Special Report No 9/2003 concerning the system for setting the rates of subsidy on exports of agricultural products (export refunds), together with the Commission's replies
Date: 2003-06-05
Institutions: European Court of Auditors
Subjects: agricultural product, export refund, export subsidy, report

5.9.2003

EN

Official Journal of the European Union

C 211/1

I

(Information)

COURT OF AUDITORS

concerning the system for setting the rates of subsidy on exports of agricultural products (export
refunds), together with the Commission’s replies

SPECIAL REPORT No 9/2003

(pursuant to Article 248(4), second subparagraph, EC)

(2003/C 211/01)

CONTENTS

Paragraph

Page

LIST OF ABBREVIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

WHAT ARE EXPORT REFUNDS AND HOW ARE RATES SET? . . . . . . . . . . . . . . . . . . . . . . . . .

THE QUESTIONS ADDRESSED BY THE AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

RATES MAY COMPENSATE FOR THE DIFFERENCE BETWEEN WORLD AND EU PRICES TO
THE EXTENT NECESSARY TO FACILITATE EXPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE COMMISSION’S APPROACH TO MARKET MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . .

INFORMATION AVAILABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REFUND RATES SET PERIODICALLY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Characteristics of the market

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Setting of the refund rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Milk and milk products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Characteristics of the market

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Setting of the refund rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The method for setting refund rates for cheese is complicated, inconsistently applied
and has not been updated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REFUND RATES SET BY TENDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cereals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Characteristics of the market

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Setting of the refund rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sugar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Characteristics of the market

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Setting of the refund rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-VII

1-6

7-10

11

12-13

14-18

19-28

19-21

19

20-21

22-28

22

23-26

27-28

29-38

29-31

29

30-31

32-38

32

33-38

39-40

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

2

3

3

5

5

6

6

7

7

7

7

8

8

8

9

9

9

9

9

10

10

11

12

13

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DG AGRI

Commission’s Directorate-General for Agriculture

LIST OF ABBREVIATIONS

CMO

WTO

WMP

SMP

fob

common market organisation

World Trade Organisation

whole milk powder

skimmed milk powder

free on board

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SUMMARY

Export refunds are subsidies paid to exporters to enable agricultural products to be exported onto the

I.
world market.

The cost to the Community budget is significant: in 2000 the expenditure amounted to 5,6 billion euro

II.
and in 2001 expenditure amounted to 3,4 billion euro.

III.
The audit’s objective was to evaluate the method used by the Commission in setting export refund
rates. The four most important product groups for export refunds were selected: meat and meat products, milk
and milk products, cereals and sugar. Together these four product groups account for more than 85 % of
export refund expenditure.

IV.
Maximising exports is not an objective. The Commission focuses its market management on achiev-
ing stability on the internal market at a price level which avoids products going into the more expensive inter-
vention system. Export refunds are one of the tools to achieve this objective.

V.
Although, in general, ample market information was available to the Commission, it was not always
up-to-date, complete or objective. The use made of the information, the impact on the refund rates actually
set, was often not clear. The Commission stresses the point that setting the rates is the result of a complex
assessment. It does not, however, define market parameters to be used in this assessment.

In the execution of rate setting, the Commission did not specify its working methods or provide for
VI.
systematic and coherent explanations of the rates set. The management checks referred to in the Commission
reply were not systematically evidenced.

VII.
Export refund rates are intended to bridge the gap between EU and world prices to the extent neces-
sary. The Commission estimates this gap for milk products, cereals and sugar on the basis of indicative prices
or quotations. It does not do so for beef products because it maintains that there are no world prices. For the
most part, the Commission’s calculations indicate that the estimated gap is not exceeded by the refund. How-
ever, for significant periods covered by the audit, the Commission’s estimates show that the EU price net of
refund is below the world price for certain milk products.

WHAT ARE EXPORT REFUNDS AND HOW ARE RATES SET?

1.
Export refunds are paid to exporters of agricultural prod-
ucts to countries outside the EU. Their main purpose is to enable
agricultural products to be marketed in these countries by com-
pensating exporters for the difference between EU internal market
prices and the lower prices normally prevailing on the world mar-
ket.

2.
Expenditure on export refunds has decreased under WTO
agreements. Their future depends on international trade negoti-
ations. The cost to the Community budget is still significant: in
2000 the expenditure amounted to 5,6 billion euro and in 2001
expenditure amounted to 3,4 billion euro.

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Illustration 1

Distribution of export refunds by product group for the 2001
EAGGF year

The cost to the budget is determined by two factors: the
3.
volume of exported products and the export refund rate for the
various products set by the Commission. The Commission con-
trols the volume of product exported by means of export licences.

4.
The refund rate for certain products is significant in com-
parison with the world market price and in some cases, notably
sugar, it is considerably more than the world price. Table 1 com-
pares a selection of the rates tested with world prices.

Table 1

Comparison of refund rates and world prices

Product

Date

EU price
(euro per tonne (1))

World price
(euro per tonne (1))

Refund rate
(euro per tonne (2))

Refund rate as % of
world price

Common wheat

6.1.2000

White sugar

3.5.2000

133,14

631,90

27.12.2000

3 429,00

milk

14.4.2000

2 259,00

90,87

213,25

1 396,00

1 566,00

41,49

488,30

1 700,00

722,00

27.4.2000

2 949,00

1 870,00

1 175,40

Butter

Skimmed
powder

Cheddar

46

229

122

46

63

(1) Prices as used by the Commission.
(2) As explained in the report, because the Commission has to use indicative prices, there is not an exact correspondence between EU prices

on the one hand and the sum of world prices and export refunds on the other.

Source: DG AGRI.

5.
The market divisions of the Commission’s Directorate-
General for Agriculture (DG AGRI), which are organised by prod-
uct group, are responsible for proposing export refund rates for
each eligible product. Proposals are presented to the Management
Committee concerned (representatives of the Member States),
which is required to take a vote on each proposal. If the commit-
tee votes against the Commission’s proposal by qualified major-
ity, which in practice rarely happens, the proposal is referred to
the Council. Otherwise the Commission adopts the proposed
rates.

6.
In certain product sectors (e.g. beef and milk products), the
rate is set periodically by the Commission without any tendering
procedure, at a rhythm provided for by the regulation covering
the CMO for the product concerned, at least every four weeks for
milk products and at least every three months for beef. In addi-
tion, the Commission can modify the rates at any time when
unexpected situations make immediate action necessary. In other
product sectors (e.g. cereals and sugar) exporters are invited to
participate in a tendering procedure for the export refund rate
and the quantity to be exported at the tendered rate. The Com-
mission decides a ‘cut-off’ rate; every tender with an export refund
rate offer lower than the ‘cut-off’ rate is accepted.

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THE QUESTIONS ADDRESSED BY THE AUDIT

7.
This report examines the way the Commission manages
the setting of export refund rates. It seeks to answer the key ques-
tion:

— is the export refund rate set by the Commission in a rational,

coherent and sound way?

and the following underlying questions:

— are the factors taken into account in fixing the refund rate

relevant and complete?

— are the underlying data sources relevant, complete, reliable,

valid and up to date?

