PURPOSE : to establish a temporary fund for the restructuring of the sugar industry in the EC in the context of restructuring the common organisation of the sugar market

LEGISLATIVE ACT : Council Regulation 320/2006/EC establishing a temporary scheme for the restructuring of the sugar industry in the Community and amending Regulation 1290/2005/EC on the financing of the common agricultural policy

CONTENT : t he Council adopted by qualified majority the three Regulations on the reform of the sugar sector. The Greek, Polish, and Latvian delegations voted against. A set of statements issued by the Council, the Commission and by delegations are annexed to the Regulations. A general approach on the reform of the sugar sector was reached under the United Kingdom Presidency in November 2005. The political compromise was later clarified and confirmed by the Special Committee on Agriculture in December 2005. The European Parliament gave its Opinion on 19 January 2006.

This reform of the sugar sector takes place in the context of the CAP reforms of 2003 and 2004. It is intended to take proper account of farmers’ incomes, consumers’ interests and the situation of the processing industry. It also gives European producers long-term certainty about the rules they have to follow. The reform therefore fixes the economic and legal framework for the European sugar sector until 2014/2015 without foreseeing a review clause.

The main points of the reform are as follows:

-A 36% price cut over four years beginning in 2006/07 to ensure sustainable market balance: -20% for the first year, -27.5% the second year, -35% the third year and -36% the fourth year.

- Compensation to farmers at 64.2% of the price cut (with the compensation calculated on the figure of 36% for the final year.) Inclusion of this aid in the Single Farm Payment and linking of payments to respect of environmental and land management standards.

- Merging of ‘A’ and ‘B’ quota into a single production quota.

- In Member States with a significant reduction of sugar quota sugar beet producers will face particularly severe adaptation problems. In such cases the transitional Community aid to sugar beet growers will not suffice to fully address the beet growers’ difficulties. Therefore, Member States having reduced their quota by more than 50 % will be authorised to grant State aid to sugar beet growers during the application period of the transitional Community aid.

- To buffer the effects of the restructuring process in Member States which have granted the restructuring aid for at least 50 % of the quota, sugar beet and cane producers will be granted an aid for a maximum of five consecutive years.

- Progressive abolition of the intervention system over a period of four years and the replacement of the intervention price by a reference price.

- Introduction of a private storage system as a safety net in case the market price falls below the reference price.

- Voluntary restructuring scheme lasting 4 years for EU sugar factories, and isoglucose and inulin syrup producers, consisting of a payment to encourage factory closure and the renunciation of quota as well as to cope with the social and environmental impact of the restructuring process.

- This payment will be 730 euros per tonne in years one and two, falling to 625 in year three, and 520 in the final year.

- A top-up payment for beet producers affected by the closure of factories.

- Both these payments will be financed by a degressive levy on holders of quota, lasting three years.

- Sugar beet will qualify for set-aside payments when grown as a non-food crop and also be eligible for the energy crop aid of 45 euros/hectare.

- To maintain a certain level of production in the current “C” sugar producing countries, an additional amount of 1.1 million tonnes will be made available against a one-off payment corresponding to the amount of restructuring aid per tonne in the first year.

- Sugar for the chemical and pharmaceutical industries and for the production of bio-ethanol will be excluded from production quotas.

- Increase of Isoglucose quota of 300,000 tonnes for the existing producer companies phased in over three years with an increase of 100,000 tonnes each year.

- Possibility of buying additional isoglucose quote for Italy (60,000 tonnes), Sweden (35,000 tonnes) and Lithuania (8,000 tonnes).

ENTRY INTO FORCE : 03/03/2006. The Regulation is applicable from 01/07/2006. However, Articles 12 and 13 (adoption of detailed rules and specific measures) shall apply from the date of entry into force of the Regulation.

