Written evidence submitted by Arvind Chudasama, Informa

1. Executive summary

• The UK sugar industry boasts four beet sugar factories with a processing capacity of over one million tonnes and two cane raw sugar refineries also having processing capacity of over one million tonnes.
• Sugar consumption in the UK currently stands at around 2.2 mln tonnes. It used to be over 3 mln tonnes before 1973.
• While sugar consumption in the West is declining slightly, this is not the case in the rest of the world. Annual global rise in consumption is put at 1.75% annually over the next decade by the OECD.
• British Sugar, the only beet sugar producer in the country, expanded output following UK becoming a member of the EU.
• Prior to accession, imports of raw sugar were more than 2 mln tonnes a year this is now less than 1 mln tonnes. This has hit Tate&Lyle Sugars, which has to pay import duties on raw sugar from countries without preferential access.
• There is no such thing as a level playing field in the sugar market. The local sugar industry, which is globally cost-competitive will need to be protected combination of preferential access and quota for select countries.
• UK should adopt current EU policy on sugar trade which includes tariff-free access for producers from LDC countries and hefty import duties from countries with non-preferential access to pre-empt dumping. Provision will, however, need to be made for T&L to import raw sugar without duty.

2. Introduction

3. The sugar industry in the UK consists of two parts, beet sugar production and cane sugar refining.

4. Beet sugar is produced by British Sugar, which operates four plants in East of England. Production is usually in the range of 1.0-1.2 mln tonnes. Almost all of the beet sugar produced is consumed locally.

5. The second part of the British sugar manufacturing industry is represented by raw cane sugar refining. This sector has shrunk in recent years. Tate&Lyle Sugars' refinery in Silvertown, owned by the American Sugar Refining (ASR) since 2010 is operating well below capacity. There is also the Ragus sugar refinery in Slough, processing 40,000 tonnes raw sugar, and specialsing in niche products.

6. This set-up, which pits a domestic producer processing local beet against an international company that would clearly benefit from lower tariffs on raw sugar, in many ways epitomises the hard choices the government will have to make.

Historical overview

7. Prior to accession to the then-European Economic Community in 1973, the UK had pursued its own domestic agricultural policies.

8. Until the Second World War British agriculture policy could best be described as haphazard and largely opportunist, its main objective was to obtain food at the lowest possible prices by buying the bulk of supplies on the international market, while leaving domestic producers to fend for themselves in a largely 'laissez faire' situation.

9. Upon accession to the European Economic Community (EEC), the British farming industry responded positively to the new subsidy system and production of agricultural crops, including that of sugar beet, reached record levels.

10. UK produced less than 1.0 mln tonnes of beet sugar prior to accession.

11. One of the major sticking points in the negotiations was the continued access to the British market for food products from the British Commonwealth, most importantly sugar imports from tropical Commonwealth. Many of these countries critically depended on the UK market for much of their overseas sales.

12. The solution at the time was the introduction of preferential access for African, Caribbean and Pacific (ACP) states for their sugar. In the Sugar Protocol the EU committed to buy certain quantities of sugar at guaranteed prices while the ACP signatory countries committed to supply that sugar. Under the agreement, duty-free import quotas were allocated for 1.3 mln tonnes per year.

13. The Sugar Protocol was followed by the Economic Partnership Agreements in 2015 which meant the end of the preferential status of former colonies. Instead, preferential access to the EU markets was now extended to a much larger group of developing countries.

14. At the same time raw sugar imports into the UK continued falling. While prior to accession, imports were more than 2 mln tonnes a year this is now less than 1 mln tonnes.

15. On the other hand, beet sugar imports rose from less than 50,000 tonnes before accession to around 300,000 tonnes in recent years.

16. So, the statistics support the view of Tate&Lyle Sugars that the EU policy is favouring domestic (EU) beet sugar producers at the expense of raw sugar exporters (and refiners). Hence their support for Brexit.