The observations in this report are based on evaluation of
8.
the Commission’s objectives and systems for setting the refund
rates and evaluation of minutes of Management Committee (MC)
meetings; on interviews with officials responsible for setting export
refund rates and on analyses of documentation available in the
Commission’s rate-setting files. A sample of 38 rates from the
important product groups (cereals, sugar, beef and dairy prod-
ucts) was selected for detailed testing. The following products
were concerned: common wheat, white sugar, beef, butter,
skimmed milk powder (SMP) and cheese. The period of reference
for transaction testing was 1 January 1999 to 31 July 2001. The
audit was carried out between October 2001 and January 2002.
Detailed findings were communicated to the Commission between
December 2001 and January 2002.

9.
The Court’s last audit on this subject was in 1990 (1). The
main conclusions regarding the way the export refunds were set
were that documentation of the facts, the Commission’s consid-
eration of the facts, the decisions taken and the outcome were not
maintained, and, as a consequence, independent third-party audit
and management control were virtually impossible.

Extracts from the Court’s last audit report on this subject in
1990:

— … the whole [rate-setting procedure] is subject to the Commis-
sions judgement or discretion … This would not necessarily be
a point of concern if adequate documentation were maintained
of the facts, the Commission’s consideration of the facts, the
decisions taken and the outcome.

— However, this is not the case and the consequences are serious
for independent control by third parties and for management.

— The Court has been unable to gather from the Commission’s
records the information necessary for more than the most elemen-
tary evaluation of many aspects of export subsidies.

— … it is unclear how management can function properly and the
various Management Committees can act as an effective check
on the Commission.

— In its replies the Commission took the view that sufficient docu-
mentation was available for important decisions and that it did
not agree that it was unclear how management could function
properly.

10.
The European Parliament’s Committee on Budgetary Con-
trol concluded in its report on the Court’s Special Report that:
‘For reasons of public accountability, the Commission’s internal
decision-making procedures must be recorded and justified in
writing so that its reasoning can be followed by the monitoring
bodies at any time’ (2).

RATES MAY COMPENSATE FOR THE DIFFERENCE BETWEEN
WORLD AND EU PRICES TO THE EXTENT NECESSARY TO
FACILITATE EXPORTS

11.
The market organisation regulations for the various prod-
uct groups (3) stipulate that different products may benefit from
an export refund aid based on the difference in price of the prod-
uct on the internal EU market and the world market, to the extent

(1) Special Report No 2/90 on the management and control of export

refunds (OJ C 133, 31.5.1990).

(2) Report of the Committee on Budgetary Control on the management
and control of export refunds (Special Report No 2/90) (PE 151.096/
fin).

(3) Regulation (EEC) No 1766/92 of 30 June 1992 on the CMO in cere-
als (OJ L 181, 1.7.1992, p. 21); Regulation (EC) No 2038/1999 of
13 September 1999 on the CMO in sugar (OJ L 252, 25.9.1999, p. 1);
Regulation (EC) No 1254/1999 of 17 May 1999 on the CMO in beef
(OJ L 160, 26.6.1999, p. 21); Regulation (EC) No 1255/1999 of
17 May 1999 on the common organisation of the market in milk and
milk products (OJ L 160, 26.6.1999, p. 48).

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necessary to enable them to be exported. Factors to be taken into
account when setting the refund within this limit are the price dif-
ference, stability on the internal market, WTO constraints, future
market trends and the economic aspect of the exports.

THE COMMISSION’S APPROACH TO MARKET MANAGEMENT

12.
The Commission focuses its market management on
achieving stability on the internal market at a price level which
avoids products going into the more expensive intervention sys-
tem. Export refunds are considered to be one of the tools to
achieve this objective. Maximising exports is explicitly not an
objective of the market management.

13.
Although the various market divisions are confronted
with similar regulatory considerations to be taken into account in
setting export refund rates, there are considerable variations in
practice, often reflecting the nature of the different markets, which
are discussed in paragraphs 19 to 38 below. Some divisions set
the rate by use of a tendering system, others do so directly. The
periodicity of rate changes varies from weekly to quarterly depend-
ing on the market sector. Both cereals and sugar are annual crops
for which world market prices are readily available on a daily
basis. Yet the cereals division bases its calculations on spot prices,
and the sugar division uses future quotations. Where the cereals
division uses an internal EU price based on information from
market sources, the sugar division uses the intervention price for
the same purpose. Only the beef division has a system for verify-
ing internal EU prices on the spot. The milk, cereals and sugar
divisions calculate the difference between indicative EU and world
prices. The beef division does not. There may be valid reasons for
such variations but there is no evidence of recent management
analysis of the justification for them.

INFORMATION AVAILABLE

To meet its objectives and comply with the regulatory
15.
provision that the refund be set to the extent necessary within the
difference between world and EU prices, the Commission should
have information on world and EU internal prices and on the
flow of exports. The latter is readily available to all market divi-
sions in that data on requests for export licences have to be com-
municated to the Commission twice weekly (daily for milk prod-
ucts). Price data are more difficult to obtain, particularly those
relating to world market prices. As described in the following
paragraphs, the Commission has to rely on a variety of trade and
trade publication sources for most of this information. This nec-
essarily means that the Commission has difficulty in monitoring
that the refund is within the limit of the difference between world
and EU prices, particularly in the beef and milk sectors.

16.
The nature and sources of world price data vary accord-
ing to the market sector. For cereals, prices are obtained on a vol-
untary basis from traders, trade associations and the press; for
sugar, the price is that quoted on the LIFFE (London International
Financial Futures and Options Exchange); for key milk products,
a range of world price quotations is available from sources such
as the US Department of Agriculture (USDA); and for beef,
although there are no world reference prices, information is avail-
able from the USA and Oceania (Australia and New Zealand) but
not for the EU’s main competitors (South America and India).

17.
Similarly the nature and sources of data on EU internal
prices vary according to the market sector. Beef and milk product
prices are reported by Member States on a weekly basis. However,
whereas beef prices are subject to periodic verification by the
Commission on the spot, milk product prices are subject only to
reasonableness checks in the Commission. Since some Member
States do not communicate prices at all and others are late, the
information available for milk products is also incomplete and
not up to date. Prices reported both for beef and milk products
vary considerably between Member States for the same product,
which renders difficult the task of calculating the indicative, theo-
retical gap between EU and world prices (see Table 2). There are
no guidelines as to how the EU internal price used for setting the
refund rate should be calculated from source data (see para-
graph 23).

14.
In setting export refund rates the Commission is an opera-
tor in markets where traders are continually looking to exploit
changing market developments. The EU has an interest in ensur-
ing a regular presence on world markets and in avoiding a limited
number of important players taking over its market share. To
achieve this aim, the Commission needs close contact with the
trade and up-to-date information.

18.
In the cereals sector the Commission relies on the trade,
trade publications and market data for its calculation of the EU
internal price as it also does for world prices. The internal EU
price used for sugar is the intervention buying-in price which has
remained the same for five years.

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Annual average prices communicated to the Commission in 2000 by Member State

Table 2

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

Maximum price difference

in %

Source: Agricultural markets 5/2001 (doc. DG AGRI).

