the sugar levies entered in the EU

budget for 2000.

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88. Consumers and industrial users of sugar pointed to the high
profits being made by the more efficient processing companies as
evidence that the level of protection is too high and questioned
whether it is appropriate for an agricultural policy to regulate and
protect a processing industry so closely.

89. Quotas are allocated in the first place to Member States and
then to the sugar-processing companies. This has had the effect
of preserving sugar production in regions which are not well
suited to it, and which in some cases have required national aids
to support production. Conversely, the most efficient production
regions have not been able to obtain increased quotas.

90. A basic aim of setting quotas is to restrict the quantity of
annual production eligible for the intervention price guarantee.
But because of the reimbursement of the costs of storing sugar
and the availability of export refunds, even with the considerable
surplus, no quantities are offered for intervention purchase. Evi-
dence was found that factory-gate sugar prices were on average
10 % above intervention prices and considerably more in some
countries.

91. This has contributed to the situation where competitive
forces are not functioning effectively and there is no real ‘com-
mon market’ for sugar. In discussions with the various stakehold-
ers it became apparent that processors have little interest in com-
peting with processors in other countries and remain largely in
their home markets. The quotas and the price system, along with

the storage-cost reimbursements and export programme, provide
stability and a guaranteed income to processors. This degree of
protection for the processing industry is rare in the CAP.

92. Consumers consider sugar to be a staple product which will
be bought at any price, but for which the impact on the house-
hold budget, in particular for low-income families, cannot be
neglected. As such the current CMO, which makes the consum-
ers pay for the support to beet growers and the sugar processing
industry, is seen by consumers as being less fair, and certainly less
transparent, than a system based on direct support to farmers
from the EU budget.

The CMO for sugar: the 1992 and Agenda 2000 reforms

93. There have been two major reforms of the CAP in the last
decade, both concerned with the need to improve the competi-
tiveness of the European agricultural sector, but in neither case
was the sugar sector involved. The 1992 reform basically put the
emphasis on a change from price support for products to income
support for growers, thus focusing more on the farmer and less
on the industry.

94. The CMO for sugar remains, as the following table shows,
almost entirely targeted on the processing companies and the fin-
ished product rather than on the farmer.

Measures directly affecting
farmers

Main measures directly affecting the processing industry

Minimum price for beet Minimum price for beet

Intervention arrangements and prices for white sugar
Export refunds on white sugar
Export refunds for sugar in processed products
Levy on production of white sugar
National quotas on production of white sugar
Obligation to export sugar produced in excess of quota
Possibility of carrying forward part of surplus
Aid for storage
Approval of storage facilities
Levy on sales to fund storage aid
Obligation to hold minimum stocks
Protection from imports
Production refunds for chemical industry
Quotas on isoglucose production and inulin syrups
Aid for refining industry
Import of SPS sugar to guarantee supply to refineries
Controls on exports, imports, production and storage of sugar

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In the Agenda 2000 reform emphasis was placed on com-
95.
petitiveness on world markets, environmental protection, sus-
tained rural development, simpler policies and greater account-
ability to the taxpayer.

96. EU sugar is clearly not competitive on the world market.
Subsidies of the order of 75 % of the EU intervention price are
currently needed to enable the quota surplus to be sold. C sugar
(production in excess of quotas), which receives no export refunds,
can only be sold profitably at world market prices because the
prices obtained for sales of quota sugar are sufficient to cover all
the fixed costs of the processing companies.

97.
Intensive sugar production can have negative consequences
for the environment: the water requirement is high (three times
that of wheat) and the nature of the crop entails a heavy usage of
herbicides (1). As a result, the maintenance of production on a
scale which substantially exceeds EU demand leads to negative
environmental impacts which could be avoided.

100. The review of the sugar regime shows that many of the
CAP and CMO objectives are being achieved, but with a structural
surplus and at a high cost to the EU budget and to the consumer.
While the Commission cannot be held entirely accountable for
this situation, the soundness of the Commission’s management
and in particular the quality of its proposals, decisions and actions
has had an impact on the outcomes and for this the Commission
is responsible and accountable.

101. Despite a situation of structural overproduction, the Com-
mission has repeatedly limited itself to proposing the continua-
tion of the sugar regime and maintaining the levels of quotas and
prices unchanged. However, extensive information has been col-
lected, and analyses prepared, by the Commission’s services which
should have provided the basis for proposing corrective
action. Increases in productivity in sugar beet production and
processing should have prompted the Commission to address the
question of the costs imposed on EU consumers.

98. As regards accountability, the fact that the major cost of the
sugar policy is borne by the final consumer, i.e., the public, war-
rants proper quantification and public reporting to ensure trans-
parency.

102. There have been two major reforms of the CAP in the last
decade but in neither case was the sugar CMO involved. Agenda
2000 placed emphasis on competitiveness in world markets, envi-
ronmental protection, sustained rural development, simpler poli-
cies and greater accountability to the taxpayer. None of these
aspects are satisfactorily addressed in the sugar CMO.

CONCLUSION

99. Serious consideration should be given by the Commission to
improving the quality of its management of the sugar CMO in
respect of:

(a) the quality of the basic information it uses in managing the
CMO; in particular it should dispose of complete information
on the achievement of the objectives in order to justify the
proposed quota arrangements and price proposals; it should
dispose of more extensive and independently verified infor-
mation in order to make sound price proposals; efforts should
be undertaken to dispose of more reliable data for the calcula-
tion of production levies;

(b) its analysis of the basic information; the Commission should
make use of independent financial experts and alternative
information sources; it should analyse all elements influenc-
ing the price proposals including growers’ income and employ-
ment and the impact on consumers; it should properly con-
sider the economic factors in its proposals for the ACP
guaranteed sugar price.

103. The CMO for sugar benefits relatively few farmers, but for
those that do benefit, it provides a level of income from beet
growing well above that available from other major crops (see
Annex II).

