Written evidence submitted by Tate & Lyle Sugars (BTS0007)

Executive Summary

• This year we celebre 140 years since Henry Tate established his refinery on the banks of the Thames. Along with Abram Lyle’s factory in Plaistow Wharf, the two sites provide 850 high-skilled manufacturing jobs in the deprived London Borough of Newham and represent one of the largest manufacturers in Greater London.

• We have seen a sharp erosion of our competitiveness and production volumes in recent years as a direct result of EU policies that are deliberately designed to advantage our beet sugar competitors across the EU.

• As a result of these pressures we have invested over €150 million in the UK business, focused on consumer-led innovation, tripling the range of products we make in the UK. But innovation alone cannot offset the impact of bad EU policies on our UK business.

• The UK now has the opportunity to design a domestic sugar policy that balances the interests of beet and cane sugar manufacturers in the UK. This has been a long-held policy objective of the UK Government that it has found increasingly difficult to deliver as an EU member. We would welcome reassurance from the UK Government that this will remain their policy objective outside of the EU. 

• Although often painted as a binary choice between beet sugar and cane sugar, it is not. The UK needs both and should pursue a policy that creates a level playing field between the two, rather than inadvertently creating a policy-driven beet sugar monopoly by simply copying and pasting the EU trade and agriculture policies relating to sugar.

• Deliberately misleading arguments are increasingly being put forward about UK cane refining in order to ensure the UK simply copies and pastes EU sugar policies. We hope that the UK Government and UK parliamentarians will rigorously and independently test these arguments, not simply accept them at face value.

• As a cane refiner, what matters to us is the differential between the raw cane sugar price and the white sugar price, not the absolute price of sugar.

• Decisions about the design of the UK’s future sugar market (a protective, high sugar price policy versus a competitive, more open market) will have consequences for the longstanding relationships between the UK and developing countries in Africa, the Caribbean and the Pacific. The UK should not shy away from this debate.

Background and context

1. This year, Tate & Lyle Sugars (TLS) is celebrating 140 years of refining cane sugar on the banks of the River Thames. The business manufactures over 650 different products, including Lyle’s Golden Syrup, at our Silvertown refinery and the neighbouring site at Plaistow Wharf, in East London. Both facilities have been in continual use since their construction by Henry Tate and Abram Lyle in 1878 and 1882 respectively. These sites provide 850 high-skilled manufacturing jobs in the deprived London borough of Newham[1]. We are one of the largest manufacturers in Greater London.  

2. Sugar cane is a grass that grows in tropical countries. We source through long-standing relationships in supplying countries in the Caribbean, Central and South America, Africa and the Pacific. We import the raw cane sugar directly through our jetty on the Thames to be refined at Silvertown, and transformed into an array of products. These range from commoditised white sugar and liquid sugars to a wide range of value-added brown sugars, syrups and treacles.

3. Cane sugar and beet sugar have coexisted since beet sugar production was commercialised in the UK just over one hundred years ago. Successive UK governments have argued that agricultural and trade policies should treat both methods of production equally. We would welcome reassurance from the UK Government that this remains their policy objective. This was not the majority view in Brussels. As the Committee inquiry terms of reference note, “Current EU policy is aimed at protecting the sugar beet industry.”

4. The EU sugar regime protects and supports our competitors in the European beet sugar industry. It does this by restrictions and protectionist tariffs on raw cane sugar, the raw material for cane refining, driving up our raw material costs[2]. Further, it inflates manufacturing costs as a result of reducing capacity utilisation in our UK factories[3]. In contrast, beet sugar production costs have been pushed down by deregulation and continued subsidies.

5. Unfortunately, this has not only had an impact on our business. It is also feeding through to the preferential suppliers in the African, Caribbean and Pacific countries (ACP) and the Least Developed Countries (LDCs). We forecast raw cane sugar purchases by cane sugar refineries in the EU will fall to less than 1 million tonnes in EU sugar marketing year 2017/18, compared to over 2.5 million tonnes in 2013/14.

6. We have done everything possible to help ourselves overcome these imbalanced EU policies. Our owners, ASR Group, have invested over €150 million in the two UK factories since 2010, primarily focused on upgrading the capacity to innovate, develop high value added products, and produce them with modern production and packaging machinery. Investments include an innovation centre and pilot plant at Thames Refinery, the introduction of robotic packaging machinery, as well as expansions to the capacity to produce value added sugars and syrups. In 2014 we also opened a European headquarters for our sugar operations in central London. Procurement of raw cane sugar for our cane refineries around the globe, including in the US, is now centered in London. However, we cannot solve the impact of imbalanced EU policies alone.