The European Parliament adopted a resolution drafted by Jean-Claude FRUTEAU (PES, FR) and made some amendments to the Commission’s proposal:

- a new article states that as a consequence of reduced market support in the sugar sector, the restructuring aid also needs to be used to finance support measures for employees in sugar farming as well in the sugar industry. Those measures must be such as to help them to find new opportunities;

- another new article states that the quotas allocated for isoglucose shall not be eligible for restructuring aid;

- there are further requirement for the abandonment of production, on which access to the restructuring scheme is dependent. These include: the opening up of economic prospects for the region and the creation of jobs, in particular through the possible conversion of the premises for social or cultural purposes; the implementation of measures to facilitate the redeployment of the workforce or to provide compensation for job losses suffered by employees of the undertakings concerned; the signing of an agreement within the trade concluded with sugar beet and chicory growers or their official representatives concerning the share of restructuring aid to be allocated to growers, and the submission of a restructuring plan and its approval by the relevant authorities of the Member State concerned. This agreement will be signed by sugar beet and chicory growers, as regards their aid entitlements, and by employees of sugar factories, as regards labour-related matters;

- a new article gives a list of requirements for the abandonment of production where industrial facilities are to be converted to produce bioethanol for energy purposes. These include the renunciation of the relevant quota after consultations to be conducted in the framework of the relevant agreements within the trade; the conversion of industrial facilities into distilleries enabling the effective production of bioethanol for energy purposes; the implementation of measures to facilitate the redeployment of the workforce or to provide compensation for job losses suffered by employees of the factories concerned; the signing of an agreement within the trade concluded with sugar beet and chicory growers or their official representatives concerning the share of restructuring aid to be allocated to growers, and the submission of a restructuring plan and its approval by the relevant authorities of the Member State concerned;

- Applications for restructuring aid shall include: a joint commitment within the trade to renounce the relevant quota; the drawing-up of a business development plan covering planned economic activity and the impact of restructuring on the environment and employment and taking due account of the situation in the region. However, where industrial facilities are to be reconverted to produce bioethanol for energy purposes, applications for restructuring aid shall include the commitment to meet only the requirements mentioned above;

- the amount of restructuring aid per tonne of renounced quota has been increased by Parliament for each marketing year. They are: EUR 800 for the marketing year 2006/2007; EUR 741 for the marketing year 2007/2008; EUR 622 for the marketing year 2008/2009; EUR 516 for the marketing year 2009/2010;

- at least 50% of the total amount per tonne of quota renounced and made available to the sugar industry for restructuring shall be for sugar beet and chicory growers. The Commission is called upon to draw up proposals on the use that might be made of the amount received by growers having ceased production under the restructuring fund arrangements with a view to the creation of economically appropriate alternative forms of production.

- a new article on compensation states that Sugar beet and chicory growers, sugar factory employees and suppliers of machinery used in sugar beet and chicory production will suffer losses as a result of the restructuring and abolition of sugar beet and chicory production; In view of this, 50% of restructuring aid shall be reserved for sugar beet and chicory growers and machinery suppliers as compensation, in particular for investments made in specialist machinery that will decline in value. Furthermore, an additional sum of at least 10% of restructuring aid shall be reserved as compensation for sugar factory workers who have lost their jobs;

- a new article on Regional diversification states that during the transitional period, the additional amount allocated for each tonne of sugar not produced, equivalent to 15% of restructuring aid, shall be earmarked for the Member States or their regions as support for diversification in regions affected by restructuring;

- Finally, sugar beet growers who continue sugar beet production in Member States which significantly reduce their sugar quota shall have access to transitional national aid for five consecutive years starting with the marketing year 2006/07 at the earliest and ending by the marketing year 2013/14 at the latest.

The committee adopted the report by Jean-Claude FRUTEAU (PES, FR) amending the proposal under the consultation procedure:

- a new article stipulated that restructuring aid should also be used to finance support measures for employees in sugar farming as well as in the sugar industry;

- the level of restructuring aid should be re-evaluated in order to bring it into line with the new price cuts proposed by the committee for the sugar sector (see CNS/2005/0118) and to maintain the incentive aspect of the restructuring scheme. MEPs proposed that the amount per tonne be set at EUR 800 for 2006/2007 and be reduced gradually to EUR 516 for 2009/2010 (as compared with the Commission's proposals of EUR 730 and EUR 420 respectively);

- at least 50% of the total amount per tonne of quota renounced and made available to the sugar industry for restructuring should be for sugar beet and chicory growers;

- the abandonment of production should also require measures aimed at facilitating the redeployment of the workforce or compensating for job losses suffered by workers of the undertakings concerned;

- restructuring plans should be submitted for approval to the relevant national authorities and be signed inter alia by sugar beet and chicory growers, as regards their aid entitlements, and by employees of sugar factories, as regards labour-related matters;

- specific conditions should be laid down for the abandonment of production with a view to producing bio-ethanol for energy purposes, i.e. industrial facilities must be converted into bio-ethanol distilleries in order to ensure that the aid granted for restructuring is indeed used to that end.