104. Given the impacts of the quota system and the high prices,
alternative measures should be examined. While import restric-
tions insulate the EU market from the volatility of world market
prices and protect EU sugar producers, a degree of liberalisation
of the EU sugar industry in order to increase competitive forces
and reduce prices should be considered. Some stakeholders have
suggested that quotas be allocated directly to growers and flex-
ibility ensured by allowing quotas to be transferred. Others have
argued for only a minimum beet price to be fixed (to protect the
farmer from a dominant processor) and for quotas and interven-
tion to be phased out, with market forces ensuring that sufficient
high quality sugar continued to be supplied and that the price was
competitive.

105. Another option raised is that of adopting the basic prin-
ciples of the 1992 reform which applied to other arable crops (see
paragraph 93). This would imply a substantial proportion of sup-
port taking the form of direct payments to growers and the con-
vergence of institutional prices with world market levels.

(1) See the Court’s Special Report No 14/2000,

‘Greening the CAP’,
(OJ 353, 8.12.2000) paragraph 27, and the OECD Directorate for
Food, Agriculture and Fisheries, Committee for Agriculture, Group
on Cereals, Animal Feed and Sugar; Sugar Policy Reform: Environ-
mental Policy Aspects, 24 September 1998.

106. The elements presented in paragraphs 87 to 92 call into
question the appropriateness of the mechanisms of the current
CMO for sugar. A number of alternatives exist which the

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Official Journal of the European Communities

C 50/17

Commission should address in its forthcoming proposals for the
reform of the regime. It is also necessary to examine whether the
current level of support remains appropriate when quotas far
exceed the level of EU demand and prices are no longer in line
with the other major crops.

— the justification for the high prices obtaining in the EU market
and the resulting high level of duties on non-preferential sugar
imports,

— the extent to which the sugar regime focuses on the industry

rather than the growers,

107. The key issues therefore to be taken into account in future
proposals include:

— the limited competition among processors,

— the consequences of keeping quotas at their existing levels

— the contradictions between the principles and objectives of

despite the continuing structural surplus,

the Agenda 2000 reform and the current sugar CMO.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 26 October 2000.

For the Court of Auditors

Jan O. KARLSSON

President

C 50/18

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Official Journal of the European Communities

15.2.2001

ANNEX I

Sugar CMO: expenditure and levies
(Mio EUR. Actuals 1995 to 1999 and budget 2000)

1995

1996

1997

1998

1999

2000

EXPENDITURE

Measure

Export refunds on sugar and isoglucose
Reimbursements of storage costs
Refunds on sugar used in the chemical industry
Measures to aid the disposal of raw sugar
Other interventions

1 312,1
398,8
70,4
15,0
34,7

1 230,0
361,1
80,9
15,4
23,9

1 115,7
362,4
81,8
14,2
33,8

1 265,5
349,5
104,8
12,8
44,1

1 591,1
342,8
128,3
11,2
39,4

1 493,0
316,0
135,0
12,0
40,0

Total expenditure

1 831,0

1 711,3

1 607,8

1 776,7

2 112,8

1 996,0

LEVIES (income)

Sugar production levies
Isoglucose production levies
Inulin syrup production levies
Sugar storage levies
Charges levied on non-exported C sugar and C isoglucose pro-
duction
Charges levied on substituted C sugar and C isoglucose
Additional levies

726,0
5,9
1,1
542,0

0,3
0,8
40,3

711,6
6,8
1,6
490,8

0,8
0,0
2,1

746,5
6,6
2,2
349,0

9,9

0,0

780,5
6,4
2,8
280,1

0,3
0,0
0,0

817,5
7,1
2,0
288,5

0,4
0,0
88,1

788,3
6,8
3,0
286,9

p.m.
p.m.

77,7

Total levies (income)

1 316,4

1 213,7

1 114,1

1 070,1

1 203,6

1 162,7

Net budgetary expenditure

514,6

497,6

493,7

706,6

909,2

833,3

15.2.2001

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Official Journal of the European Communities

C 50/19

ANNEX II

THE EU AND THE WORLD SUGAR MARKET

The world market

1. The total value of the 135 million tonne world sweeteners market is of the order of 70 000 million euro, with sugar
representing 91 % by value and 83 % by volume (1). High fructose syrups and intense sweeteners are the other main product
groups.

2. Over 70 % of the world’s sugar is produced from cane, grown mainly in Asia, South and Central America, Africa and
Oceania. Most of the beet sugar is produced in Europe (80 %), followed by North America (10 %) and Asia (8 %) (2). In recent
years Brazil has overtaken the EU as the largest producer of sugar in the world, with 21,4 million tonnes in 1998/1999
compared to the EU’s 17,6 million tonnes. The next largest producers are India (16,9 million tonnes), China (9,7 million
tonnes) and the United States of America (7,5 million tonnes) (3). The ACP countries together have an average annual produc-
tion of 3,9 million tonnes (4).

3. World sugar consumption is growing steadily at an annual average 1,4 % in the 1990s (3). There is little growth, and
even some decline, in consumption in the industrialised countries, who together consume about one third of the world total.
Elsewhere, consumption is increasing largely in line with population growth, forecast to be about 1 % per annum over the
next quarter century (5).

4. World trade is dominated by a handful of countries. Brazil, the EU, Australia, Cuba and Thailand together account for
68 % of all exports (3). Five importers — Russia, Indonesia, the USA, the EU and Japan — represent one third of all sugar
imports. The EU is unique in being both a major exporter (of white sugar) and importer (of raw cane sugar).

5. The value of sugar traded internationally exceeds all other crop products except wheat. Some 28 % of total sugar produc-
tion is placed on the world market, compared to 16 % for wheat and 12 % for maize (6). Since the demise of the Soviet-Cuba
agreements, only about 10 % of the 37 million tonnes of sugar traded annually fall under preferential trade agreements. The
most important of these are the USA’s tariff-rate quotas (1,8 million tonnes in 1998) and the EU’s Sugar Protocol and special
preferential sugar agreements with the ACP countries (1,7 million tonnes) (7).