Butter

318

377

337

443

295

311

295

252

317

333

305

361

304

191

76

SMP

255

245

256

214

253

230

253

250

229

224

279

65

30

Gouda

325

316

296

315

355

59

20

Beef

186

104

110

208

150

151

115

81

112

163

143

127

157

(EUR/100 kg)

Wheat

129

132

129

146

145

119

151

141

131

146

138

134

143

32

27

REFUND RATES SET PERIODICALLY

Beef

Characteristics of the market

19.
The European beef sector has been hit by a number of
crises over the past few years: the monetary crisis in Russia in
1998, the dioxin problem in 1999, Bovine Spongiform Encepha-
lopathy (BSE) in 2000 and foot-and-mouth disease in 2001. As a
result a ‘normal market’ situation has not existed. The main export

destinations are the less prosperous countries (Russia accounts for
about 80 %). The rates for most beef products are derived from
those set for carcases. Beef exports are subject to WTO quotas,
but at the current level this does not put constraints upon the
trade.

Setting of the refund rate

Although it could be counter-productive for rate-setting
20.
methods to be transparent to the outside world in circumstances
when operators will use this to anticipate, or manipulate, Com-
mission decisions, they should be so to Commission manage-
ment. Yet the relationship between the information available
(requested quantities for advanced fixing of the refund rate; the
level of the internal EU price for beef based on the Irish price) and
the final level of the refund rate fixed is not clear. There were no
guidelines concerning changes in the market situation which
would warrant a change in refund rates (e.g. internal price levels,
stocks, exchange rates, etc.). When refund rates are adjusted, nei-
ther the choice of products affected nor the extent of the adjust-
ment is systematically clearly explained and justified. The Com-
mission states that it cannot calculate the difference between
world and EU prices because of the lack of world market prices

Photographs courtesy of USDA, Office for Official Publications of the
European Communities, M. Rostam and P. J. Kavanagh.

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and therefore has difficulty in monitoring the appropriate level of
refund. Expenditure on export refunds has declined significantly,
notably because of the impact of Agenda 2000 on internal EU
prices, and the need to comply with the EU’s commitments under
the World Trade Agreement.

The main data source used by the Commission for world
24.
market price quotations (1) provides two prices per region, a low
and a high. The lower price is consistently used, thus increasing
the calculated price difference (i.e. the theoretical refund).

21.
The effectiveness of a particular rate set is judged a pos-
terioriby continuous monitoring of the level of demand for
licences. There are, however, no explanatory notes of such action
contained in the files, so that it is unclear on exactly what basis
management control can take place and audit is possible.

25.
Although the Commission follows the price difference as
described, there is no direct link between these calculations and
the refund rate set. It is not clear from the files which of the other
factors referred to in paragraph 11 are taken into account when
setting the refund rate, or how this is done. There are no explana-
tions for differences between the calculated theoretical rate and
the rate actually proposed.

Milk and milk products

Characteristics of the market

22.
The dairy market covers a large number of different
products. Some 400 are defined for refund purposes. Butter, SMP
and cheese represent more than 50 % of milk products exported
with refunds. The rates for butter, whole milk powder (WMP) and
SMP are set individually. The rates for most cheeses are based on
the rate for Edam. The export market for milk products has been
affected by the same crises that have hit the beef market.

26.
According to the Commission’s analyses of indicative
price data for the period covered by this audit, for the most part,
the refund rates set were within the limit of the Commission’s
estimates of the difference between EU and world prices. How-
ever, there were a significant number of occasions when, for cer-
tain products, these estimates indicated that the EU price, after
deducting refunds, was lower than the world price. The Commis-
sion justifies this by reference to conditions in the third-country
markets concerned. For example:

(a) during the period 14 February to 21 May 2001, the theoreti-
cal EU price net of refunds for SMP varied between 17 and
143 euro per tonne below the world price;

Illustration 2

Comparison of theoretical EU and world prices for SMP

Setting of the refund rate

23.
In contrast to the beef division, the dairy product divi-
sion calculates the difference between the internal EU and world
market price quotations and makes the comparison with the
export refund rate on a weekly basis. The internal EU price used
is not the weighted average of market prices reported by all Mem-
ber States, but is the arithmetic average of prices reported by cer-
tain Member States, selected for reasons of representativity and
timeliness of their price data for a given product (for example,
prices in Germany and the Netherlands for butter). With the
exception of butter, there are no guidelines for Member States
defining whether or not elements such as transport costs should
be included or excluded.

(b)

the theoretical EU price net of refunds for WMP remained
below the world price from 28 March to 12 July 2001 by
between 22 and 240 euro per tonne.

(1) USA Dairy News.

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Illustration 3

Comparison of theoretical EU and world prices for WMP

The practical usefulness of many of the detailed calcula-
28.
tions is thus questionable. None of the original and fewer than
half of the corrected theoretical rates were used and subsequent
changes in butter and SMP rates have not been reflected in the
cheese rates.

The method for setting refund rates for cheese is compli-
cated, inconsistently applied and has not been updated

There is no coherent link between the rates set and mar-
27.
ket prices. In 1997 the Commission calculated the theoretical
export refund rates for most cheeses on the basis of the equivalent
quantities of milkfat and SMP used in their manufacture and the
rates in force for those products at the time. The most important
pilot cheese used for this calculation was Edam and the theoreti-
cal rates for most other cheeses were derived from the Edam cal-
culation. However, as the resulting theoretical rate for Edam was
considered too high in comparison with the existing rate, the
existing rate was maintained but the proportions of that rate
derived from the fat (butter) and dry-matter (SMP) contents were
calculated. Theoretical rates for all other cheeses were then derived
from this corrected calculation for Edam. However these theoreti-
cal rates were not consistently adopted. In some instances the cal-
culated rate was adopted, in others the existing rate, and for some
cheeses the rate was increased by bonuses of 10 %, 15 % or 20 %.
These bonuses were eliminated in 1998.

REFUND RATES SET BY TENDER

Cereals

Characteristics of the market

29.
The largest grain exchange for common wheat is in Chi-
cago, USA. Prices quoted on this exchange are considered to be
the most representative (world) prices. Prices are quoted in gen-
eral for futures (contracts to be fulfilled at a certain time in future).
Common wheat exists in a variety of qualities (and thus prices),
from high-quality breadmaking wheat to low-quality feed wheat.
There is no worldwide or even European classification system for
wheat; each country has its own system, so wheat from different
origins is not directly comparable.