The Council reached a general approach on the three proposals for Regulations - on the CMO in the sugar sector, amending Regulation 1782/2003/EC establishing common rules for direct support schemes, and establishing a temporary scheme for the restructuring of the sugar industry - on the basis of an overall compromise drawn up by the Presidency and which the Commission endorsed. This general approach on the sugar reform was agreed without prejudice to the opinion of the European Parliament expected on 17 January 2006.

The key elements of the general approach agreed are as follows:

• A 36% price cut on white sugar beginning in 2006/07 to ensure sustainable market balance. This cut (from 631.9 EUR/t to roughly 404.5 EUR/t) will be operated over 4 years (2006/2007 to 2009/2010);

• Compensation to farmers at a level slightly above 64% of the price cut. Inclusion of this aid in the Single Farm Payment and linking of payments to respect of environmental and land management standards. The payment will be 100% decoupled. However, during a transitional period of up to 5 years, for Member States reducing their quota sugar by more than 50% a temporary adjustment coupled aid may be granted under the EAGGF Guarantee Section;

• For the 10 New Member States since 1 May 2004, introduction of a Separate Sugar Payment (SSP) in 2006-2007-2008 only for beet growers as an alternative to the Single Area Payment Scheme (SAPS). A new Member State would have either the possibility to opt for the SAPS non-specialised payment and to add national top-ups to provide incentives in regional areas or specific production or to opt for the SSP granted only to beet growers without possibility of national top-ups. The SAPS is a transitional payment before the NMS will benefit from the existing Single Payment Scheme applicable to the "old" Member States since the CAP reform in 2003;

• Validity of the new regime, including extension of the sugar quota system, until 2014/15. No review clause;

• Merging of "A" and "B" quota into a single production quota;

• Replacement of the existing intervention price by a reference price and by a private storage mechanism. However during the transitional period of four years (2006/2007 to 2009/2010), an intervention price is set at 80% of the reference price of the following year for a maximum quantity of 600 000 t per year of white sugar;

• Introduction of a private storage system, instead of the guaranteed price in case the market price falls below the reference price;

• Voluntary restructuring scheme - lasting 4 years - for EU sugar factories, and isoglucose and inulin syrup producers to encourage total factory closure and the renunciation of quota as well as to cope with the social and environmental impact of the restructuring process. The Commission will present a report on the working of the Restructuring Fund by the end of 2008;

• This payment will be EUR 730 per tonne of white sugar renounced in years one and two, falling to 625 EUR/t in year three, and 520 EUR/t in the final year;

• This restructuring aid will be financed by a degressive levy on holders of quotas, through the restructuring amount - production levy - of 126,4 EUR/t the first year, 173,8 EUR/t the second year and

113,3 EUR/t the third year;

• Greater flexibility is added with regard to eligibility for restructuring aid - at a lower percentage -including in the case of partial dismantling of a factory and continued use of the production site excluding products covered by the CMO sugar (75%), partial renouncing of sugar quota and continued use of the facility for products covered by the CMO sugar with the exception of refining raw sugar (35%);

• Regional diversification: 15% of the restructuring aid amount for each 2006/07, 2007/08, 2008/09 and 2009/10 year is earmarked for regions affected by the restructuring process;

• Import regime: statements by the Commission on the automatic triggering of a procedure when sugar imports from an Everything But Arms (EBA) country increase by more than 25% in comparison with the previous marketing year and by the Council on the modification of legislation on rules of origin are added to the compromise;

• To maintain a certain production in the current “C” sugar producing countries, an additional amount of (1 million tonnes) will be made available against a one-off payment corresponding to the amount of restructuring aid per tonne in the first year;

• Additional quotas of 10 000 t per Member State are granted to Greece, Spain, Ireland, Italy, Latvia, Hungary, Portugal, Slovenia, Slovakia and Finland, also against a one-off payment corresponding to the amount of restructuring aid per tonne in the first year;

• Increase of isoglucose quota of 300 000 tonnes for the existing producer companies phased in over three years with an increase of 100 000 tonnes each year (2006-2007, 2007-2008, 2008-2009). The existing figure of the quota is 507 680 tonnes for the EU 25. Additional quotas may be allocated by Member States during the transitional period (2006/2007 to 2009/2010) subject to a one-off payment of EUR 730 per tonne to Italy (60 000 t), Lithuania (8 000 t) and Sweden (35 000 t).