17. However, it was not only adverse trading policies which prompted raw sugar imports to drop. What should not be overlooked is that consumption of sugar at around 2.2 mln tonnes a year is now far below the levels prior to 1973 when it was above 3 mln tonnes. On a per capita basis, sugar consumption has dropped even more dramatically to 34 kg from over 50 kg during the UK's membership period in the EU.

18. Before proceeding further, it’s best to get an overview of the global sugar sector.

Global sugar industry

19. Sugar is the only commodity that is grown from two entire different crops – sugar beet and sugarcane. Globally, some 80% of sugar produced comes from cane (see table 1), the rest from beet.

20. Sugar is produced in 113 countries, with 7 producing both beet and cane sugar, and 36 and 70 countries producing only beet sugar and cane sugar, respectively.

21. Table 2 provides a breakdown in trends in sugar output in the various regions of the world - Asia and South America dominate.

Trends in global consumption

22. Combination of persistent negative press and politicians not only in the west, jumping on the bandwagon to tax mainly sugar-sweetened drinks, are having an impact on demand. Some leading analysts have predicted a significant drop in the rise in demand annually from 2% to around 1%. But not all analysts, notably the OECD, predict a significant squeeze on demand. OECD projects rise in sugar consumption over the next decade at 1.75% annually, rising to 203 million tonnes in 2026. Indeed, there appears to be little statistical evidence proving either the slowing down in growth rates or decreases in per capita consumption in recent years at the global level. The global sugar consumption data for 2017/18 from FO Licht (see table 3) attests to this view.

23. With the exception of Asia, where sugar consumption has been rising every year, trend in sugar consumption in other regions is fairly flat. In the EU, over the five years, consumption has dropped by half million tonnes. Asia boasts emerging economies India and China whose rising middle classes boost demand. For the foreseeable future, Asia will continue to be powerhouse of the world sugar consumption growth.

24. There is a steady growth in consumption in Africa as stability, and rise in both population growth and middle class population increase demand.

• Per capita consumption

25. While the per capita consumption has been dropping in the West, the emerging and developing economies continue to be major drivers of consumption growth. Some of the highest per capita consumption of sugar is in emerging economies of Cuba and Brazil (see table 4). Israel boasts the highest sugar consumption - there is no news of sugar tax imposed by the government on health grounds. Per capita consumption in China has only to increase by a kg or two to cause a spike in global demand.

26. Besides the mix of rapid urbanisation and rise in middle classes fuelling demand in these economies, particularly via the use of industrial sugar, mobility revolution which has promoted overseas travel has fostered exposure to foods of other countries impacting changing tastes in local fare. “Every year, an estimated 320 million people fly to attend professional meetings, conventions, and international gatherings – and their numbers are steadily growing” according to the World Bank’s 2010 World Development Report.

Challenges and opportunities for sugar processors

27. With the abolition of sugar quotas, British Sugar faces no quantitative restrictions with regards to sugar production. This will doubtless continue post-Brexit. The minimum prices for sugar beet will go. Sugar beet will compete with other crops on the basis of price.

28. It has to be re-called that the EU import duties will not be touched by the 2017 market reforms. It would be up to the British Government to determine the future duty level and fix tariff rate quotas.

29. If the Brexiteers live up to their campaign promises the protection that the beet sugar producer and the sugar beet farmer in the UK currently enjoy in the form of tariffs will be reduced or even be completely lost.

30. This would make sugar beet growing in the country less attractive and sugar imports from non-EU countries could rise as a result. Through the Common Agricultural Policy, British farmers receive around £3 billion in subsidies, against a farming output level of about £9 billion.

31. Such a scenario could support UK’s cane sugar refiners who would gain access to a larger number of competitive raw sugar origins and would be in the position to better utilise its capacity.

32. However, increased access for raw sugar would require the negotiation of new bilateral agreements between the UK and its future suppliers. The problem is that the country can only start to negotiate these new pacts once it has left the EU and becomes a WTO member in its own right.

33. In this case the UK could either reduce the relevant Most Favoured Nation tariffs, which would benefit all exporters, or open a new tariff rate quota as part of a Free Trade Agreement with those countries with whom such a pact has been agreed. All of this will take time and uncertainty may persist well beyond 2019.