Setting of the refund rate

30.
For wheat a maximum refund rate is set on the basis of a
tender. The arrangements for setting the rate are obscure in a
number of respects:

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Difference between normal and ACP refund (euro per tonne)

Illustration 4

(a) common wheat exists in a range of qualities, whose relative
prices can be expected to reflect differences in quality and
demand. The refund is in principle calculated on the differ-
ence between EU internal prices for the French ‘tout venant’
category and the nearest equivalent non-EU wheat, American
Soft Red Winter 2 (SRW2). On five of six occasions audited,
however, the Commission maintains that higher qualities of
wheat than ‘tout venant’ were used because on these occa-
sions they were closer in quality to SRW2;

(b)

the Commission asserts that exports to African, Caribbean
and Pacific (ACP) countries normally involve high-quality
wheat. To calculate the refund rates the Commission com-
pares the price of high-quality (breadmaking) EU wheat to
compare with US SRW2,
instead of using an equivalent
breadmaking quality on the world market. The result is a
higher refund rate. Over 80 % of wheat to ACP countries is
exported from France. In two of the five ACP rates examined,
for which tenders of 19 000 tonnes were accepted, the rate
fixed exceeded even the calculated difference between the
world prices for US SRW2 wheat and EU prices for French
breadmaking wheat. Given the origin of these exports, there
must be some doubts as to whether they are in fact of the
quality assumed by the Commission;

Illustration 5

Comparison of the difference in price between EU wheats and
US SRW

31.
The refund rate adopted is increased for certain months
of the year by increments designed to compensate for storage
costs and to encourage the traders to export grain left at the end
of the harvest year. Since the Commission has already determined
the fob prices both for the world market and the internal market,
and the export refund is defined as the difference between these
two prices, the addition of the monthly increment appears to be
unjustified.

(c) until the 2001 harvest, refunds on common wheat to ACP
countries benefited from a flat rate supplement varying
between 0,02 and 7,63 euro per tonne in the different market
years covered by this examination;

Sugar

Characteristics of the market

(d)

the Commission’s calculations are based on the ‘spot’ free on
board (fob) price (the price of a contract to be fulfilled on the
day of the setting of the refund), not on the future price. The
world and the EU prices used in the calculation of the the-
oretical refund are the averages, for the day in question, of
prices communicated by the trade, producer organisations,
etc. However, the relationship between the calculations per-
formed and the final rate set is not clear.

The sugar market is managed, among other instruments,
32.
by the use of a production quota, which, combined with a pref-
erential import quota for sugar from the ACP countries, is respon-
sible for a substantial oversupply of the internal market (1). This
surplus (created by the production of white sugar within the quota
and from ACP imports) is exported with the aid of export refunds.

(1) See also Special Report No 20/2000 concerning the management of
the common organisation of the market in sugar (OJ C 50, 15.2.2001).

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Any Community production over and above the production quota
(so called ‘C’ sugar) has to be exported without the benefit of
export refunds. The major product, in this group, exported from
the EU is white (refined) sugar.

For the world market price the quotation on the LIFFE is
34.
taken. Contrary to the cereals sector, which is based on the spot
price (price of the day), the price retained for sugar is that for
future quotations. Usually the two-month future quotation is
taken.

Setting of the refund rate

33.
The sugar market differs from the other three product
markets in that it is heavily controlled by the CMO. As a result,
the expected quantity to be exported is known to the Commis-
sion at the beginning of the marketing year and serves to draw up
an export plan for the whole year. The setting of refund rates is
highly transparent. The Commission uses the intervention price
adjusted with a flat rate amount for fob costs, transport, bagging
and traders margin to arrive at an artificial internal price. The fig-
ures used for these elements have not changed in the past years,
so the internal price factor in the calculation is more or less fixed
and is public knowledge.

35.
In the past a fixed amount of 0,02 euro was deducted
from the difference between these two prices to arrive at the
maximum refund to be accepted under the tendering procedures
in order to avoid overshooting the price differential. Nowadays
the amount of the reduction varies, but only within a small band-
width.

The use of this methodology meant that tendering export-
36.
ers knew in advance the exact level of the maximum refund that
the Commission would accept because all of the elements of the
calculation and the methodology were (and are) known to the
trade. Even with the introduction of the variable reduction the
trade is still able to define the most probable level of refund to be
accepted.

37.
Given that the method and elements of the procedure to
set the maximum refund are public knowledge and that the sugar
market is dominated by a very small number of large companies,
the tendering system, designed to set export refunds in the most
economical way for the Community budget, does not function as
a real tendering system in the sense that traders are in meaning-
ful competition with each other. A rate set directly by the Com-
mission would not differ significantly from that set by the tender-
ing system, which is more cumbersome. Another factor preventing
the tendering system from functioning properly is the interven-
tion price which provides a floor for tenders. The Commission
should consider carrying out a cost/benefit analysis of the option
of fixing the rate directly or by tendering.

38.
The level of the refund for sugar is significant. For the
samples audited the accepted refunds were in the range of 40 to
50 euro per 100 kg, which is about double the level of the world
price. ‘C’ sugar has to be exported without the benefit of export
refunds, so it would be expected that the production of this type
of (over quota) sugar would be small. Over the past years, how-
ever, the production of ‘C’ sugar has varied between 11 % and
21 % of quota production, which equals in some years the quan-
tity of sugar that is exported with the aid of export refund. This
calls into question the substantial level of the aid granted to the
export of quota sugar, bearing in mind that export refunds should
only be granted to the extent necessary to enable the product to
be exported (1). In the 2000 EAGGF year refunds on sugar
amounted to some 1 400 million euro.

(1) Article 18 of Regulation (EC) No 2038/1999 of 13 September 1999

(OJ L 252, 25.9.1999, p. 1).

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CONCLUSIONS

39.
The market organisation regulations for the various prod-
uct groups (1) stipulate that different products may benefit from
an export refund aid based upon the difference in price of the
product on the internal EU market and the world market, to the
extent necessary to enable them to be exported. Factors to be
taken into account when setting the refund within this limit are
the price difference, stability on the internal market, WTO con-
straints, future market trends and the economic aspect of the
exports. The Commission estimates the difference between EU
and world prices for milk products, cereals and sugar on the basis
of indicative prices or quotations. It does not do so for beef prod-
ucts because it maintains that there are no world prices. For the
most part, the Commission’s calculations indicate that the gap is
not exceeded by the refund. However, for significant periods cov-
ered by the audit, the Commission’s estimates show that the mini-
mum EU price net of refund is below the world price for certain
milk products. While the Commission disposes of most of the
information necessary, some of it is incomplete and/or not up to
date (see paragraphs 14 to 18) and the use of that information
cannot be systematically linked to calculations of proposed rates
(see paragraphs 1, 18 and 25). In the beef and milk product sec-
tors explanations for the rates proposed were insufficiently docu-
mented. There are no guidelines on rate-setting procedures (see
paragraphs 20 and 23). There is no coordination between the
responsible market divisions and no evidence of recent manage-
ment analysis of the reasons for variations in practice between
market divisions (see paragraph 13). The Commission states that
it carries out management checks. There is, however, no system-
atic written evidence of such. The overall conclusion therefore
remains the same as in the Court’s last report on this subject, that
there is still a lack of demonstrable coherence in the rate-setting
procedures for milk products, beef and to a lesser extent cereals.
Independent third-party audit is very difficult. However, subse-
quent to this audit, in its Annual Activity Report for DG AGRI of
1 May 2002, the Commission accepted that there was a need to

strengthen internal controls over the quality of parameters for set-
ting refund rates.