As a reminder, the budget foreseen for the sugar sector in 2004 represented EUR 1721 million, made up for the most part of export refunds (75% of the total). The draft Regulation establishing accompanying measures for the 18 Sugar Protocol countries affected by the reform of the EU sugar regime (COD/2005/0117) is expected to be agreed upon at a later stage, under the co-decision procedure.

The Council had an exchange of views on the proposals for a reform of the Common Market Organisation (CMO) of the sugar sector, on the basis of a questionnaire giving delegations the opportunity to clarify their positions on the key elements of the reform and providing excellent guidance for further work to be done. It also announced on this occasion that a High Level Working Party will be convened for intensive discussions on the file on 8 and 11 November in order to prepare the Agriculture and Fisheries Council on 22-24 November, where it is expected to adopt a "general approach" on the reform.

Delegations acknowledged the need for sugar reform, several of them urging that a political decision be taken by the Council at its next meeting on 22-24 November. A few delegations stated, however, that the proposal needed to be strongly rebalanced.

As regards the questionnaire submitted by the Presidency:

1) Concerning the key improvements to the proposal needed to ensure market balance and the maintenance of a competitive EU sugar sector:

- delegations expressed concerns about the effectiveness of the market management tools proposed to ensure market stability;

- diverging opinions were expressed on the price cut, with some delegations considering 39% as a minimum and others considering that the aim of reducing production could be attained by a less radical price cut;

- some delegations considered that it would be more appropriate first to cut surplus production (i.e. the current "B quota" and "C" sugar production);

- some delegations considered that there should be scope for flexibility for the Member States so as to allow for the possibility of targeted partial coupling;

- a few delegations underlined the priority of ensuring the budget neutrality of the proposal;

- the question of EBA imports and especially their effective control was a major issue for many delegations in the context of the SWAPs effect, with effective measures to combat fraud, respect for rules of origin and the need for safeguard measures to be taken quickly and effectively called for.

2) Concerning the restructuring fund, it was generally agreed that this was an important tool in the reform proposal. Delegations welcomed the possibility of further definition of the role of the Member State in determining how the restructuring plans should be drawn up, in particular to include conditions on environmental and social requirements, and in monitoring the effective implementation of these plans.

A large number of delegations considered that the decision to close a factory should ultimately be taken by the industry. Most delegations welcomed the possibility of having the restructuring payment extended to cases of partial dismantling of a factory in certain circumstances. The interests of sugar beet growers in particular were considered important in the context of the restructuring scheme, and the possibility of extending a specific restructuring payment to growers was discussed.

Commissioner Fischer Boel reiterated the urgent need for a 39% price cut, as an element essential to the overall balance of the proposal, bearing in mind the large volume of surplus sugar to be taken out of the EU market, and assured the Council that this reform had been proposed for the long term, without a mid term review, with a view to providing security for farmers. She justified the 60% rate of compensation on the grounds that this rate had been the same in past CAP reforms in 2003 and 2004 and respected budgetary limits. Concerning the restructuring fund, she made it clear that the Member States would be authorising and monitoring the restructuring plans. However, she made it clear that the decision to close was for the industry itself. She acknowledged the need for financial compensation in the case of partial dismantling of a factory.

T he Council, having heard the Commission's presentation of the three legislative proposals and the preliminary reactions given by delegations to the three questions on the main principles underlying the sugar reform proposal, invited the Special Committee for Agriculture to conduct a thorough examination of all the issues and to prepare a report which the Council will examine at a future session.