6. The international sugar trade is divided more or less equally between raw cane sugar, which will usually be refined at its
destination, and white sugar. While the EU’s imports are primarily of raw sugar for refining in the EU, its exports are of
white sugar. The EU’s main markets are the Middle East (35 % of exports 1996 to 1998), North Africa (20 %) and other
European countries (16 %) (3).

7. The surplus production, and consequent build-up of stocks during the 1990s, has led to historically low prices on the
world market.

8. Analysts (3) suggest that the extreme swings in the world market sugar price that have been experienced in the past are
less likely to recur. For industrialised countries sugar is considered as a staple which will be purchased whatever the price.
Supply shortages have therefore led to rapid price escalations. However, developing countries now represent a much larger
— and increasing — proportion of world demand and this has increased the price-sensitivity of consumption. The structure
of world trade has changed and the sources of supply have diversified.

9. Most sugar-producing countries have some degree of protection and regulation of their sugar industries. Imports are
subject to restrictions and the prices paid to growers — and in some cases to the processors — are regulated. However, the
EU is the only major producer that directly subsidises exports (8).

International Sugar Organisation: Yearbook 1997.
European Commission, DG for Agriculture, internal document.

(1) Rabobank: The World of Sugar and Sweeteners, 1999, p. 28.
(2)
(3)
(4) ACP website: www.acpsugar.org.
(5) Rabobank: The World of Sugar and Sweeteners, 1999, p. 8.
(6) Rabobank: The World of Sugar and Sweeteners, 1999, p. 33.
(7) Rabobank: The World of Sugar and Sweeteners, 1999, p. 51.
(8) Rabobank: The World of Sugar and Sweeteners, 1999, p. 49.

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Official Journal of the European Communities

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10. The top 10 sugar companies worldwide account for 20 % of all sugar production. Six of these are based in the EU (1).
Several have become multinationals in the last decade through overseas acquisitions (2).

The EU market

11. Almost 90 % of the EU’s sugar supply is produced from beet grown within the EU, the remainder is produced in the
EU’s refineries from raw cane sugar. At first, this concerned only the cane sugar produced in the French Overseas Depart-
ments, but this situation changed radically with the United Kingdom’s accession. Prior to joining the EC, the United Kingdom
obtained two thirds (about 2 million tonnes) (3) of its domestic needs from raw cane sugar imported under the Common-
wealth Sugar Agreement and refined in the United Kingdom.

12.
In 1975 this agreement was replaced by the Sugar Protocol which commits the EU to purchase 1,3 million tonnes of
cane sugar from the ACP countries each year. The British market therefore continues to be supplied by refined cane sugar —
albeit to a lesser extent — in addition to beet sugar. Portugal, and to a much lesser degree Finland, also obtained their sup-
plies by refining imported cane sugar before joining the EU and these arrangements have also been continued.

13. Because the prices guaranteed by the sugar CMO are above free market levels, quotas are used to limit production of
beet sugar and quantitative restrictions are placed on imports of cane sugar for the refineries. As the EU guarantees to
purchase any unsold sugar produced within these limits, one can consider the quotas plus the imports of cane sugar for the
refineries as the EU guaranteed supply. However, this supply of sugar is considerably in excess of the EU’s requirements for
its own consumption. This structural surplus is sold on the world market with export refunds (subsidies). The actual supply
situation in the EU for the period 1991/1992 to 1998/1999 is shown in the ‘balance sheets’ in Annex III.

14. All EU Member States grow sugar beet, with the exception of Luxembourg. France and Germany dominate, together
producing more than half of the EU’s total. Fewer than 300 000 (4 %) of the EU’s seven million farms grow sugar beet.
Although beet is grown on just 1,6 % (2 million ha) of the EU’s agricultural area, it represents 2,5 % of agricultural output
by value (4).

15. Eurostat data indicate that the gross value added per hectare of sugar beet (i.e. the value of the crop less the costs of
production) is 6,5 times that of cereals, or 3 times if CAP subsidies are included (4).

16. The period since the introduction of the CMO in 1968 has been characterised by increasing yields achieved through
improved farming techniques and seed varieties. Yields in terms of white sugar extracted have increased significantly, from
an average for the period 1968/1969 to 1976/1977 of 5,26 tonnes per ha (5) to reach 8,4 tonnes for 1996/97 to 1999/
2000 (4).

17. The sugar processing industry has seen increasing concentration and improvements in efficiency; the number of fac-
tories in EU-15 has fallen from 374 in 1968/1969 to 140 in 1995/1996 (6) and the number of companies from 86 in 1991/
1992 to 64 in 1998/1999 (7).

18. Beet growing represents some 45 000 full-time equivalent agricultural jobs (8); due to technical progress, mechanisa-
tion, use of improved varieties and herbicides, the employment of agricultural labourers has practically disappeared in many
regions (9). The sugar processing industry employs 52 000 (10) although most of these jobs are only seasonal.

European Commission: The Agricultural Situation in the European Union, 1998.

(1) Tate and Lyle, Südzucker, Eridania-Beghin Say, Danisco, British Sugar, Azucarera Ebro Agrícolas.
(2) Rabobank: The World of Sugar and Sweeteners, 1999, p. 42.
(3) UK Ministry of Agriculture, Fisheries and Food: Annual Review of Agriculture, 1973, 1974, 1975.
(4)
(5) CEFS-CIBE, The Sugar Regime in the European Union, February 1998, p. 7.
(6)
(7) CEFS website: www.ib.be/cefs/.
(8) CEFS-CIBE, The Sugar Regime in the European Union, February 1998, p. 8.
(9)
(10) CEFS-CIBE, The Sugar Regime in the European Union, February 1998, p. 11.