The Court notes that, as a result of this audit, the Com-

40.
mission:

(a)

is reviewing the rate-setting procedures (2);

(b)

is drawing up internal guidelines with a view to making the
procedures more coherent and to ensure that rate changes
are timely;

(c) will examine the possibility of verifying EU internal prices for
milk products reported by Member States to the Commission
periodically in Member States along lines similar to those
applied in the beef sector (see paragraph 12);

(d) will ensure that rates proposed are clearly justified and sup-

ported with all of the relevant source information;

(e) will clearly evidence management checks of refund rate pro-

posals;

(f) will review the need for monthly increments for cereals with

a view to their abolition;

(g) will consider carrying out a cost/benefit analysis of the option

of fixing the rate directly or by tendering;

(h) will review certain existing rates to ensure that they are at the

appropriate level (e.g. sugar and cheese).

This Report was adopted by the Court of Auditors in Luxembourg at its meeting of 5 June 2003.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

(1) Regulation (EEC) No 1766/92 of 30 June 1992 on the CMO in cere-
als (OJ L 181, 1.7.1992, p. 21); Regulation (EC) No 2038/1999 of
13 September 1999 on the CMO in sugar (OJ L 252, 25.9.1999, p. 1);
Regulation (EC) No 1254/1999 of 17 May 1999 on the CMO in beef
(OJ L 160, 26.6.1999, p. 21); Regulation (EC) No 1255/1999 of
17 May 1999 on the common organisation of the market in milk and
milk products (OJ L 160, 26.6.1999, p. 48).

(2) As a result of this audit the Commission has set up a working party
on export refunds. One of its principal tasks will be to carry out a
critical examination of the systems in the different market sectors
and, if appropriate, to recommend structural improvements.

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THE COMMISSION’S REPLIES

SUMMARY

II.
The attached table (Trend in EAGGF Guarantee Section expenditure for export refunds by sector (in EUR
million)) clearly shows the substantial (66 %) reduction in export refunds as a share of the overall agriculture
budget from 1993 to 2002.

Table

Trend in EAGGF Guarantee Section expenditure for export refunds by sector

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002 (1)

(in EUR million)

Arable crops
Sugar
Olive oil
Fruit and vegetables
Products of the wine-
growing sector
Tobacco
Other sectors — rice
Milk and milk products
Beef/veal
Pigmeat, eggs and
poultrymeat
Non-Annex I (including
spirits)
Food aid
Export refunds total
Expenditure EAGGF-
Guarantee (2)
Export refunds/Expenditure
EAGGF (%)

2 789
1 531
69
187

100
36
59
2 288
1 711

1 513
1 377
53
217

80
50
19
1 927
1 708

1 093
1 312
38
240

37
35
49
2 267
1 761

313
1 230
59
98

41
2
33
1 605
1 559

532
1 116
43
84

60
0
64
1 753
1 499

429
1 266
25
58

41
0
50
1 427
775

883
1 593
3
41

27
0
31
1 439
595

824
1 439
0
46

22
0
38
1 671
661

260
1 008
0
51

23
0
39
1 107
363

99
1 168
0
46

24
0
41
1 160
387

484

499

319

241

152

165

386

348

116

104

744
160
10 159

631
86
8 161

574
78
7 802

494
29
5 705

569
15
5 887

556
35
4 826

576
30
5 603

575
25
5 649

439
9
3 412

414
6
3 449

34 369

32 176

33 980

37 221

38 326

36 880

37 273

36 178

37 093

39 074

29,6

25,4

23,0

15,3

15,4

13,1

15,0

15,6

9,2

8,8

(1) 2002 (provisional figures).
(2) Heading 1a, except for veterinary and phytosanitary measures and fisheries.

V.
The Commission would stress that the mechanisms used to calculate refunds (tenders or otherwise) in
the four sectors covered are different: bulk products (cereals, sugar) and processed products with value added
(meat, milk products). The special features of each sector are illustrated in particular in the Council regulations
for the specific product groups.

The difficulties in pinpointing a ‘world price’ are best illustrated by the dairy sector (see paragraph 28).

As far as the relationship between the prices is concerned, it should be noted that no precise gap between the
internal and the external prices exists. They are rather price brackets and the choice of the gap selected is
determined by a combination of the balance of the internal market, the prospects for change and ‘WTO/
budget’ constraints.

Furthermore, the time for consideration before the Commission accepts applications for refunds allows it rap-
idly to correct the refund as soon as the quantities in question exceed the norm.

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Information used for the fixing of export refunds is the most recent available; in certain sectors, up-to-date
commercial information is practically impossible to obtain. Information can never be complete without the
full contract details but, on the other hand, information communicated by operators may be subjective. Fur-
thermore, there is a clear advantage in pursuing a certain degree of stability in the rate of refunds not fixed by
tender procedure.

VI.
The fixing of the refund rates are supported by analysis and management checks are part of the stan-
dard procedure. All fixings are prepared in a meeting with the Director-General and the opinion of a Manage-
ment Committee is sought by the Director responsible for the sector concerned (see paragraph 40(d) and (e)).

The improvements in the working methods in the field of fixing export refunds formalised by the Commis-
sion on 10 July 2002 correspond to the recommendations made by the Court.

VII.
The level of refund set cannot simply be the result of a difference between two prices or ranges of
prices; other factors have to be taken into account: market balance, WTO commitment, extraordinary events,
anticipated changes in the EU or world market situations.

WHAT ARE EXPORT REFUNDS AND HOW ARE RATES SET?

for limited quantities may a tendering procedure be applied but,
furthermore, only for products for which that procedure seems
appropriate.

The attached table (Trend in EAGGF Guarantee Section
2.
expenditure for export refunds by sector (in million euro)) shows
that export refunds as a total share of EAGGF Guarantee Section
expenditure have decreased from almost 30 % (EUR 10,2 billion)
in 1992 to less than 9 % (EUR 3,4 billion) in 2002. The reduction
is attributable to the post-1992 reforms, and this remains Com-
mission policy.

4.
Certain prices are used by the Commission from the range
of internal and external prices, but other parameters have to be
taken into consideration. Therefore, the setting of refund rates is
not a precise mathematical exercise.

The last column in Table 1 (Refund rate as % of world price) sim-
ply shows that to maintain stable Community agricultural prices,
the refund must increase when world prices fall and vice versa.
The result is that a low world price inevitably leads to a high
‘Refund/World price’ ratio.

In addition to the market division, there are other depart-
5.
ments involved, including those responsible for budget, interna-
tional relations, trade mechanisms and legal services, as well as
senior management.

Refunds for beef are to be fixed at least once every three months,
which means that alterations may be made within that period
where circumstances so justify, most often following the Manage-
ment Committee procedure. A twice-weekly follow-up is carried
out. This situation for milk is similar. A monthly fixing is pre-
ferred. A tender procedure may be used for fixing refunds for bulk
butter and bulk SMP. Applications for licences are monitored daily.

THE QUESTIONS ADDRESSED BY THE AUDIT

9 and 10.
The Commission considers that measures to
improve the internal decision-making procedure and record keep-
ing have been put in place since the Court’s audit in 1990. For
most sectors, export refunds have been based on a brief, usually
in writing and containing the relevant facts; the results have been
filed. Furthermore, with effect from January 2003, this is done for
all sectors, and includes a recording of the justification for the
rate(s) set.