The questionnaire, which had been submitted to the Special Committee on Agriculture (SCA) on 11 July, aimed at getting political guidance from the ministers. The general political orientation following the round table held at the Council could be summarised as follows:

- in general an overwhelming majority of delegations acknowledged the need for a reform of the sugar sector; delegations also recognised the importance of complying with the World Trade Organisation's legal requirements, following the outcome of the WTO Panel. Most of the delegations also supported the introduction of a restructuring scheme in particular in order to alleviate the social effects of the sugar price cuts on sugar producers and beet growers;

- concerning the options proposed, between the voluntary restructuring scheme combined with a larger price cut or the smaller price cut and mandatory quota cuts as proposed in the Commission Communication of July 2004, a large number of delegations could support the first approach included in the proposals. However, several delegations supported reduced price cuts, these cuts being possibly extended for a longer period of time than the two years proposed. Some of these delegations also supported in some cases a reduction of the current B quota (exported sugar at guaranteed prices) and a further reduction of current C sugar (sold outside the EU without export refund) and asked to keep the current distinction between A quota (sugar for domestic use at guaranteed prices) and B quota, in order to protect the EU sugar output for domestic consumption;

- concerning the extension of the reformed regime until the 2014/15 marketing year, most of the delegations supported this long-term perspective which would provide for stability for EU producers and consumers as well as sustainability of the regime for the sugar imports from the African Caribbean and Pacific (ACP) countries and the Least Developed Countries. Nevertheless, some delegations suggested that a mid-term review be inserted in the proposals, possibly after the restructuring scheme in 2010, in order to consider possible further price and quotas cuts;

- as regards the Commission proposals for compensation under the scheme of a decoupled payment and of national envelopes for direct payments that would represent 60% of the estimated revenue loss: although many delegations found this approach in line with recent CAP reforms to be fair and balanced, several delegations asked for an increased rate of compensation while others insisted on sticking to budget neutrality. A few delegations asked to keep part of the payment coupled to production in order to avoid the total ceasing of activity in regions of the EU.

Given that the legal basis for these proposals is Article 37 of the Treaty, the so-called consultation procedure applies - no legally binding Opinion from the European Parliament -: the EP's Opinion is scheduled for 15 November 2005, the adoption of the report by the Committee being expected on 11 October.

PURPOSE : to establish a temporary fund for the restructuring of the sugar industry in the EC and amend Regulation 1258/1999/EC on the financing of the common agricultural policy.

PROPOSED ACT : Council Decision.

CONTENT : f ollowing the CAP reforms of 2003 and 2004, the Commission states that the time has come to bring the sugar regime into line with the approach already adopted in other sectors. Sugar reform must take proper account of farmers’ incomes, consumers’ interests and the situation of the processing industry. The reform must bolster the competitiveness of the EU sugar industry, improve its market orientation and produce a sustainable market balance in line with the EU’s international commitments. (Please refer to CNS/2005/0118 for details of the proposed reform to the sugar regime, and CNS/2005/0119 for income support measures for sugar beet growers.)

As a precondition for the implementation of a functioning new common market organisation for sugar a separate and autonomous temporary scheme for the restructuring of the sugar industry in the Community needs to be established. Under this scheme quotas will be reduced in a manner that takes account of the legitimate interests of the sugar industry, sugar beet and chicory growers and consumers in the Community.

The Commission proposes a new, voluntary and temporary restructuring scheme for the EU sugar sector, which will operate for four years (2006/07 to 2009/10).

The restructuring fund has three main objectives:

- to provide incentives to encourage less competitive producers to leave the industry;

- to provide money to cope with the social and environmental impacts of factory closure (financing of social plans or redeployment programs and reconversion measures to bring the site into good environmental condition) and

- to provide funds for the most affected regions.

The scheme will provide:

- a high, degressive per-tonne restructuring aid, available to EU sugar factories, isoglucose and inulin syrup producers, which will be granted for factory closure and renunciation of the quota; workers in zones that are particularly hard hit by the consequences of the reform;

- a top-up payment, to ensure sugar beet growers the possibility of receiving the full, final direct payment, as from the first marketing year, in the event that they abandon production, owing to the fact that the factory, with which they have sugar beet delivery rights, has closed under the restructuring scheme.

The conditions for having access to the restructuring fund are to be fixed on Community level in accordance with the economic, social and environmental objectives of the fund. The fulfilment of these conditions has to be controlled by the Member States; restructuring aid can only be granted once the closing factory is clearly committed to the respect of these conditions.