FO-Licht: International Sugar and Sweetener Report, 1998, p. 249.

FIRS, Trente ans, 1998, p. 5.

.

.

1
5
2
2
0
0
1

ANNEX III

EU sugar supply balance
Production year (October to September)

1991/1992
EU 12

1992/1993
EU 12

1993/1994
EU 12

1994/1995
EU 15

1995/1996
EU 15

1996/1997
EU 15

1997/1998
EU 15

1998/1999
EU 15

(1 000 tonnes, white sugar equivalent)

SUPPLY

Production of sugar from EU-grown beet and cane (1)
Within quotas
In excess of quotas (C sugar)

Imports
Raw cane sugar for refining in the EU (2)
Sugar for the supply of the Azores, Madeira and the
Canaries
Sugar contained in processed products

Opening stocks
Closing stocks
Changes in stocks

USES

Consumption

Exports
C sugar produced in excess of quotas
Quota and refined sugar exported with refunds
Sugar contained in processed products

14 703
13 130
1 573

1 922

16 012
13 747
2 265

1 979

16 216
13 298
2 918

2 077

15 403
13 412
1 991

2 154

(321)

223

78

(728)

11 966

4 980

11 939

5 829

11 623

6 592

12 615

5 670

15 859
14 278
1 581

2 200
1 755

60
385

1 638
1 715
77

12 559

5 181
1 581
2 747
853

16 766
14 398
2 368

2 272
1 755

62
455

1 715
2 150
435

12 727

5 681
2 368
2 440
873

17 763
14 616
3 147

2 181
1 616

69
496

2 150
2 394
244

12 710

6 865
3 147
2 902
816

16 396
14 218
2 178

2 320
1 729

77
514

2 383
2 320
(63)

12 748

5 827
2 178
2 887
762

(1) Includes approximately 250 000 t p.a. of sugar produced from cane grown in Spain and French Overseas Departments.
(2) Includes approximately 60 000 t p.a. raw cane sugar for direct consumption.
Source: European Commission.

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
C
o
m
m
u
n
i
t
i
e
s

C
5
0
/
2
1

ANNEX IV

EU sugar production quotas 1995 to 2001 by Member State

(1000 t white sugar equivalent)

4 000

3 500

3 000

2 500

2 000

1 500

1 000

500

0

Belgium Denmark Germany

Greece

Spain

France

Ireland

Italy

Luxem-
bourg

Netherlands Austria

Portugal

Finland

Sweden

United
Kingdom

B quota

A quota

146

680

97

328

812

2 637

29

290

40

960

806

2 996

18

182

248

1 320

0

0

182

690

74

316

7

73

13

134

34

336

104

1 040

C
5
0
/
2
2

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
C
o
m
m
u
n
i
t
i
e
s

.

.

1
5
2
2
0
0
1

15.2.2001

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Official Journal of the European Communities

C 50/23

THE COMMISSION’S REPLIES

EXECUTIVE SUMMARY

CMO for sugar

The EU and the world sugar market

The Commission would like to point out that the surplus on the
world market (30 % of world production) is not structural but
cyclical, with cane production having played the key role. World
production for the 2000/2001 marketing year is forecast to be
below the consumption figure by 3 to 5 million tonnes, and a
production shortfall is likewise expected for the 2001/2002 mar-
keting year. At Community level the area under sugar beet has
been reduced by 12 % under the current system (even though
production has remained stable) in order to improve the supply/
demand ratio at world level, but the significant increase in cane
sugar production has led to very low prices on the world market.
Even though Community production is exceeding consumption,
this has to be viewed against annual preferential
imports of
1,6 million tonnes from the ACP countries. In the Commission’s
opinion, the quantities of sugar corresponding to those preferen-
tial imports should not enter into the calculation of the structural
surplus, which concerns only Community production. Under the
rules governing the CMO for sugar, the structural surplus (deter-
mined on the basis of production quotas) comprises approxi-
mately 10 % of consumption (1,3 million tonnes). (See Commis-
sion response to paragraphs 13 and 78(a).)

Budget cost

The net cost for 1999 was EUR 909 million; in 1998 it was
EUR 706 million and in 2000 it is expected to be EUR 833 million.

The net cost of the CMO for sugar to the budget is the cost of
exporting a quantity of sugar equivalent to imports from the ACP
countries and India (1,6 million tonnes) resulting from the Com-
munity’s international commitments under the ACP/EU Protocol
and the agreement with India. The Court points out its impor-
tance to those countries as development aid, although under the
accounting and budget rules this expenditure is classified as agri-
cultural.

The wholesale price of unprocessed sugar is almost double the
intervention price, and this consumption accounts for only 30 %
of total consumption.

Processed product prices are higher in the Community than else-
where in the world, and sugar accounts for about 5 % to 10 % of
what the consumer pays.

Lastly, it has to be borne in mind that household spending on
sugar in the Community is among the lowest in the world.

While the founding principles of the CMO for sugar (quotas +
self-financing) have been reaffirmed constantly since 1968, the
sugar regime has nevertheless responded to the various challenges
faced over the years by undergoing continuous adjustment. For
example, and leaving aside the successive enlargements of the
Community, those adjustments have included:

— integrating isoglucose production,

— integrating the ACP Protocol linked to the Lomé Convention,

— full self-financing of Community production on an annual

basis,

— integrating inulin syrup production,

— adopting a supply system for Community refineries,

— adopting mechanisms in order to comply with the GATT

agreements.

The Commission would also like to stress that, even though the
CMO for sugar was not included in the 1992 reform or in
Agenda 2000, it incorporates several of the same objectives: con-
trol of production and of budget expenditure.

The Court’s main findings

(a) As the Court states (paragraph 24), the Commission depart-
ments possessed extensive information about the sugar market.
The Council received all the information it needed to take its deci-
sion. No national delegation asked the Commission to present
other alternatives, apart from two which asked for prices to be
reduced.