6.
It should be emphasised that in the beef sector the Council
has given priority to refunds being fixed periodically (Article 33(3)
of Council Regulation (EC) No 1254/1999). Only in addition and

10.
The rate-setting administrative procedures have been sub-
stantially improved since the last Court of Auditors report. The
facts underlying decisions are better documented, including inter-
nal and external price ranges for the basic products, daily data on
prefixings, monthly targets for a number of products, monthly

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data on actual EU and important competitor exports and imports
by some important importing countries and exchange rates.

INFORMATION AVAILABLE

These and other relevant documents were discussed weekly and
the appropriate staff in DG AGRI were informed of the conclu-
sions. When changes were considered necessary the proposals
were worked out in these meetings and they were put forward for
agreement to the relevant departments. All of these documents
were made available to the Court.

It is not the policy of the Commission to defend a par-
14.
ticular market share on the world market or in any particular
country. It is, nevertheless, important to be regularly present on
third-country markets given the economic, logistical and admin-
istrative difficulties in re-opening a market which has not been
served for some time.

A statement of reasons was drawn up for the amendment of
export refund levels.

Against this background, in the dairy sector the Commission
sometimes finds it necessary to adopt a more active export policy
with a view to not being pushed out of important and traditional
markets.

Decisions taken to modify or to maintain refund levels were
always published and the outcome was always reflected in the
level of applications for licences, the exports carried out, the inter-
nal market balance and prices.

Price information is, however, not readily available. In fact, infor-
mation on comparable external prices is difficult to collect and
even when it is available its validity is sometimes questionable.

Proposals were presented in detail together with the motivation
to the delegates of Member States in the Management Commit-
tees.

The Commission uses all available sources to obtain price
15.
information. This is difficult in sectors where no real worldwide
markets with published prices exist. Furthermore, future price
trends as well as current prices have to be taken into account.

THE COMMISSION’S APPROACH TO MARKET MANAGEMENT

16.
For all milk products only ranges of prices are available
and the range is often wide. Prices quoted may be for current,
near future or distant future transactions and for products of
varying qualities and presentations.

13.
The differences in terms of production between cereals
and sugar on the one side and dairy products and beef products
on the other side should be emphasised. The former products are
produced in bulk once a year and subsequently put into storage
for later sale on the internal or external market. The quantity ini-
tially produced is not linked to the level of refund. The latter,
‘value-added’ products (so called because additional processing is
usually involved), are produced on a day-to-day basis, very much
in response to new contracts being concluded given the refunds
available.

The importance of the refunds as an active management tool for
the internal market is provided for in the basic Council regula-
tions for dairy and beef (Article 33 of Regulation (EC) No 1254/
1999 and Article 31 of Council Regulation (EC) No 1255/1999).

In the beef sector, information on export or import prices from
Argentina, Brazil and Russia has been available since the begin-
ning of 2002.

17.
The prices in Member States are just one factor taken into
account in the exercise of rate setting. Price differences between
Member States exist, despite the single market, caused by several
factors e.g. differences in veterinary conditions, extensive or inten-
sive production, meat and/or dairy herd animals, etc. Ultimately,
the price is the result of the negotiation between the market play-
ers and expresses the level at which offer and supply are balanced
against each other.

All decisions on refunds are taken at the highest hierarchical level
in DG AGRI. Since neither the nature of the products nor their
systems of production and marketing have changed, a new look
at the mechanism for fixing refunds is not required. The param-
eters relating to these mechanisms are constantly monitored.

For example, for butter products, the difference between the
maximum and the minimum price in the single market ranges
from 80,4 % of the intervention price in Italy (EUR 263,87/
100 kg), to 96,4 % in Austria (EUR 316,38/100 kg) — a difference
of EUR 52,5/100 kg on an average price of EUR 298,99/100 kg
or 91,1 % of the intervention price.

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Specific rules regarding price calculation exist (e.g. Commission
Regulation (EC) No 2771/1999 for butter and Commission Regu-
lations (EEC) No 563/82 and (EC) No 295/96 for beef).

producer prices. Equally, a particular change in producer prices
should not in itself lead to different refunds when the dollar/euro
relation may iron out these changes.

In the dairy sector, the Commission, using source data obtained
in accordance with Regulation (EC) No 2771/1999 and Commis-
sion Regulation (EC) No 1498/1999, calculates the representative
Community price using the prices in the most important export-
ing countries. Internal guidelines do exist but could perhaps be
documented more formally.

18.
The Commission takes account of the latest prices noti-
fied by the Member States and other prices (from traders, proces-
sors, brokers) in order to calculate the average which best reflects
the market situation.

World market prices cannot be established in the beef trade due
to the variety of destinations and products produced and traded
all over the world. Consequently, a difference to be used for moni-
toring purposes is impossible to calculate. Instead, a close moni-
toring of the licence applications (twice a week) provides appro-
priate guarantees against oversubsidy. A refund rate set at too
high a level against the background of all other relevant param-
eters entering into play between seller and buyer would provide a
speculative increase in applications and, as seen in the past, a
response from the Commission in form of corrective measures
(suspension of applications and reduction of refunds). Further-
more, the reduction in refund rates seen since 1995 demonstrates
the effectiveness of the procedure.

Finally it should be noted that the representatives of the Member
States, who are responsible for the notification of prices, are also
members of the Management Committee for Cereals, which fixes
refunds.

In conclusion, a transparent procedure has existed in the beef sec-
tor leading to consistent management, taking into account glo-
bally all relevant parameters.

REFUND RATES SET PERIODICALLY

20.
It is the Commission’s view that rate setting in the beef
sector is sufficiently transparent for the internal decision-making
process, including the Management Committee, to be concluded
correctly. Internal guidelines containing the relevant parameters
and derived calculations were formalised at the end of 2002 and,
as noted in the comments to paragraphs 9 and 10, before each
new rate setting, a comprehensive analysis of the present and
future situation is made in writing, giving, for each of the market
indicators (prices, stocks, licence applications, price forecasts,
production, etc.), an appreciation of where they stand compared
to Council regulation criteria. In this context it should be noted
that the Irish price is not the only reference price for refund set-
tings. Although Ireland is the only exporter of steer beef and very
dependent on export markets, price references are also obtained
for meat from young bulls (average Community price) and for
cow meat (average Community price).

Market management cannot be carried out in a ‘predetermined’
way; it requires a global approach, with export refunds being only
one of the instruments. Therefore, the Commission does not
adjust rates on the assumption that ‘everything else is equal’. For
instance, it would not be sound management to adjust refund
rates upwards immediately following a depreciation of the dollar
against the euro (fluctuations happen every day) when the inter-
nal supply/demand balance already provides for firm and stable

21.
The Commission does not agree with the last part of the
statement of the Court. The market parameters setting the frame-
work for refunds are well defined, e.g. through the export ceiling
under the WTO and the forecast export surplus established by the
periodical balance sheets for each product. Full information about
parameters which are subject to more frequent changes (prices,
currencies, etc.) is made available in writing before each rate set-
ting, permitting the necessary management control. Transparency
exists which also permits an audit exercise in the knowledge that,
in global market management where a refund scheme is only one
of the instruments, movement in one particular parameter does
not necessarily lead to adjustment of refund rates.