7. The UK Government now has the opportunity to create a level playing field between UK beet and cane sugar producers through its own agricultural and trade policies. The choice the UK faces is not a binary one of whether to choose beet or cane to supply the UK market alone. It is the opportunity to develop a trade policy that enables both beet and cane producers in the UK to thrive, securing good quality jobs in the UK, benefiting consumers through increased competition, choice and innovation, and moving the UK back from a net importer to a net exporter of an important foodstuff whose demand is in strong growth internationally.

8. That new UK policy could either be one where both beet and cane sugar are subject to free market forces, or where both are highly managed and regulated and market prices are much higher than free market levels. As a cane refiner, either of those would enable us to be competitive. This is because what matters to a cane refiner is the margin available between the purchase cost of raw cane sugar and the sale price of refined sugar. Simply adopting the EU policy of cheap beet sugar and expensive cane sugar as UK policy would make cane sugar refining in the UK unviable once and for all.

9. A number of arguments have been put forward recently with regards to cane refining in the UK, including i) cane refiners are just importers and simply “clean-up” sugar, ii) Tate & Lyle Sugars is just a US company looking for cheap sugar, iii) all cane sugar is heavily subsidised whilst beet sugar is not. All of these need to be examined independently and properly as they are the same spurious arguments used by the EU beet sugar sector to protect and grow their own vested interest. We ask that the UK Government and UK parliamentarians do not simply accept these arguments at face value and gift a monopoly to a vested interest.

The EU sugar regime: artificially cheap beet sugar and expensive cane sugar

10. From 1968, the beet sugar sector in the EU was subject to marketing quotas, allocated to Member States, and minimum pricing set considerably above the world market price for sugar. These policies left a limited market for cane refiners, as the combined quota limits fell short of total EU demand.  The ACP and LDC countries were able to command high prices for their raw sugar and we were able to pay this because the EU white sugar price was also high. The additional costs on cane refiners resulting from trade restrictions and tariffs were generally passed on to consumers, whilst also generating economic rent for beet sugar producers.

11. The 2006 and 2013 CAP reforms reduced and abolished minimum EU prices for sugar and ended beet sugar marketing quotas from 30 September 2017. Importantly, the 2013 reforms did not include any parallel liberalisation for cane refiners despite the best efforts of ourselves and the British Government to secure them. With no improvement in access to raw material and a white sugar market price more aligned with the world price, we and the British Government[4] predicted that it would become increasingly difficult for cane refiners to compete, especially in the face of substantial volumes of additional beet sugar production. In effect, EU policies created a cheap white beet sugar market whilst maintaining expensive access to raw cane sugar, making us uncompetitive. 

12. As noted by the Committee’s terms of reference, this has benefited EU beet sugar producers who have increasingly sold refined beet sugar in to the UK market. Refined beet sugar imports from the EU have risen from around 0.2 million tonnes to 0.6 million tonnes as a result of these reforms, whilst refined sugar exports from the UK, of beet and cane, have fallen from over 0.5 million tonnes to around 0.3 million tonnes. The UK has moved from a net exporter of refined sugar to one of the largest net importers of refined beet sugar in the EU. This change has not come about because we are uncompetitive in our own right. It is the result of a deliberate policy to deregulate and support EU beet sugar production whilst maintaining historic constrains on cane refining that make us artificially unable to compete. 

13. To confound the problem, the EU beet sugar sector, which operates in 19 Member States, receives both direct and indirect financial support (in addition to the considerable protection offered by the tariff regime and special sugar-specific restrictive Rules of Origin which further limit competition). Notwithstanding non-direct support beet producers receive as part of the EU’s €57 billion CAP budget, ten of the nineteen beet producing countries also allocate a direct subsidy through Voluntary Coupled Support (VCS) payments. This amounted to €174 million in 2015[5]. The UK rightly does not opt-in to this scheme.

14. The UK government argued during the 2013 CAP reform that it was imperative to ease restrictions on cane refining in parallel to the abolition of beet quotas. Unfortunately this was not successful. We would welcome reassurance that this remains the policy objective. The ability for the UK Government to secure a fair deal for cane refining has been undermined as the EU has grown from 15 to 28 member states, and as the European Parliament gained co-decision power in agriculture and trade. CAP simplification also complicated matters as many individual agricultural policies like sugar were rolled in to one large policy, leading to reduced focus on specific sectors and increased trade-offs between them.