(b) The Commission is aware of the difficulties in obtaining infor-
mation on the sugar industry’s commercial situation. Confiden-
tiality problems are inherent in gathering information on the
sugar industry’s actual production costs, and the same applies to
the second-stage processing industry (which accounts for 70 % of
the sugar volume consumed in the Union).

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Official Journal of the European Communities

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(d) The economies of the ACP countries, and in particular Mau-
ritius, do indeed largely depend on the special arrangements for
sugar continuing. That is why the ACP countries are very attached
to maintaining the Sugar Protocol linked to the Lomé Conven-
tion.

reduce the system’s actual budget cost, as against even the gross
budget amount. The net cost for 1999 was EUR 909 million; it
was EUR 706 million in 1998 and is
expected to be
EUR 833 million in 2000.

(e) In order to meet budget and GATT constraints, the Commis-
sion is able to limit the export programme and reduce quotas if
necessary. At all events, the Commission has always had to take
into account the economic and commercial reality of the world
market each marketing year when managing tenders.

The Commission would like to point out that more than 90 % of
that net expenditure comprises the export costs for a quantity
equivalent to the sugar imported from the ACP countries (1,7 mil-
lion tonnes), and is therefore tantamount to a kind of develop-
ment aid.

(f) The Commission does not share the Court’s view.

(g) The statistics used to calculate production levies are supplied
by the Member States. Since the completion of the single market,
its specific rules have made intra-Community trade statistics more
difficult to obtain.

However, the self-financing nature of the system is attained not
only on an annual basis but also on a multiannual one, and the
checks carried out by the Commission show that the production
levies still cover the cost of exporting Community surpluses.

The Commission regards as excessive the Court’s estimate of the
cost borne by the consumer (see paragraphs 81 and 82).

THE EU AND THE WORLD SUGAR MARKET

The Commission nevertheless notes the Court’s suggestions.

10. World operating stocks are increasing in line with the rise in
world consumption.

(h) Checks are carried out by the authorities responsible in the
Member States: customs departments, Ministry of Finance depart-
ments and Ministry of Agriculture departments. The Commission
in turn audits those checks via the accounts clearance procedure
and by means of unannounced visits to sugar undertakings.

12. Community rules permit non-quota production, in excess of
the quantities under Community guarantee.

This non-quota sugar must be exported unprocessed to the world
market, and comply with the rules of the WTO.

OUTCOMES

(b) While it is aware of the criticisms focusing on the lack of
competition under the present system, the Commission would
nevertheless like to stress that the product (sugar) placed on the
Community market under similar guarantee conditions is homo-
geneous and of a quality which is valued highly both inside and
outside the Community.

13. The sugar surplus on the Community market is approxi-
mately 3 million tonnes, comprising a Community production
surplus of roughly 1,3 million tonnes in relation to consumption
which results from the beet production quota fixed by the Coun-
cil, and a quantity of roughly 1,7 million tonnes equivalent to
preferential imports from the ACP countries and India, on the
basis of preferential agreements adopted by the Council.

(c) See the comments above on the CMO for sugar.

An evaluation of that surplus should take into account that:

INTRODUCTION

— operating stocks are also needed,

— sugar is exported in sugar-based products.

3. Annex I to the Court’s observations describes the Community
sugar budget for 1995 to 2000. Production levies significantly

Lastly, it should be noted that Community white sugar finds an
outlet on the world white sugar market, where there is an obvi-
ous demand which other countries cannot satisfy (at least in the
short term).

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C 50/25

MANAGEMENT BY THE COMMISSION

Commission proposals on quotas

18 to 31. The Commission welcomes the Court’s acknowledge-
ment that the Commission departments ‘prepared a thorough
assessment of the operation of the sugar regime, its impact and
the challenges it faced. An internal working group considered a
wide range of options for reform, some of them quite radical’
(paragraph 24 of the Court’s observations).

The Commission therefore had all the information needed to
present its proposals to the Council, the European Parliament and
the Economic and Social Committee — proposals which would
significantly alter the system. The system was in fact rolled for-
ward three times in four years pending the outcome of the GATT
negotiations. During that stage preceding the Commission pro-
posal for 1995 to 2001, the Commission, the Council and the
Working Parties received all the information needed to take their
decisions. The national delegations did not ask the Commission
to present other alternatives, with only two delegations arguing in
favour of reducing prices.

The Commission would stress that the Council voted for the
Commission proposal by a very large majority (82 out of 87) with
the favourable opinion of the European Parliament.

Annual proposals for institutional prices

Data used in preparing the price proposals

33 to 36. Since it cannot possibly have access to any industry’s
real production costs, the Commission draws up its analyses on
the basis of data supplied by specialist professional bodies and
publications as well as profit and loss accounts published by sugar
companies.

The Commission would like to stress that institutional prices and
hence also the manufacturing margin have effectively been frozen
for over 15 years (there was even a 2 % fall in 1989/1990), which
means that the prices and the margin have fallen in real terms
over the period.

The results of the study to which the Court refers at paragraph 36
are not borne out by the facts.

Taking account of the CAP objectives

37 and 38. Maintaining minimum prices unchanged for 15 years
has led to a price reduction in real terms for producers. A price

cut, offset by direct aid to agricultural producers, would entail
substantial budget costs exceeding the budget constraints for
2000 to 2006.

As regards environmental aspects, the amounts of fertiliser, her-
bicide and pesticide used for each tonne of beet or sugar produced
is decreasing steadily (less used per hectare and increased yields
per hectare).

The level of prices

39 to 41. The Commission would stress that:

(a) prices have been frozen since 1984/1985;

(b) the Council adopted its proposals by a very large majority;

(c)

it is quite normal for the Commission to present only one
proposal after examining the economic position and taking
into account the political situation in the Community at the
time.

