As the U.S. awaits further WTO actions on the Brazilian cotton case, the EU is already struggling with its sugar policy reforms resulting from a 2004 WTO ruling limiting EU sugar exports to 1.37 million metric tons (mmt) per year, down from 4-5 mmt per year before the WTO ruling. The EU reform program has a complex set of moving parts that hinges on incentives to sugar processors to reduce production. This is the first major WTO driven agricultural policy reform in developed countries and is not likely to be the last one.
The EU effort has the right economic policy goals of reducing overall production and shifting remaining production to the most economically efficient areas. According to analysis in the June 4, 2007 Sugar and Sweeteners Outlook of the Economic Research Service of USDA, the temperate climate of Northern Europe is the optimal region for EU sugar beet production. Only Ireland, Latvia and Slovenia renounced all their sugar quotas, and Italy renounced the most quotas at almost 800,000 metric tons (mt). France, Germany, the UK, Poland, the Netherlands, Belgium and Austria added quota under a program allowing companies to add quota for a one time payment of $985/ mt (current exchange rate of $1.35 per Euro).
The $985/ mt for new quota was the same as the one-time payment that current quota holders received to renounce quota in the first two years of the program, marketing years 06/07 and 07/08. The payment declines to $844/ mt for quota renounced in 08/09 and $702/ mt for 09/10. Over the four years, the reference price for white sugar is being cut by 36 percent. According to the April 10, 2007 U.S. Agricultural Attaché annual EU sugar report, member states renounced 1.5 mmt of quota for 06/07 and less than 0.7 mmt for 07/08. The two year total of 2.2 mmt is short of the 3.0 mmt goal for the first two years to achieve a total of 6.0 mmt renouncement of quota over four years. The higher payments for renouncements in the first two year were designed to achieve rapid progress early in the program, but that has not happened. The ERS Outlook notes that an additional payment of $321/ mt renounced in 2008/09 is being considered.
The slow movement on reducing quotas resulted in a temporary, mandatory quota cut of 1.8 mmt for the 06/07 marketing year and 2.0 mmt cut for 07/08. These cuts applied to all production regions, with regions that have made the largest renouncement of quota receiving the lowest percentage reductions. This is directly counter to the EU goal of moving the sugar beet industry to the most economically efficient areas. The EU is concerned that without mandatory, temporary quota cuts carryover stocks would build to burdensome levels and requires further measures to move surplus stocks.
The EU’s efforts are complicated by its Everything But Arms program with the world’s 50 poorest countries to phase out tariffs on raw sugar by 2009. The EU is also working with 77 African, Caribbean and Pacific (ACP) countries that have had preferential tariff access to the EU to reduce tariffs to zero by 2015. The ERS Outlook notes that EU analysts believe some of those countries will increase exports to the EU as tariffs decline. The ACP countries are limited to 1.3 mmt of exports through 2009 and to 3.5 mmt after 2015.
The only bright spot in sugar policy reform is the growth in biofuels output. The ERS analysts explain that rapeseed is the most likely alternative crop to sugar. Rapeseed oil is the preferred feedstock for biodiesel production, and EU requirements for biodiesel use will continue to increase. The U.S. Agricultural Attaché projects that 1.0 mmt of sugar will be used for ethanol in 07/08 compared to 24,000 mt two years earlier. The EU Commission projects that 2.2 mmt of sugar beets could be used in ethanol by 2013. Sugar beets have a higher yield of ethanol per acre than feedstocks like wheat. Ethanol is about 20 percent of current biofuels production.
The EU experience is a wake-up call for all developed countries facing the possibility of reforms due to WTO actions and to developing countries who expect quick changes in long-standing domestic farm policies in developed countries. A few insights can be gained from the experience.
First, don’t try to do too much. Reforming domestic policies is hard enough. Making changes in the ACP preference programs and implementing the Everything But Arms program may simply be too much too fast. The distortions caused by past policies have developed over decades and cannot be changed in just a few years.
Second, estimate a big number for upfront costs and then add a big factor to it. Achieving rapid changes in production practices requires big incentives. The more generous the upfront payments are the easier it may be to maintain political support when additional policy changes are needed.
Third, all quotas could have been reduced an automatic, uncompensated 10 percent even in the most efficient growing areas. While that would have hurt the goal of shifting sugar beet production to the best areas, it could have reduced the up front costs and recognized that change is not pain free.
Fourth, alternative land use options need to be readily available. While biodiesel production has been active for years in the EU, ethanol production is a much more recent addition. Readily available alternative uses for land may reduce the up front costs of policy.
Finally, gradual policy reforms may not be possible. Too many special interest groups may make a balanced, market driven program unachievable. The only choice then is to adopt a program that entirely frees the market over two or three years without compensation programs.