Tate & Lyle Sugar is involved in a struggle with the EU over tariffs it says are causing sugar supply shortages and inflating prices. Guy Montague-Jones reports

Two hundred years after an English sugar cane blockade forced Napoleon to start growing sugar beet in Europe, sugar once again stands between the two countries.

This time, the field of battle is EU import tariffs and production quotas rather than the open seas. The British-based company Tate & Lyle Sugars is seeking compensation from the EU, having paid out €14.5m in tariffs to buy sugar cane over the past year.

Tate & Lyle Sugars claims the EU’s quota and tariff policies, introduced between 2006 and 2009, are not only bad news for the company, but are artificially causing supply shortages and inflating sugar prices in the UK.

The UK government sympathises. Agriculture minister Jim Paice said this week it would negotiate on behalf of Tate & Lyle Sugars to ensure the company gains fair access to cane sugar on the world market. However, the government is likely to face opposition from France, which will be eager to protect its sugar beet farmers - the country has the largest beet industry in Europe. The French government has already taken the unusual step of officially expressing its opposition to Tate & Lyle Sugars’ case against the EU.

The UK food industry has a keen interest in how French and UK lobbying affects the EU Commission, as next year’s sugar price as well as the long-term price of the commodity are at stake. Suppliers in the UK have already seen the price of sugar rise further than in other European countries.

“UK prices have risen in the last year by 50% and market prices are now 10% higher than European quoted prices,” says a leading manufacturer. UK companies pay a premium because Britain, already more reliant on imports than its neighbours with bigger beet industries such as France and Germany, has had to rely more heavily on imports at just the wrong time.

A disastrous domestic beet harvest coincided, at the start of the year, with a spike in the world price, which made Europe a much less attractive market for the limited group of suppliers in Africa, the Caribbean and the Pacific states who have tariff-free access to the EU market.

The result was an unprecedented shortage of sugar that forced importers to pay tariffs of more than €300 a tonne to buy sugar from the world market. This is why Tate & Lyle Sugars has paid out €14.5m in tariffs. The upshot of all this for the UK industry is high prices - and a continued struggle to secure supply.

“UK sugar users face significant sourcing difficulties,” says Martin Turton, who represents biscuit, cake, chocolate and confectionery makers at the FDF. Retailers and consumers have also suffered.

The spike in the price of the raw material has fed through to shop shelves, where bags of Tate & Lyle branded sugars are now about 10% pricier than a year ago. Retailers were reluctant to pass on more of the commodity price rise - sugar is a staple, so consumers are sensitive to price changes.

The Commission has attempted to provide some relief, holding auctions for sugar imports and allowing more sugar beet to be sold for use in food. However, these measures have proved “too little, too late” to resolve supply problems, says Rabobank sugar analyst Gorjan Nikolik. The UK industry is calling on the EU to take more decisive action to prevent continued shortages next year.

“We urge the Commission to use available market instruments without delay to ensure additional supplies of at least 1.1 million tonnes of sugar are available for manufacturers,” says Turton. The big question is what that action should be.

To allow more sugar on to the market, the EC can open up cane imports or increase beet sugar quotas in the EU. It has to choose what balance to strike. In the longer term, a new sugar regime is due to be introduced in 2015 that will determine the future of production quotas and import tariffs.

The latest proposals, published this month by the Commission, are for the abolition of production quotas and no changes to import tariffs. However, the proposals have a long way to go down the EU negotiating path before they are implemented.

The result of discussions over what action to take now and in 2015 will influence prices. Tate & Lyle Sugars claims the UK industry could end up paying inflated prices if the Commission continues down its path of opening up the domestic beet market without allowing in more cane imports.

Ian Bacon, president of Tate & Lyle Sugars, claims the company - which is currently operating its refinery in Silvertown, London, at 60% capacity - could be forced to close the factory if there is no opening up of imports. Ultimately, he suggests, the whole European sugar cane refining industry is in jeopardy and, if it falls, higher prices are likely.

“Manufacturers and consumers bear the cost of a more concentrated market,” he says. On the other hand, opening up the European market to more foreign cane sugar would increase the competitive pressure on domestic beet producers, filter out the least efficient and, in so doing, reduce prices, Bacon argues.

However, Nikolik warns that manufacturers eager to see import tariffs brought down should be careful what they wish for.

“If we open up our market, very few beet producers will survive and we will become huge importers of sugar, exposed to big volatilities in Brazil and India.

“Protectionism may inflate prices, but it does at least ensure they remain relatively stable. This is the argument put forward by the beet industry.

“EU policy has stabilised European prices, particularly during the last three years while global commodity markets have been in turmoil,” claims Marie-Christine Ribera, director general of the CEFS, the European trade body representing beet producers.

Although the Commission’s proposals for 2015 suggest it appears to favour lowering quotas over reducing import tariffs, Rabobank predicts the most likely outcome of negotiations is a gradual transition to the abolition of production quotas and significantly lower import tariffs.

Such a scenario would allow beet producers to thrive when world prices are high and permit cane refiners to compete by giving them better access to world markets. It would create a more competitive market that would favour the most efficient European beet producers and bring down prices.

The flipside of this is that the EU would be more exposed to global markets, so domestic sugar users would have to brace themselves for more price volatility. There is, sadly, no magic policy bullet to achieving the ideal of low and stable sugar prices.