The price for ACP raw cane sugar

42 to 45. After examining the evidence available for the ACP
countries in respect of each marketing year, the Commission pro-
poses prices to those countries which take economic factors into
account as far as possible within the limits of the Community
intervention price. Throughout the negotiations and in spite of
those countries’ requests, the Commission has always considered
that a higher price would prevent their sugar from being sold
unless there were a Community subsidy and would call into ques-
tion the Community preference principle.

Management of the export programme

46 to 52. The theoretical calculation of refunds in the sugar sec-
tor is based on the intervention price and not on the internal mar-
ket price as in other sectors. This calculation not only accords
well with reality but also greatly restricts commercial companies’
room for manoeuvre, their competitiveness being fundamentally
dependent on the state of the world market.

The management of tenders must take into account the economic
and commercial realities of the world market prevailing in each
marketing year.

The organisation of the tendering procedures

53. Management of this CMO involves the Member States through
the Management Committee. The tendering procedures are trans-
parent; over the past five marketing years some 95 % of the opin-
ions by the Management Committee have been favourable (223
favourable opinions out of 233 procedures).

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54. The Commission cannot reconcile its duty of proper man-
agement with the use of speculative market factors as criteria in
the tendering procedure.

The distribution of tendering procedures throughout the year
helps to supply the market as a function of its needs and to issue
greater licence tonnages when demand is greatest.

Self-financing arrangements

55 to 59. The Commission would like to point out that under
current rules and the Marrakesh Agreement (WTO) the cost of
disposing of Community production surpluses (not including the
quantities corresponding to imports from ACP countries and
India) is wholly covered by production levies. Self-financing of the
regime is guaranteed not only on an annual basis but also on a
multiannual one and the verifications carried out by the Commis-
sion demonstrate that expenditure on exporting the Community
surpluses is effectively covered by the production levies.

does it have to consult the Committee when carrying out internal
studies or arranging for external studies. However, the Manage-
ment Committee was informed of the start of the evaluation of
the sugar CMO and was given the tender specifications when the
call for tenders was launched in April 1999.

REVIEW OF THE SUGAR REGIME

Introduction

68 to 70. The Commission will forward the sugar CMO evalu-
ation report to the Court as soon as it is available. The report will
be accompanied by the comments of the steering group, in par-
ticular its view of the quality of the evaluation.

56 and 57. Single market rules make the production of intra-
Community statistics difficult because of the differing declaration
thresholds operated by the Member States.

Achievement of the objectives of the CMO

58. The Commission has already considered the use of licences
and discussed it within the Management Committee. At the present
time such a system would not solve the problems relating to pro-
cessed products.

Administrative, control and financial arrangements of the
CMO

59. Over the years the Commission’s clearance of accounts unit
has carried out controls of production and stocks, but the risk of
unjustified expenditure is considered low and the control fre-
quency reflects that assessment. The most recent controls carried
out were in 1991 to 1994.

60 to 63. A Commission working paper addressed to Member
States’ authorities on control of the sugar storage scheme under
Regulation (EEC) No 4045/89 was drawn up in 1999 to provide
guidance to staff performing ex post controls under Regulation
(EEC) No 4045/89. These controls are aimed at reconciling pro-
duction and storage records with financial accounts and any other
commercial documents in individual undertakings.

72.

(a) The Court notes that farm income from sugar beet is ‘up
to twice that from alternative crops’. That comment should
be qualified or subject to further explanation. The alterna-
tive crops considered for comparison are very probably cere-
als, in other words the most common and least profitable
crops. If the comparison had been with potatoes or cotton,
for instance, the result would have been quite different.

Beet growers also produce, for example, wheat and beef and
it is their overall income which counts in terms of the objec-
tives set for the CAP in the Treaty.

(d) The Union decided to limit quotas by region. This policy
indicates a clear desire to safeguard a degree of production
in all the regions of the Community so as to contribute
directly to rural development both in terms of beet growing
and in terms of sugar production. The Commission would
point out
the objectives of multi-
that
functionality in agricultural activities amount to a deliberate
policy of rural development.

to the Court

73. The Court itself indicates that world market prices are not a
fully objective indicator. Prices in the Union are in fact no differ-
ent from those in many other industrialised countries.

The Commission’s responsiveness to the various stakeholders
and to events affecting the CMO

For example:

67. The Commission was not obliged to consult the Manage-
ment Committee for Sugar before starting its evaluation, neither

— Sugar prices in the United States, Canada and Australia are 2,9
times the level of world market prices. In the United States the
sugar ‘intervention price’ fixed for 1996 to 2002 is similar to
that fixed for the Community.

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— In Norway, where all sugar is bought on the world market,
consumer prices for white sugar are more or less the same as
in the Community; for some processed products they are in
fact considerably higher.

quotas, is some 10 % of consumption, 1,3 million tonnes, of
which the Community is allowed to export 1,2735 million
tonnes under the WTO agreements.

74. The increases in quotas shown in Chart 2 largely followed
the successive enlargements of the Community. The increase in
quotas in the 1970s was linked to sugar supply shortages. In the
1990s, EU surplus production remained fairly stable.

The current surplus situation on the world market is due to con-
siderable increases in production in a number of the other main
sugar-producing countries. The world market is increasing by
some one million tonnes per year while Community exports to
that market remain stable (5 to 5,5 million tonnes) and are not
subject to cycles. Brazil, on the other hand, which has incidentally
also implemented a bio-alcohol programme, increased its exports
in the 1990s from 1,5 million tonnes per year to 11,0 million
tonnes in 1999/2000 on a total world market of some 38 million
tonnes; Thailand and Australia have also increased their exports.
In the latter country direct production aid and structural aid have
been implemented.