34. This means that many of the advantages that may arise from lower import tariffs for Tate&Lyle Sugars will only materialise at some (distant) future stage.

35. By contrast, British Sugar will be a beneficiary of post-Brexit in case the status quo for sugar is maintained. After all, the weaker pound will make the sugar producer more competitive. At the same time the UK market will become less lucrative for sugar sellers from other EU countries, most notably France.

Level playing does not exist in the global sugar sector

36. As Marie Christina Ribera from CEFS has pointed out, the world sugar market is a residual ‘dump’ market for surplus sugar, distorted by the state policies of the major producers and exporters. There is no such thing as a level playing field in the sugar market.

•         The major structural exporters (e.g. Thailand, Brazil) have massive programmes in place to support their sugar and ethanol sectors.

•         For non-structural exporters (e.g. India), dumping sugar on the world market is a market clearing mechanism used to keep domestic price high. Pakistan is the new wild card. The government is subsidizing exports of some 1.5 million tonnes to the tune of some US$124/t.

37. It would be reckless for the British government not to include significant safeguards for the beet sugar industry. British Sugar is progressive and cost competitive. It used to have 17 factories producing over a million tonnes of sugar. Now it produces the same amount from four factories.

38. The reform of the EU’s sugar regime has made the sector quite competitive. Over the last decade, nearly half of sugar factories in the EU have closed, from 189 to 109, leading to the loss of 4.5 million tonnes of production capacity. Beet acreage in the EU 28 decreased from 2,193,583 ha in 2005/06 to 1,313,697 ha in 2015/16. Over the same period, the number of beet growers decreased from 304,890 to 137,354, while the number of permanent and seasonal workforce decreased from 52,279 to 27,986.

39. Against this backdrop, the industry has gradually become competitive to be jettisoned in the market-driven space. Over the last 25 years, beet sugar production costs in the EU has on average increased by only 0.4% annually, compared with the inflation rate of 2.3% – meaning, constant reduction of costs relative to inflation has driven industry’s competitiveness. Investment in R&D and effective collaborative structure between the processors, researchers and growers have driven beet productivity – with sugar yields on average increasing from 9.4 t/ha in 2005/06 to 12.5 t in 2014/15. Further, the reform catalysed expansion in economies of scale (or increase in production capacity of factories).

40. British Sugar is one of EU’s most efficient producers that can effectively compete in the global market. But that need is unexpected to be a reality in the foreseeable at current production levels.

41. Tate&Lyle Sugars can heave a sigh of relief that a new 500,00 t beet sugar plant is unlikely now to be built in North Yorkshire. The investor from UAE is opting for the alternative site in Spain following certain hiccups with the local council. Since the UK is the largest importer of EU sugar, T&L will doubtless want to replace this with their processed refined sugar.

42. UK should simply adopt current EU policy on sugar trade which includes combination of preferential access and quota for select countries.

43. Namely:

• Tariff free access from LDC countries via the Everything But Arms initiative.
• EU sugar policy was supported by three pillars: production quotas, a sugar reference threshold and trade measures in the form of import duties. To shield the industry from imports of sugar from countries with non-preferential access the current import duties of €339 per ton on raw cane sugar for refining and €419 per ton on white sugar will need to remain. Provision will need to be made for T&L importing raw sugar for refining, so as not to disadvantage it competitively with British Sugar.
• Maintain CXL quota for certain sugar exporting countries which currently attracts a tariff of €98/t. This includes the major sugar exporter Brazil who could have additional access during periods of deficit.

44. Acknowledgement

Would like to note contributions from our sister publishe FO Licht.

Personal brief

I have been editing the International Sugar Journal for the last 17 years. It is a peer-reviewed technical trade journal, first published in 1869. Its main focus is on beet and cane production, beet and cane sugar processing, sugar refining and biorenewables. The title is owned by the publisher Informa. The main reason for my submission is that I can perhaps add to the discussion on the subject as I am quite familiar with the industry.