Financing for the restructuring scheme will come from a specific, per-tonne amount, charged over three years on all sweetener quota. The restructuring amount will be set at EUR 126.40/t in 2006/07, EUR 91.00/t in 2007/08 and EUR 64.50/t in 2008/09.

The scheme will provide a high, degressive per-tonne aid, available only to EU sugar factories, isoglucose and inulin syrup producers, wishing to cease production. In year 1, the aid will be set at EUR 730/t of quota, falling gradually to EUR 420/t of quota in year 4. In order to encourage an early uptake of the scheme, sugar factories closing as from 1 July 2005 will be eligible for the restructuring aid. Furthermore, as from 2008/09, a part of the restructuring aid may be earmarked for diversification measures in regions most affected by the sugar reform. Note should also be taken of the additional possibilities provided for by the instruments of

European Cohesion policy, to assist the economic restructuring and the retraining of workers in zones that are particularly hard hit by the consequences of the reform.

Through the restructuring scheme budget, sugar beet growers will receive a top-up payment, to ensure the possibility of receiving the full, final direct payment to those growers, who have to abandon production owing to the closure of the factory with which they have sugar beet delivery rights, from year 1 of the price cuts.

FINANCIAL IMPLICATIONS:

For the period, the cost of the proposed reform respects the status quo expenditure, as proposed at the time of the CAP Reform proposals of January 2003. The costs of the new measures proposed for this sector, for which the direct decoupled payment to producers represents the major element, will be mainly offset by the savings resulting from a substantial reduction in export refund expenditure and abolition of the refining aid. When the proposed measures for the sector have been fully implemented, the envelopes for direct income support will involve an annual cost of EUR 1 542 million. Any costs in respect of the private storage scheme (see CNS/2005/0118) should be limited and only arise if market prices risk falling significantly below the reference price.

With regard to the restructuring scheme, an ad hoc restructuring amount will be charged to finance it and will be assigned to a restructuring fund. The amount of EUR 4 225 million will be charged over three marketing years (2006/07 up to 2008/09) and the restructuring aid will be available for four marketing years (2006/07 to 2009/10).

COMMISSION’S IMPACT ASSESSMENT

For further information concerning the background to this issue, please refer to the summary of the Commission’s initial proposal COM(2005)0263 of 22 June 2005 establishing a temporary scheme for the restructuring of the sugar industry in the European Community and amending Regulation (EC) No 1258/1999 on the financing of the common agricultural policy.

Note: This is one of a package of three proposals put forward by the Commission comprising measures 1) to restructure the EU’s sugar industry, 2) to provide direct income support to sugar beet producers (CNS/2005/0119) and 3) to reform the sugar COM (common organization of the market) (please refer to summary relating to CNS/2005/0118) respectively.

1- POLICY OPTIONS AND IMPACTS : The Commission initially considered three possible policy orientations for the EU sugar regime, which were analysed in the September 2003 Extended Impact Assessment, taking into account the effects of the internal and external constraints placed on the sector and the dispute that was taking place before the WTO. This impact assessment incorporates new information gathered since the publication of the initial impact assessment.

1.1- Option 1 - No reform: As a reference for the alternative scenarios, the consequences of an extension of the present regime beyond 2006 were assessed. This consisted of keeping intact the current common market organisation, based on flexible quotas, which maintain market balance through the quota adjustment mechanism and price intervention. The EU market would be open to import quantities according to the various international commitments already agreed or agreed in the future.

1.2- Option 2 - Price cut: The second scenario evaluated was a reduction in the EU internal price. Once imports and production levels stabilised, production quotas would be phased out and the internal market price would be allowed to adjust itself to the price of those imports. To smooth the effects of the reduction in the EU sugar price, this scenario also looked at the possibility of introducing the single payment scheme into the sugar sector, in line with the June 2003 CAP reform.

The June 2005 proposal remains based on the “Price cut” option with quota adjustment and consists of the following: the EU sugar regime will be prolonged until the end of the 2014/15 marketing year and there will be no review of price and quota levels in 2008; there will be a significant reduction (39%) of the institutional support price net of restructuring amount for EU sugar, in two steps, with the abolition of intervention and the introduction of a reference price; direct decoupled payments within CAP budget limits will be introduced, with the same historical reference period as used in the 2003 CAP reform (2000–2002).

