WTO sugar ruling may force harsher EU subsidy cuts

Europe may have to make harsher cuts to its generous subsidy system for sugar following a world trade ruling, threatening businesses and the livelihood of thousands of farmers, analysts said.

Europe has pledged to comply with the ruling from the World Trade Organisation's (WTO) top court and will have some 15 months to change its policy: a complex and much-criticised system barely untouched since its birth in the late 1960s.

This time frame dovetails with the European Union's own reform plan, experts say. The question is how that will change - and what is on the table now already threatens to put several national industries, as well as thousands of farmers, out of business.

Most EU governments have serious misgivings about the Commission's ideas for sugar reform, particularly in countries like Finland and Ireland whose lower-yielding industries are seen as Europe's most vulnerable. How they react to a revised plan that might be even more drastic remains to be seen.

Under intense pressure to reform, the European Commission wants to cut internal support prices and production quotas to soothe its critics while keeping its sugar sector competitive.

These cuts may now have to be far deeper because of the WTO verdict, analysts say. One thing is clear: Europe's sugar production and exports are going to fall sharply.

The Commission is due to publish its new plan on June 22. EU farm ministers will hold a first debate in July and aim for a deal in November. Existing sugar policy expires in June 2006. "The EU is going to get out of sugar in a big way over the next five to seven years," one Brussels-based analyst said.

Even in March, EU Agriculture Commissioner Mariann Fischer Boel hinted she would like deeper cuts than the 33 per cent reduction in prices and 2.8 million tonnes in quotas that were proposed in a 2004 blueprint.

The policy overhaul had to be ambitious and thorough to avoid further reform a few years ahead, she said, adding that the proposed cuts now on the table were "a necessary minimum".

On quotas, the cut will now have to incorporate a further 1.6 million tonnes of sugar that the bloc imports duty-free each year from former European colonies such as Mauritius. The WTO ruled that the EU could not export a similar amount at reduced prices on the world market to recover some of the import cost.

More significantly, the WTO confirmed that more than three million tonnes of sugar produced in excess of national quotas - known as C sugar - was in fact benefiting from state aid since EU producers had already received aid to grow and process beet.

C sugar must be exported from the EU without subsidy. So C sugar has to go. But how to do it? One way might be to cut prices further so that it becomes non-profitable to produce.

"They (Commission) have to find a mechanism to prevent C sugar exports. They have to recommend a larger price cut - and it's no good cutting the quota without cutting the price," independent agriculture analyst Brian Gardner said.

"The Commission's recommendation is to cut to twice the world price," he said. "But a majority of factories and farmers will still be able to produce sugar above quota profitably at that price level, so they would still be cross-subsidised."

EU sugar policy, often accused of distorting global trade and harming Third World producers, at present inflates internal prices to more than three times the world market.

Another way to limit C sugar production would be to tax excess-quota sugar, officials say, admitting that this would be a politically sensitive path to follow. A similar system known as "superlevy" has existed for years in the EU dairy sector.

However it is done, scrapping C sugar will annoy France, the EU's top producer of this sugar category. France is by far the largest beneficiary of EU farm funding, a mammoth budget worth nearly half the EU's entire annual spend of €100 billion.

"The problem is how to stop people producing over-quota sugar," the analyst said. "But what rules will be put in place to prevent this, and stop C sugar exports, remains to be seen. This is a challenge facing the Commission."

To sweeten the pill of more drastic price and production cuts, the Commission may change one of the most sensitive parts of its reform plan - quota transferability, or allowing national production allowances to move between countries.

The Commission sees this as a way to help industries unable to cope with lower revenues leave the sector by selling quotas to rival operations overseas, thus creating a secondary market.

Critics say it will just boost the dominance of the few big players that have controlled EU sugar for decades.