Route to a more Efficient Sugar Industry is price cuts not reductions in quota

PRICE CUTS will deliver a more efficient sugar industry than quota cuts, though both will result in a smaller area of beet grown, according to a new report* from Cambridge University and the Royal Agricultural College.

Taking a baseline scenario of growers” incomes in 2002, the study looks at the effects of a 25% quota cut, a 25% price cut and a 40% price cut.

Under the 25% quota cut it notes that even the most efficient farms will have to rein in their production. The immediate effect will be a 25% reduction in the area grown, if no restructuring occurs.

 “Cuts in quota lead to higher unit costs of production and, therefore, farms currently growing may well cease production altogether rather than simply cut back by the 25%,” the report says.

Productivity will also fall in the short term as economies of scale are lost, though there will be some recovery as the least profitable drop out. The study suggests a 15% loss of productivity from a 25% quota cut.

This is in contrast to a 25% price cut, which is estimated to lead to an initial drop in the grown area of just 7%, though this could rise to 50% if net margins are not covered in the long run. “With a price cut, in general the least profitable producers will exit the industry. Sugar beet productivity will increase significantly, due to the fact that only the most productive farms remain.” These trends will be even more extreme in the case of a 40% price cut.

The report notes that in all scenarios, there is a drop in the income generated by sugar production. But these impacts may be ameliorated by restructuring, with quota moving to continuing producers. “It is estimated that if low cost producers were able to expand sufficiently, then the UK”s quota could be produced at an average cost of under 20/t (compared with 25/t currently).”

A 20% reduction in average costs, which the researchers describe as “a challenging but plausible scenario”, would mean that about 80% of UK beet production would still be viable after a 25% price cut.

Compensation may also offset some of the effects of the reform, though the report concludes that there is little justification for coupled support.

 *Economic, Social and Environmental Implications of EU Sugar Regime Reform, by the Rural Business Unit, Cambridge University and The Royal Agricultural College.