75. Sugar beet growers are not specialist producers but also pro-
ducers of wheat, beef, etc. The following table gives an idea of the
significance that beet growing has in some regions of the Com-
munity:

Region

Percentage of
total holdings
growing sugar
beet (1997) (1)

Percentage of
regional
agricultural
area under
sugar beet
(1997) (2)

Percentage of
total agricultural
output
(1995) (2)

22,0 %
14,1 %
30,3 %
53,6 %
45,3 %
13,8 %
15,5 %
37,8 %

6,9 %
4,9 %
5,1 %
12,5 %
7,8 %
6,2 %
8,2 %
10,9 %

4,8 %
4,7 %
10,4 %
22,6 %
9,5 %
4,5 %
10,1 %
10,5 %

Belgium
Lower Saxony
Saxony-Anhalt
Picardy
Nord/Pas-de-Calais
Emilia-Romagna
Marche
East Anglia

(1) Farm structure survey.
(2) Regio database.
Source: Eurostat.

The cost of achieving the objectives

(b) The world price is not a particularly objective indicator,
as the Court itself acknowledges in paragraph 82 of its
report.

(c) Stocks run at 2 million tonnes, but only 1,1 million tonnes
are normally available, and this is less than 10 % of con-
sumption.

(d) The Commission is aware of the fact that the system has
been subject to criticism implying that the lack of competi-
tion is due to the highly segmented nature of the market and
to concentration in the sector. However, the Commission
endeavours to restrict the anti-competitive effects of the sys-
tem by actively applying Community competition rules in
the sugar sector, as can be seen from the numerous anti-trust
proceedings and the fines recently imposed (British Sugar
1997, Irish Sugar 1999).

(e) In the Commission’s opinion the cost of such controls in
terms of the organisation of an entire sector is reasonable in
comparison to the production levies.

80. The production levies and the cost of exporting a quantity
equivalent to imports from ACP countries, which form the major
part of budget expenditure, are independent of consumption.

The method of calculating production levies is based on identify-
ing the proportion of expenditure to be borne by Community
producers.

81. The sum of EUR 6 500 million is not representative and does
not, in the Commission’s view, reflect economic or budget real-
ity. It is based on a calculation supported by basic data (world and
intervention prices) which have only a theoretical significance.
The world price of EUR 200 per tonne used by the Court is not a
relevant indicator of consumer price both because it is highly
volatile and given its current level, which is less than the most
efficient producers’ production costs. In fact, the Court itself indi-
cates that it is not a ‘fully objective indicator’.

78.

(a) It is the Commission’s opinion that the sugar quantities
offset against preferential imports must be excluded from
the calculation of the structural surplus, which should only
concern Community production. Under sugar CMO rules
the structural surplus, drawn up on the basis of production

Moreover, the Court’s calculation does not take adequate account
of the economic realities linked to equilibrium on the sugar mar-
ket. If the Community had to draw its supplies from the world
market, the additional demand which that would generate would
immediately push up world prices significantly.

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The CMO for sugar is, like other CMOs, based on Community
preference combined with an intervention scheme and export
arrangements. This leads to very stable prices and supply to con-
sumers and the processing industry, who are sheltered from the
excessive volatility of the world market. The world sugar market
is currently typified by a surplus caused by an increase in the pro-
duction of cane sugar — in particular in Brazil because of the sub-
sidies on its market for cane-based alcohol — while Community
sugar production has remained stable. World demand — although
it has increased — cannot absorb that increase in production. The
result has been an increase in world stocks in recent years, and
these currently represent some 50 % of world consumption.

82.
It should be remembered that the carry-over stocks (approxi-
mately 1,0 million tonnes) are released only in the event of natu-
ral disasters. Moreover, the Commission has proposed that the
Council discontinue the monthly storage refunds for carried-over
C sugar, but the Council has regularly rejected this proposal.

A distinction should also be made between the compulsory mini-
mum stocks (approximately 0,4 million tonnes) and the stocks
considered necessary by the trade (approximately 0,84 million
tonnes). The Commission therefore does not agree with the Court’s
calculation of the cost of Community stocks to the consumer. In
reality this cost remains stable because the system makes it pos-
sible to ensure normal supplies.

83. Concentration in the sugar industry has followed a similar
path to that in other sectors with market organisations different
to the sugar regime.

84. The Commission considers that including isoglucose and
inulin syrup in the market organisation for sugar was justified
because these markets are interdependent and because the move
reflected a political will to maintain sugar production. The Com-
munity must control production of isoglucose, which is manu-
factured from raw materials most commonly imported without
financial constraints from non-member countries, just as it con-
trols sugar production, which is restricted by the system of quotas
with Community producers assuming financial responsibility.
This fundamental aspect has been recognised by the Court of Jus-
tice.

85. The Member States currently withhold 10 % of contribu-
tions. As of 1 January 2001, that percentage will increase to 25 %.
Thus, the figure of EUR 290 million is only indicative, as the exact
amount withheld will depend on the actual amount of contribu-
tions.

Any cost should be seen in the light of the objectives of the CAP
stated in the Treaty and the Union’s international obligations.
Account must also be taken of the residual character of the world
market for sugar, where prices are generally lower than the pro-
duction costs of most efficient producers.

The mechanisms of the CMO for sugar, in particular the level
of the production quotas and price support

89. See the Commission’s reply to paragraph 73.

90. The Commission sees the fact that sugar is not offered for
intervention as a sign that the CMO and storage arrangements are
functioning and that exports are being soundly managed by the
Management Committee and Commission departments.

91. The Commission is aware of the criticism that the market is
partitioned and that competition in the sector is not very strong.
However, it considers that these phenomena are partly due to the
nature of the product: homogeneity, stable demand and high
transport costs. Moreover, intra-Community trade accounts for
more than 30 % of the consumption of unprocessed sugar and
26 % of the consumption of sugar in the form of processed prod-
ucts.

92. While sugar is indisputably a basic product, it represents a
very small share in household budgets. In percentage terms, sugar
accounts for between 0,2 % and 0,3 % of total consumer expen-
diture at Community level. A system based on reducing the price
of sugar and providing direct support to growers from the budget
would certainly impact on the budget, but it is not certain that a
drop in ex-refinery sugar prices would be passed on to the final
consumers of sugar and processed products.

