Ref. Ares(2015)5011813 - 11/11/2015
Possible Impacts of Sugar Quota
Abolition in the EU
ASSUC General Assembly
23 May 2012
Brussels
Stephan Nolte
pag. 1
Recently published research
[1] Nolte, S., Buysse, J. and Van Huylenbroeck, G. (2012). Modelling the
effects of an abolition of the EU sugar quota on internal prices,
production and imports.
European Review of Agricultural Economics
39(1): 75-94.
[2] Nolte, S., Buysse, J. and Van Huylenbroeck, G. (2012). Abolition of
the EU sugar quotas – what’s at stake?
International Sugar Journal
114(1359): 146-155.
[3] Nolte, S. (2012). What to expect from the abolition of EU sugar
quotas?
Agra-Europe, 20 March 2012.
pag. 2
CMO Policy Instruments
• Import tariffs for raw and white sugar (external competition)
‣ Prohibitive at MFN level
• Production quotas & Administered Prices (internal competition)
‣ Actually sales quotas
• Distinction between in-quota and out-of quota market for sugar
and for beet
‣ Subsidization/ compensation of industrial users of sugar and ethanol
producers
• Preferential Imports
‣ Support to specific trading partners
pag. 3
Instruments after 2015
• Import tariffs for raw and white sugar (external competition)
‣ Prohibitive at MFN level
• Production quotas & Administered Prices (internal competition)
‣ Actually sales quotas
• Distinction between in-quota and out-of quota market for sugar
and for beet
‣ Subsidization/ compensation of industrial users of sugar and ethanol
producers
• Preferential Imports
‣ Support to specific trading partners
pag. 4
Increased internal competition
• No plan to abolish import tariffs – Protection against
external competition remains as strong as before
• Any increased competition for EU producers is to come
from EU producers themselves
• Price in the EU market will not fall below a level at which
the current level of quotas can be produced with a
reasonable margin
• Who will produce sugar after quotas fall?
pag. 5
What does quota abolition mean?
1. Distinction between in-quota and out-of quota sugar will
fall
‣ Any firm can sell as much as they want on the food market
‣ Firms will redirect quantities for exports and industrial users to the
food market
‣ Quantity on the current in-quota market increases, prices come
under pressure
2. Effective limits to production will fall
‣ Farmers and factories can decide to expand their production
‣ Quantity on the current in-quota market increases, prices come
under pressure
pag. 6
Effects of quota abolition - 2nd round
• After prices come under pressure:
1. Less competitive producers in the EU close factories or
leave the sector
‣ Will likely already happen before, in expectation of lower prices
2. Preferential imports will be discouraged
‣ Raw sugar refineries will not be able to utilize their capacities
3.Exports of sugar containing products will increase
‣ Trade balance for sugar in processed products is already now
positive and increasing
‣ Effective demand for domestic sugar will be increased
pag. 7
Quota abolition and the world market price
• High world market prices lead to lower
preferential imports
‣ Takes some pressure from internal competition
‣ If prices are very high or the EU sector proves sufficiently
competitive, the EU could become a (net) exporter of
sugar again
‧ Export Restriction of the WTO will not be applicable without quotas
‣ Preferential imports and with them the refining industry will
disappear
pag. 8
Quota abolition and the world market price
• Low world market prices
‣ Higher preferential imports
‣ Intensifies competition in the EU
‣ EU price level will not fall below world market price
‣ …plus premium for preferential imports
‧ Currently ~ 180 € (in order to attract imports of 3 million t WSE)
‧ Will drop if domestic production expands = less imports are needed
pag. 9
Quota abolition and isoglucose
• Isoglucose quotas will fall as well
• Analytically, isoglucose producing firms and
sugar producing firms are identical:
‣ If the firm can achieve a reasonable profit margin it will stay in the
market, otherwise not
‣ Caveat: Technical upper limit for substitutability
‣ Is isoglucose more competitive than sugar?
‣ Market share of 40% as in the US is not considered realistic for EU
pag. 10
Who wins – who loses?
• Sugar Producers
‣ Those who cannot compete are worse off
‣ Those who stay in the market, even those who increase
their market share significantly, loose, as well:
‧ King-Davenant law of consumption: Own price elasticity of
demand for food is below unity
‧ Translation for non-economists: the higher the crop (in a closed
market), the lower its total value, since the price drops by a larger
percentage than the quantity increases
‣ If world market prices are very high this can change
pag. 11
Who wins – who loses?
• Food manufacturers - win
‣ Lower input prices
‣ Higher profit margins
‣ Increased competitiveness on export markets
• Food retail sector – wins
‣ Higher profit margins – though distribution between food
industry and retailers unclear
pag. 12
Who wins – who loses?
• Consumers - win
‣ At least for table sugar, a transmission of prices to the
final consumer can be verified
‣ Less clear for sugar containing food products
• Preferential importers and Refiners – lose
‣ Imports will be crowded-out by increased domestic
production
pag. 13
Remaining Questions
• Sugar for the yeast industry
‣ Currently access at world market level. Will the duty-free quota be
extended to meet their entire requirements?
• Relation between growers and manufacturers
‣ Beet are non-tradable/non-storable: No spot market for beet
‣ How will (dwindling) margins be split in future?
‣ New forms of cooperation
• State support for uncompetitive sectors
‣ E.g. national top-ups to direct payments for beet area
pag. 14
Remaining Questions 2
• Distinction between in-quota and out-of-quota
beet?
‣ Growers contracts are likely to remain an element of the sugar
supply chain in Europe
‣ Variability of yields will not disappear anytime soon, either
‣ Differentiated prices (or other modalities) for beet within the
contracted quantity and above the contracted quantity are possible
• Volatility
‣ Will increase if compared to pre-2006
‣ Less certain it will increase if compared to 2015 with quotas
pag. 15
Remaining Questions 3
• Staying in or leaving the sector is a strategic
decision – difficult to predict
‣ What level of production do firms expect from their competitors
(determines the internal price)?
‣ Does the firm have reserves to survive (and the willingness to see
through) a consolidation phase with low prices and negative profits?
‣ What types of costs does the firm need to cover in the short run?
‣ Will some firms expand beyond current capacities before 2020?
‣ Will new firms emerge (e.g. in Ireland)?
pag. 16
Document Outline