Question 1: What challenges and opportunities will the UK sugar industry face from new trade arrangements with EU countries post-Brexit?

15. The first challenge the UK and EU sugar industries face is replicating duty free tariff free trade in sugar whilst also accepting that the UK has the right to an independent trade policy on sugar. The two appear mutually exclusive. The EU-27 beet sugar industry will wish to maintain unconstrained access to the UK sugar market whilst wanting to avoid the UK giving its cane refining sector the ability to compete with them in the UK sugar market. For instance, existing EU free trade agreements with other countries or regions do not allow complete free trade in sugar. Sugar is always either excluded completely from the scope of the agreement or tightly volumetrically controlled through tariff rate quotas, like other sensitive agricultural products.

16. The second challenge will be Rules of Origin. These rules determine whether sugar manufactured in the UK can qualify for being of UK origin and trade under the terms agreed between the UK and the EU. The EU consistently applies strict rules of origin to sugar in other FTAs by specifically excluding cane sugar refining from conferring origin. This is a special exclusion overriding all other rules of origin criteria. It is designed to further protect EU beet producers by complementing the high sugar tariff wall the EU applies. In practice this will mean that any cane sugar refined in the UK will not qualify to be exported to the EU under a UK-EU FTA. This would mean that EU beet sugar producers would be free to export refined beet sugar to the UK, often subsidised by VCS, whilst we would be unable to export refined cane sugar back to the EU.

17. Both of the above should be weighed against the big opportunity for the UK to design a sugar policy that better reflects the UK’s own sugar sector, striking a balance between beet and cane. Today, EU-27 beet sugar producers simply see the UK as a deficit sugar market where they can export cheap refined beet sugar knowing that cane refiners are unable to compete due to our costs being inflated by EU restrictions and tariffs. In the future, the UK government will have the opportunity to design a sugar policy that encourages competition and innovation and truly allows us to compete with EU beet sugar on equal terms.

18. If the UK doesn’t design a new policy, and simply copies and pastes existing rules and tariffs, the outcome will not simply be the status quo. This is because the UK will move from being part of a surplus market where refined sugar prices are set by the marginal price of exports, to being a deficit market, where refined sugar prices are set by the marginal cost of imports. The high external tariff would drive up the price of sugar in the UK by the equivalent of the value of the applied tariff, incentivising UK beet sugar producers to produce more and shut out cane sugar. Whilst this may be desirable in some UK agricultural sectors where there are numerous UK producers, the fact that there is only one UK beet sugar producer would lead to a policy-driven monopoly in the UK sugar market for both the purchase of sugar beets from growers and the sale of refined sugar to consumer. See graph in annex A.

Question 2: How should the deficit in sugar that will accompany the departure from the EU be filled?

19. As the inquiry’s terms of reference note, the breakdown of UK sugar supply is currently 60% domestic beet sugar, 25% cane sugar and 15% imported EU beet sugar. It is important to note that these trade flows are not the result of market forces, but a direct consequence of recent EU policies.

20. Under the EU’s single market and customs union, the external sugar tariff is exceptionally high, but sugar can trade free of any duties or tariffs between any EU country. The external EU tariff for sugar is set at €339 per tonne for raw cane sugar and €419 per tonne for refined white sugar.  The ad valorem equivalent varies but for raw cane sugar it is currently around 141%.[6] This has meant that the deficit in the UK has grown as UK cane refining has declined, and the gap has increasingly been filled by imported EU beet sugar.

21. Examining the data, it is clear that there is sufficient capacity amongst UK sugar producers to not only satisfy UK demand but for the UK to be a significant net exporter of refined sugar. UK demand for sugar is around 2 million tonnes per annum. UK sugar production capacity is at least 2.5 million tonnes. Tate & Lyle Sugars has a proven capacity to produce 1.1 million tonnes of refined cane sugar in the UK. The UK’s capacity to produce refined beet sugar is currently estimated at around 1.4 – 1.5 million tonnes of beet sugar.[7]

22. If the UK had only two car manufacturers it would not look to design a policy to make sure they only share a limited UK market. It would look to design a policy which allows both to flourish and produce to their capacity, selling both in the UK and abroad. The UK sugar sector should be no different. When designing a UK sugar policy the Government should be considering how to create a policy that allows both UK producers, and potentially new entrants, to flourish by meeting UK needs and exporting, rather than seeking to fill a specific volumetric gap in imports from the EU-27 that is only there as a result of relatively recent changes to EU policies.