1.3- Option 3 - Full Liberalisation – removal of price support and quota regime: The third option for reform represented a complete liberalisation from the current regime. This meant that the domestic EU price support system would be abolished and production quotas would be abandoned. In its July 2004 Communication, the Commission discarded two of the three options. The “No reform” option was deemed unsustainable in the medium term while the “full liberalisation” option was considered unbalanced, in terms of its impact on EU producers and trade partners, such that it did not offer realistic prospects for their long-term future.

CONCLUSION : The Commission concluded that option 2 offered the best solution of the three. If the proposal is adopted as it stands, the EU institutional price, net of the restructuring amount, will be cut by 39%, over two years, to ensure a sustainable EU market balance, consistent with the EU’s international commitments; the national envelopes for the farmer direct payments in each Member State will grant 60% of the estimated revenue loss from this 39% institutional price-cut; the sugar quota regime will be extended until the end of the 2014/15 marketing year.

IMPACTS : Starting with actors at the end of the food chain, it is expected that some internal price reductions should benefit consumers but, due to the rigid price elasticity of sugar, the impact on sugar consumption is expected to be low. The most important health impact would not be on the overall consumption level but rather the composition of the intake of sweeteners. Since sugar is an important input for the agri-food industry , lower sugar prices would mean they would benefit from a decrease in their variable costs. Within the starch industry, isoglucose production should remain competitive at the price level envisaged by the current legal proposal. Regarding inulin syrup producers , the less competitive ones would probably find it attractive to take advantage of the restructuring scheme.

Sugar refineries will in time have access to a larger supply at lower prices, while during the transition period their supply needs will be ensured through privileged access to Traditional Supply Needs.

As concerns the ACP countries , any option involving a price reduction will affect the countries benefiting from the Sugar Protocol by reducing the income accruing from exports to the Community. Recognising the need for adjustment due to the reform, the Commission has initiated a dialogue with ACP countries on the basis of an Action Plan in order to define appropriate accompanying measures covering both development and trade.

The Least Developed Countries (LDC) benefit from the EBA initiative, which abolishes quotas and duties for all products except arms exported to the EU, with a transition period for sugar, to be fully implemented from 2009/10 onwards.

For EU sugar beet processors, the future profitability of sugar beet processing will depend on whether processors can keep their margins positive by reducing processing costs per tonne or reducing raw material costs. For EU sugar beet growers, the future maximisation of profit will depend on whether farmers can reduce their sugar beet growing costs per tonne or switch from sugar beet to alternative crop production, should the margin per hectare of sugar beet fall below that for the alternative crops.

The impact on agricultural employment will be much less accentuated than in the processing industry. Reductions in farm employment levels will come mainly from replacing beet production with less labour-intensive alternative crops.

Assessing the specific impact of the proposed price cut, based on estimates of the combined profitability of the industry (growers + manufacturers) the EU-25 sugar-producing Member States fall into three groups, depending on their level of costs compared with the new sugar price (€ 386/t):

- Member States where sugar production is likely to be drastically reduced or even phased out: Greece, Ireland, Italy, Portugal;

- Member States in the border zone: Czech Republic, Spain, Denmark, Latvia, Lithuania, Hungary, Slovakia, Slovenia and Finland. In these countries, production is likely to be maintained but at a significantly lower level;

- Member States where the decrease in sugar production will be limited . It is even likely that overall production would not decrease in some countries: Austria, Belgium, France, Germany, the Netherlands, Poland, Sweden and the UK.

2- FOLLOW-UP: In order to ensure good governance and monitor the management of the sugar CMO, the Commission services will follow, particularly, certain aspects of the EU sugar sector in the planned reform period (2006–2013):

evolution of the sugar market economy (production, imports, exports and consumption, EU and world price trends); development of EU sugar production structures (agricultural holdings, sugar factories, refineries); incorporation of sugar beet growers into the 2003 CAP Reform process, in particular their inclusion in the single payment scheme.

PURPOSE : to establish a temporary fund for the restructuring of the sugar industry in the EC and amend Regulation 1258/1999/EC on the financing of the common agricultural policy.