The CMO for sugar: the 1992 and Agenda 2000 reforms

94. See the Commission’s reply under the heading ‘CMO for
sugar’ in the Executive Summary.

Mechanisms are in place to ensure that manufacturers pay a mini-
mum price to farmers.

86.
It is correct that the Community budget and the consumer
pay a price for the CAP. The sugar regime is part of this, although
it must be remembered that the Community’s production under
quota is self-financing.

Moreover, sugar beet is perishable.

95. See the Commission’s reply to paragraph 94.

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96. See the Commission’s replies to paragraphs 81 and 82. The
Court has based its argument on a level of export refunds valid
during a period when world prices were at their lowest for 30
years.

Lastly, regarding the cost to consumers, 30 % of sugar is con-
sumed unprocessed, while the remaining 70 % is consumed in the
form of processed products.

97. The environmental problem involving water comes from
irrigation, which is regulated by national policy. Moreover, beet is
irrigated only in some southern regions of the Community, and
any alternative crops would also be irrigated in those regions.

101. Still regarding the cost to consumers, the price of unproc-
essed sugar at the wholesale stage is approximately twice the
intervention price, while the sugar consumed in processed prod-
ucts represents only 5 % to 10 % of the price paid by the con-
sumer. In terms of purchasing power, the Community sugar price
is among the lowest in the world.

If there is a water issue in this context, it is the possible pollution
of groundwater. In this connection, the practice of putting in beet
late in the year after the main crop depletes nitrogen in the soil.
However, this danger is minimal because industrial-quality beet is
not compatible with over-fertilising.

As for weedkillers and pesticides (see paragraph 38), thanks to
technical progress the quantities applied per hectare can be reduced
while obtaining a higher yield.

CONCLUSIONS

99.
(a) and (b) It is difficult to obtain precise information, par-
ticularly on the production costs of the sugar industry, owing to
the requirements of confidentiality. However, the Commission
has a broad range of information from the Member States, profes-
sional organisations, sugar manufacturers and their customers;
although this information reveals conflicting interests.

100.
In the Commission’s view, the quantities of sugar imported
under preferential arrangements need not be included when cal-
culating the structural surplus, which concerns only Community
output. Imports from the ACP States (1,6 million tonnes) or an
equivalent quantity can be exported without affecting the Com-
munity’s international commitments under GATT. Under the
Regulation governing the organisation of the market in sugar, the
structural surplus, which is calculated on the basis of the produc-
tion quotas, is approximately 10 % of consumption (1,3 million
tonnes).

(See also the reply to paragraphs 13 and 78(a))

The net cost to the budget (EUR 660 million) corresponds in
practice to the cost of exporting a quantity of sugar equivalent to
the imports from the ACP States and India (1,6 million tonnes)
resulting from the Community’s international obligations under
the ACP/EU Protocol and the agreement with India.

See also the Commission’s reply to paragraph 108.

102. The Commission wishes to stress that ever since 1968, and
even more so since 1986, the sugar CMO has sought a number of
the objectives pursued by the 1992 reform and Agenda 2000,
namely controlling production and budget expenditure. In addi-
tion, competitiveness on world markets is ensured by the export
regime for quota sugar and the disposal of non-quota sugar. The
rules of environmental protection apply as much to beet growing
and the sugar industry as to any other crop or industry, although
there is room to strengthen environmental policy still further.
Rural development is stimulated by the substantial economic
activity generated by beet growing and the sugar industry in rural
areas.

With regard to greater accountability to the taxpayer, the net
expenditure in the budget corresponds to the cost of the Union’s
commitments to the ACP countries and India.

103. The Commission wishes to stress that sugar beet does not
require single-crop farming, and that beet growers are conse-
quently also producers of wheat and beef. In fact, the average area
sown to beet per farmer is six to seven hectares. Moreover, in the
agricultural areas where the sugar industry is established, almost
all farmers have been allocated a quota.

104. The Commission is continually reviewing the sugar regime
and examining alternatives. The drawbacks of the alternative
solutions proposed by the Commission during the 1990s out-
weighed their advantages over the current arrangements.

105. The option of adopting the mechanisms of the 1992 reform,
as mentioned by the Court, would have a very high cost to the
budget (EUR 1 125 million to achieve a 25 % price cut with only
50 % compensation to growers) which would be impossible to
meet from the resources available under the financial perspective
for 2000 to 2006 as set in Berlin in March 1999 and confirmed
by the European Parliament.

106. See the Commission’s reply to paragraph 105.

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The Commission’s replies to paragraphs 88 to 93 show that the
mechanisms currently in place under the market organisation for
sugar are adequate.

employment, consumers, the remotest regions and the least-
developed countries in particular, and the pros and cons must be
carefully weighed.

107. The current quota arrangement expires at the end of the
2000/2001 marketing year. On 4 October the Commission decided
to propose to the Council some temporary amendments to the
market organisation for sugar for a two-year period and to under-
take the necessary impact studies with a view to reforming the
sector. These studies will examine, among other things, the criti-
cal points raised by the Court of Auditors and other parties.

A sweeping reform of the sector in response to such criticism will
require a review of both the quota system and the level of inter-
vention prices. Aspects such as high market concentration, lack
of competition and the difference between the price paid to grow-
ers and that paid by consumers concern not only the sugar sec-
tor, but the food industry as a whole. Interrelationships of this
complexity deserve thorough analysis.

At this stage, there is still considerable uncertainty over a number
of technical aspects likely to affect any radical change in the sugar
regime. Moreover, the current arrangements and all possible
changes to them must be examined in the light of their impact on
both the sector itself and on the competing crops, aid for industry,

The Commission is planning to carry out a study to evaluate the
aspects touched on above as well as the level of competition in
the main food sectors (not only sugar, but also meat, milk prod-
ucts and cereals).