Question 3: How can future policy best address trends in the sugar industry such as a falling world price and decreased consumption?

23. The EU beet sugar sector, including the UK, is amongst the best-equipped of all agricultural sectors to compete on global sugar markets. Whilst it may be justifiable for some sectors to be protected from free market prices for wider policy considerations, sugar is not one of those. High tariffs only exist as a throw-back to the establishment of EU sugar policies when beet sugar costs were much higher and global cane sugar costs much lower. In that context, for the purposes of protecting producers alone, we do not believe that it should be the role of government policy to protect beet sugar producers from market fluctuations. Policy should instead encourage sugar producers to focus on competitiveness, innovation, and ultimately the needs of the consumer.

24. Whilst we have suffered badly from EU sugar policies, one lesson we have learnt is that competitive pressure encourages an obsessive focus on the needs of the customer. That pressure has forced us to reduce our production by over one half, but invest heavily in consumer-focused innovation.  As a result, we have grown our value added sales by 15% to 20% per year over 5 years, and the number of products we produce has tripled. 

25. We now manufacture over 650 types of white, brown and liquid sugars as well as a wide range of syrups and treacles in the UK. We knew that EU rules meant that we could not compete on price alone in the commoditised EU white market so we sought to develop new products that would appeal to our customers. It has been a difficult and painful process but ultimately one that has put us in a position where we are better able to withstand competition – whether fair competition from the free market or unfair competition from EU policies. Our lesson has been that there is no point being the lowest cost producer of a product that nobody wishes to purchase.

26. Regarding decreasing consumption, the same applies. UK Government policy should not aim to shield UK sugar producers from the reality of a decreasing UK sugar market, but instead equip them to be competitive and innovative producers who see the world as their market, and not just the UK. This is no different to the way in which UK policies are aiming to help UK car manufacturers develop electric vehicles in the face of declining demand for vehicles powered by the internal combustion engine. Notably, global sugar consumption continues to rise every year by the same quantity as the total UK sugar market.

Question 4: What trade policies and agreements could achieve a balance between protecting domestic and infant industry, competiveness and free trade and supporting the sugar industry in LDC and ACP countries?

27. The answer to this question all depends on the type of sugar regime the UK government wants to design. For cane sugar refiners what matters is not the absolute price of sugar but the difference between the price we pay for our raw cane sugar and the price at which we sell refined sugar. 

28. The UK government has two options for a future sugar policy:

1. A protective, high sugar price policy: the UK could implement a tightly regulated market with high consumer sugar prices, quotas for the beet sugar sector, tariffs on cane sugar, with the share of each micromanaged. Under this scenario, the domestic industry is protected through high tariffs and we as a cane refiner are economically able to pay a high price to ACP and LDC suppliers to enable them to receive economic benefit from their preferential access to the UK market. 

2. A competitive, free market sugar price policy: the UK could pursue a light regulatory touch approach to the market, with tariffs on raw cane sugar removed, no quotas on beet sugar, and low consumer prices. The value of the preference for the ACP and LDC countries would be low to non-existent and many of these countries would choose to sell their sugar to other more remunerative markets in this scenario.

29. We can operate under either scenario.  If there is an expensive cane sugar policy (high tariffs and restrictions on suppliers) we need the white sugar price at which we sell our end product to also be high. Equally, we can succeed under a low white sugar price policy so long as we are allowed to source raw cane sugar without current EU restrictions. What we are not able to do is survive in the existing EU scenario where access to cane sugar is restricted and expensive, but there is a cheap white sugar policy due to no a deregulated beet sugar sector benefiting from subsidies including VCS.

30. We are often criticised for wanting to source cane sugar from a wider range of suppliers by EU beet sugar producers who claim that tariffs should remain and that their motive is to protect the best interests of the ACP and LDC suppliers. The reality is that it is economically illiterate to assume that we can pay preferential cane sugar suppliers a high price for raw cane sugar whilst selling refined sugar in a low priced beet sugar market. This is particularly the case now that beet sugar producers are deregulated and, in many cases, get coupled support to grow sugar. The sad reality is that those beet producers who claim to have the best interests of the ACP and LDC at heart are the same ones taking market share from them and, in many cases, benefitting from VCS to do so. The economic reality is that we can only pay a high price for preferential sugar if the refined sugar market is subject to a high price policy and constraints on beet sugar production.