23.
The best indicator of responsible management of export
refunds in the milk and milk products sector is evidenced by the
remarkable reduction in refund levels in the last eight years. A
table is attached.

Article 31(5) of Regulation (EC) No 1255/1999 provides
24.
for the most favourable third-country prices to be taken into
account.

25.
The fixing of export refunds in the milk sector is an itera-
tive process combined with a five-day reflection period. Refunds
are fixed monthly and modified in between if necessary.

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The factors taken into account are those laid down in the Regula-
tion namely:

Improvements have been made to the internal procedures and
now a detailed description of the reasons for and the calculations
justifying the changes must be provided.

(a)

the existing situation and future trends with regard to prices
and availability of milk and milk products on the Commu-
nity market and prices of milk and milk products on the
world market;

(b)

demand on the Community market;

(c)

the objectives of the common organisation of the markets in
milk and milk products, which are to ensure a balanced situ-
ation and a natural development regarding prices and trade
on these markets;

(d)

tenders resulting from agreements concluded in accordance
with Article 300 of the Treaty;

26.
For the most part the Commission’s calculated fob prices
were well above the minimum quotations for similar products on
the world market. The Commission has already pointed out that
in fixing export refunds it takes the factors provided for in Coun-
cil legislation into account. In the absence of quality data on world
market prices, it relies heavily on quantity data, notably on appli-
cations for licences compared with availability under the WTO
commitments as well as market balance needs.

The Commission has also commented in paragraph 25 on the
validity of the minimum and maximum quotations of prices of
dairy products on the world market, published in various publica-
tions. These quotations are subjective and have to be treated as
such.

(e)

the importance of avoiding disturbance in the Community
market;

The Commission has illustrated this with the most recent infor-
mation available as shown in the reply to paragraph 25.

(f)

the economic aspect of the proposed exports;

(g)

entries of milk and milk products under inward processing
arrangements.

All these factors are taken into account in fixing refunds.

The exports of SMP in the year 2001 were almost 47 % below the
average of the previous five years (i.e. 140 000 tonnes compared
to an average of 262 400 tonnes). Exports of WMP in 2001 were
16 % below the average for the previous five years (477 500 tonnes
compared to the average of 569 000 tonnes).

The Commission considers, however, that there are no reliable
world market prices for milk and milk products, only a wide
range of quotations, which are subjective in nature.

For these reasons the Commission’s practice of monitoring daily
applications for licences and comparing quantities to those estab-
lished in a theoretical profile is a vital factor in its considerations
for fixing refund levels.

Other considerations such as market balance and WTO commit-
ments are also relevant, as is stability, which contributes to trade
flows. The setting of refund rates is therefore not a precise math-
ematical exercise — see Regulation (EC) No 1255/1999.

The preamble to and Article 31 of Regulation (EC) No 1255/1999
provide the Commission with a certain latitude in its assessment
of each situation in arriving at its eventual judgement on a par-
ticular rate. In the cases mentioned by the Court the Commission
has explained why it proceeded as it did. While it may not always
have been completely documented in the individual files, the
Commission has explained that extremely important circum-
stances prevailed in opting for a rate different from the theoreti-
cal calculated rate during the period examined.

Applications for licences during the months in question were also
at or below normal levels. Therefore the estimates of the Com-
mission which were not fully taken into account in the assess-
ment of the refund level were inaccurate as demonstrated by the
very low level of applications for export licences for SMP and a
normal level of applications for WMP.

Serious animal health problems (BSE and the foot-and-mouth
outbreak) influenced the sector in this period. Several third coun-
tries had imposed bans on imports of Community milk powders
or were considering doing so.

In March 2001 the Commission established the possible impact
of foot-and-mouth disease on the dairy sector. If third countries
which were applying import restrictions continued to do so, pur-
chases of butter and SMP in the April, May and June period in
2001 due to the loss of exports would amount to 106 000 tonnes
of SMP and 52 000 tonnes of butter. The quantities would be sub-
stantially greater if all third countries were to ban imports of EU
products (e.g. 394 000 tonnes of SMP and 166 000 tonnes of but-
ter).

Under these circumstances the Commission reduced the refund
on SMP only four times in the period in question and the WMP
refund three times.

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The milk-products sector was affected to a signifi-
27 and 28.
cant extent by the Russian financial crisis in 1998, the dioxin
problem in Belgium in 1999, the BSE crisis in 2000 and the foot-
and-mouth outbreak in February 2001. Cheese exports to Russia
fell from 140 000 tonnes in 1997 to 71 000 tonnes in 1998 and
to 21 000 tonnes in 1999. The cheese sector is a complex sector
as regards quality, composition, presentation, packaging and pric-
ing, and the cheese market is not necessarily linked to develop-
ments on the butter, SMP or WMP markets.

The Court describes succinctly the Commission’s efforts, given
the complexity of the cheese sector, to set minimum standards for
cheeses eligible for refund and to establish a new method for cal-
culating export refunds by fixing unit fat and solid-non-fat refunds
and then applying these amounts to the minimum fat and solid-
non-fat amounts in the cheese.

The Commission has made great efforts to improve the system for
cheese, notably by establishing minimum standards of cheeses eli-
gible for refunds.

As the Court points out, the theoretical rates were not consis-
tently used. This is because the developments and needs of the
cheese market were not the same as for butter and SMP. This was
the case notably when developments in the SMP market led to
very low refunds and eventually none from September 2000, but
also when the calculation would have led to an unjustified increase
in the existing rates.

The bonuses were introduced with a view to avoiding violent
downward movements in cheese refund levels. By the introduc-
tion of the new method in February 1997, for certain high-dry-
matter cheeses in particular, the calculated refund was increased
temporarily by bonuses of 10 %, 15 % or 20 % depending on
whether the cheese contained 55 %, 60 % or 65 % dry matter.
These bonuses were eliminated in October 1998.

REFUND RATES SET BY TENDER

There are still other factors to be taken into consider-
ation, particularly competition from wheat from other
sources (Argentina, the Black Sea, Pakistan, India, China,
etc.) with that from the EU and America. These other
exporting countries often compete against our wheat
with lower prices in order to secure a slice of world trade.

(b) The ACP States have for a long time been a traditional

and stable EU market.

Under the EU/ACP agreements, the EU has undertaken to
ensure supply to these countries on preferential terms.

The Commission has not made differentiated refunds
since the 2001/02 marketing year because these have not
been justified by market conditions.

(c) The refund differential may vary from one year to another,
mainly because of reasons concerning the quality of
wheat on the Community and world markets and the dif-
ferent prices on different markets. Following application
of Agenda 2000 from the 2001 harvest, specific refunds
have no longer been made.

(d) When fixing the amount of the refund, the Commission
takes into account not only the spot prices but also those
for forward delivery in order to follow changes on the
markets as far as possible throughout the period of valid-
ity of the export licence.

The maximum refund awarded does not necessarily cor-
respond to the strict mathematical calculation but includes
other market factors: these are discussed with the repre-
sentatives of the Member States in the Management Com-
mittee. Furthermore, the representatives of the Member
States vote on the fixing of refunds by tender.