PROPOSED ACT : Council Decision.

CONTENT : f ollowing the CAP reforms of 2003 and 2004, the Commission states that the time has come to bring the sugar regime into line with the approach already adopted in other sectors. Sugar reform must take proper account of farmers’ incomes, consumers’ interests and the situation of the processing industry. The reform must bolster the competitiveness of the EU sugar industry, improve its market orientation and produce a sustainable market balance in line with the EU’s international commitments. (Please refer to CNS/2005/0118 for details of the proposed reform to the sugar regime, and CNS/2005/0119 for income support measures for sugar beet growers.)

As a precondition for the implementation of a functioning new common market organisation for sugar a separate and autonomous temporary scheme for the restructuring of the sugar industry in the Community needs to be established. Under this scheme quotas will be reduced in a manner that takes account of the legitimate interests of the sugar industry, sugar beet and chicory growers and consumers in the Community.

The Commission proposes a new, voluntary and temporary restructuring scheme for the EU sugar sector, which will operate for four years (2006/07 to 2009/10).

The restructuring fund has three main objectives:

- to provide incentives to encourage less competitive producers to leave the industry;

- to provide money to cope with the social and environmental impacts of factory closure (financing of social plans or redeployment programs and reconversion measures to bring the site into good environmental condition) and

- to provide funds for the most affected regions.

The scheme will provide:

- a high, degressive per-tonne restructuring aid, available to EU sugar factories, isoglucose and inulin syrup producers, which will be granted for factory closure and renunciation of the quota; workers in zones that are particularly hard hit by the consequences of the reform;

- a top-up payment, to ensure sugar beet growers the possibility of receiving the full, final direct payment, as from the first marketing year, in the event that they abandon production, owing to the fact that the factory, with which they have sugar beet delivery rights, has closed under the restructuring scheme.

The conditions for having access to the restructuring fund are to be fixed on Community level in accordance with the economic, social and environmental objectives of the fund. The fulfilment of these conditions has to be controlled by the Member States; restructuring aid can only be granted once the closing factory is clearly committed to the respect of these conditions.

Financing for the restructuring scheme will come from a specific, per-tonne amount, charged over three years on all sweetener quota. The restructuring amount will be set at EUR 126.40/t in 2006/07, EUR 91.00/t in 2007/08 and EUR 64.50/t in 2008/09.

The scheme will provide a high, degressive per-tonne aid, available only to EU sugar factories, isoglucose and inulin syrup producers, wishing to cease production. In year 1, the aid will be set at EUR 730/t of quota, falling gradually to EUR 420/t of quota in year 4. In order to encourage an early uptake of the scheme, sugar factories closing as from 1 July 2005 will be eligible for the restructuring aid. Furthermore, as from 2008/09, a part of the restructuring aid may be earmarked for diversification measures in regions most affected by the sugar reform. Note should also be taken of the additional possibilities provided for by the instruments of

European Cohesion policy, to assist the economic restructuring and the retraining of workers in zones that are particularly hard hit by the consequences of the reform.

Through the restructuring scheme budget, sugar beet growers will receive a top-up payment, to ensure the possibility of receiving the full, final direct payment to those growers, who have to abandon production owing to the closure of the factory with which they have sugar beet delivery rights, from year 1 of the price cuts.

FINANCIAL IMPLICATIONS:

For the period, the cost of the proposed reform respects the status quo expenditure, as proposed at the time of the CAP Reform proposals of January 2003. The costs of the new measures proposed for this sector, for which the direct decoupled payment to producers represents the major element, will be mainly offset by the savings resulting from a substantial reduction in export refund expenditure and abolition of the refining aid. When the proposed measures for the sector have been fully implemented, the envelopes for direct income support will involve an annual cost of EUR 1 542 million. Any costs in respect of the private storage scheme (see CNS/2005/0118) should be limited and only arise if market prices risk falling significantly below the reference price.

With regard to the restructuring scheme, an ad hoc restructuring amount will be charged to finance it and will be assigned to a restructuring fund. The amount of EUR 4 225 million will be charged over three marketing years (2006/07 up to 2008/09) and the restructuring aid will be available for four marketing years (2006/07 to 2009/10).