31. Whilst we raise both scenarios as policy options, it is our expectation that the UK Government will most likely want to adopt current EU sugar policy and amend it to allow EU cane refiners to compete in this lightly regulated and lower priced environment. 

32. The Department for the Environment, Food and Rural Affairs (DEFRA) is aware of these challenges and published a report in November 2015[8] on the topic. The report stated:

“After quota abolition, the EU refining margin is only positive in a scenario where refiners can access raw sugar at the world price, tariff-free.”

[…]

“31. If the trade regime remains unchanged and raw sugar imports are restricted by duties then refiners will continue to face artificially high prices for raw material from the world market. This is because many countries who have duty-free access to the EU market have not historically supplied sugar at the world raw price and/or risk losing preference when EU prices are much closer to world levels. Countries that can supply at the world price of raw sugar are subject to tariffs, which means very little raw sugar can enter the EU market at the world price.

“32. In such a situation, lower EU white sugar prices as a result of quota abolition will translate into reduced profitability for European refiners as their margins are reduced: The cane refiners are likely to continue operating at a loss.”

33. It is clear that some easing of the restrictions on cane sugar coming into the UK will be necessary if the UK continues to pursue a low price refined sugar market. A complete unilateral removal of tariffs on raw cane sugar does not need to be the only answer. By way of example, there could be a system of annual tariff rate quotas (TRQs) to allow sufficient raw cane sugar free of tariff to enter the UK. This system might be replaced over time if the UK negotiates more permanent access to a wider range of raw cane sugar suppliers through free trade agreements, such as with Australia. 

34. Adopting the EU’s low refined sugar price policy would not allow us to pay ACP and LDC suppliers the premium they desire. Indeed, traditional suppliers to the EU and the UK have already started to react to these new market conditions.  By way of example, Jamaica is selling more in its domestic market and looking for local markets rather than continuing to export to the EU.  Speaking at a meeting of the Jamaican Public Administration and Appropriations Committee (PAAC) in January 2018, Donovan Stanberry, Permanent Secretary for Agriculture stated[9]:

“We now have to tailor the sugar industry to satisfy the markets that really make money… certainly for the last four or five years, all the (brown) sugars we consume in Jamaica are in fact from local production.  There was a time when the EU (European) market was so lucrative that we would send all our local production to meet our quota and then we would buy cheap world market sugar for local consumption. That is no longer the case.”

35. How to square the circle of a competitive UK sugar market with the desire to recognise ACP and LDC suppliers is not one the UK should shy away from. However, it is important to remember that there are some ACP and LDC suppliers who are truly globally competitive and see preferential access to the EU or UK as a chance to make more profit. Whilst other ACP and LDC suppliers are significantly cost and capability challenged. To us the only clear option available to the UK Government appears to be to recognise the need for those challenged ACP and LDC sugar industries to receive targeted UK aid to develop their ability to compete, whether that be in the UK, EU or other local markets that best suit them. In parallel we as cane sugar refiners can do our best to pay some of these suppliers an above market price by continuing to buy as much cane sugar on Fairtrade terms[10] as consumers in the UK wish to purchase.

Question 5: What are the opportunities for export for the UK sugar beet industry post-Brexit?

36. The scope of the question should be the UK sugar industry as a whole, if not the UK food and drink sector more generally, not just UK cane refiners. All adds value to the UK. Until 2009, we had important export markets both within the EU and beyond. Around 30% of our UK production, approximately 0.3 million tonnes, was exported per year. As a result of protective EU trade and agricultural policies, our principal market is now the UK, although we continue to export around 10% to 15% of our much lower production. We currently export our value added products to customers in over 50 countries around the world. We are excited by the possibility of operating under a fairer and more stable UK policy environment that would enable us to spend more time focusing on re-building our export markets and less time battling EU policy-makers. 

37. Profitable long-term growth in the UK exports – of beet or cane sugar, or sugar-containing food and drink – is most likely to come from value added products. This is because many countries have their own sugar production and exporting commoditised white sugar to these markets is hard. Growing sugar markets without local production that rely heavily on imports of refined sugar typically get to a scale at which it becomes economically viable to build a cane refinery at market to supply local needs. If we want to succeed in export markets, the UK industry will need to invest more in consumer-led innovation so that we have products to sell in export markets that are truly differentiated from local production. To build that capability UK producers need to be subject to a domestic policy that truly incentivises them to put the needs of the consumer first.

END

ANNEX A

February 2018

8