The opinions of the Committee are recorded in a file
note, with explanations; these are available to the Court
of Auditors.

30. (a) For a long time, the main price reference on the world
market has been US SRW wheat. On the Community
market the price of French wheat is the most representa-
tive in view of the size of the French wheat harvest, which
accounts for over one third of the EU total. Naturally,
since the quality of wheat varies depending on climatic
conditions, this has to be borne in mind when compar-
ing different types of wheat and their prices. This means
that fixing a refund is not a matter of simply comparing
wheat prices in the EU (standard French wheat) and the
US SRW.

As part of Agenda 2000, the Commission proposed abol-
31.
ishing the monthly increments but on 24 March 1999 at the Ber-
lin Summit the Heads of State decided to keep them. The Com-
mission repeated its proposal as part of the ‘CAP reform’.

32.
The short description of the sugar regime needs some
qualification. The surplus created by the production of white sugar
within the quota and imports (including ACP sugar) is, however,
exported with an export refund only up to the limits to which the

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EU is committed under the WTO Agreement on Agriculture. If an
exportable surplus above the limits is likely to arise in a given
year, the Commission has to reduce the quota production by the
amount above the limits.

and where in particular the problem of the control of the quanti-
ties and financial outlets under the WTO commitments is
approached. The Commission will give due consideration to the
Court’s recommendation.

The export refund is granted only for quota sugar and ACP-
protocol and India sugar. Therefore the surplus created by other
imports is theoretically re-exported by an equivalent amount of
quota or ACP-India sugar.

38.
‘C’ sugar is produced in order to cover the risk that the
quota is not fulfilled because of adverse climatic conditions and
in the most efficient regions also purposely; depending on world
market prices this sugar is then exported or carried forward quota
sugar for the following year.

Before July 2001 this calculation of the internal prices
33.
has included the amount of the storage levy as part of the price
support level. Thus the reference for the internal price has been
reduced as well as the refund rate since then.

35 and 36.
Competition between the tenderers takes place by
varying the gap between the theoretical refund and the maximum
refund, taking into account the export programme, the price level
and evolution on the world market as well as the degree of com-
petition. In 2001/02 this gap varied between EUR 0,03 and 0,730/
100 kg with an average of EUR 0,073/100 kg.

36.
Though the calculation of the theoretical refund is known
and though the absolute amount of the gap and its variation may
be small compared with the amount of the refund, it is neverthe-
less this gap which determines whether a tenderer is successful.
The gap is normally a function of the total offers made, which are
not predictable. It has also to be considered that to export with
refund is in any case considerably less profitable than selling into
the internal market (where prices are generally higher than the
intervention prices and where storage costs are recovered) and
that it is also as a consequence of the method below the support
level.

37.
The fact that the method used is known to the operators
does not hamper this kind of competition. The EU exporter oper-
ates between the intervention price level (which is guaranteed to
the sugar producer/seller) and the world market quotations as
export contracts refer usually to these prices. The tendering sys-
tem appears to function properly under these premises, in par-
ticular if one takes into consideration the smooth carrying-out of
the export programme.

There was particularly heavy competition during October and
November 2002 when only around a half of the total quantities
offered it had been accepted at a gap to the theoretical refund of
up to EUR 0,3/100 kg.

This does not mean that quota sugar could also be exported at a
lower (or higher, as necessary) refund, as for quota sugar a mini-
mum price for beets has to be paid and as this sugar, if not
exported, would have to be put into intervention.

The Commission wishes to emphasise that an in-depth evaluation
of the entire sugar regime is currently being undertaken.

CONCLUSIONS

39.
The level of refund set cannot simply be the result of a
difference between two prices or ranges of prices; as provided for
in the relevant Council regulations, other factors have to be taken
into account: market balance, WTO commitment, extraordinary
events and anticipated changes in the EU or world market situa-
tions.

The Commission takes account of the latest prices notified by the
Member States and other prices (from traders, processors, bro-
kers) in order to calculate an average which best reflects the mar-
ket situation.

For the beef sector, internal guidelines containing the relevant
parameters and derived calculations were drafted at the end of
2002 and, as referred to in the comments to paragraphs 9 and 10,
before each new rate setting a comprehensive analysis of the
present and future situation is made in writing.

The question whether a system with periodically fixed rates as
compared to a tender system would produce savings in total
expenditure could be answered only by a more profound study
where all possible administrative consequences are scrutinised

In the dairy sector, the Commission, on the basis of source data
obtained in conformity with Regulations (EC) No 2771/1999 and
(EC) No 1498/1999, calculates the representative Community
price using the prices in the most important exporting countries.
Internal guidelines do exist but could perhaps be documented

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more formally. Article 7 of Regulation (EC) No 2771/1999 indi-
cates that a flat rate amount of EUR 2,50 is to be added to the
ex-factory price of butter to cover transport costs.

All decisions on refunds are taken at the highest level in DG
AGRI. Since neither the nature of the products nor their systems
of production and marketing have changed, a new look at the
mechanism for fixing refunds is not required. The parameters
relating to these mechanisms are constantly monitored.

All proposals to the Management Committee on export refund
rates are prepared or discussed in a meeting chaired by the
Director-General (or his replacement), in the presence of repre-
sentatives of the financial and legal departments. Any decision on
export refund rates is initialled by the responsible Director (who
is also Chairman of the Management Committee) and signed by
the Director-General.

The specific features of each sector are illustrated in particular by
Regulations (EEC) No 1766/92 for cereals, (EC) No 1255/1999 for
milk, (EC) No 295/96 for beef and Council Regulation (EC)
No 1260/2001 for sugar.

From the beginning of 2002, a coordination group has been in
operation and has worked on the following dossiers: prefinanc-
ing, differentiated refunds, ‘carousel’ (roundabout) fraud and mini-
mum guidelines for rate setting.

the minimum rules to be followed for fixing refunds.
These cover the requirement to clarify and specify the
methods of calculating refunds and the documentation
required for each decision of this type.

(b) The guidelines describe the method of calculating the
refund and the policy on this point followed for the sec-
tor concerned.

(c) Taking into account all the elements for fixing export
refunds including price quotations, the Commission will
examine the role which a price verification system along
the lines of that applied in the beef sector could play in
the milk products sector.

(d) An explanatory note justifying a proposal to amend the
amounts of the refunds must be submitted to the hierar-
chy before the meeting to prepare the Management Com-
mittee.

(e) A detailed description (file note) of the reasons and cal-
culations justifying a decision to amend or not to amend
the amount of the refund must be prepared, describing
the main points on which it is based (price, calculations,
trade, commercial information, tactical considerations,
aims, level at which the decision was taken). This descrip-
tion should also contain the levels at which the decision
was taken.

(f) As part of the mid-term review, the Commission will
again propose that the Council should abolish the arrange-
ments for monthly increments in the cereals sector.

RECOMMENDATIONS

(g) The Commission agrees to consider the idea.

40. (a) There has been an interdepartmental coordinating group
on refunds since February 2002, which has laid down

(h) For sugar, the Commission will give due consideration to
the Court’s recommendation. For cheese, the rates are
regularly monitored.