In the baseline, the EU produces and exports some 1.3 million tons of C sugar in addition to the 2.9
million tons of in-quota sugar exported. Note that production costs account for cumulative technical
change up to 2010, which explains the ability of the EU to produce C sugar at a price of 221 € per ton.
The quota rents amount to 2.6 billion euros, after deduction of a 798 million euros levy for the funding
of B sugar exports. Production costs amount to 20 euros per ton of beet and 391 euros per ton of
sugar, in particular because of the flexibility brought by the 2003 CAP reform.
Policy scenarios. The model is used for simulations of two scenarios that appear relevant in the
present policy debate. These are:
• Scenario 1: the 2005 reform of the sugar sector is implemented, with no other adjustment
coming from international pressures.
• Scenario 2: the ending of all export subsidies in the sugar sector (including ending of exports
of C sugar), with no change in the ACP quotas, and without the implementation of the EBA.
The EU sugar reform. The 2005 sugar reform includes a 36 percent price cut over four years
beginning in 2006/07; compensation to farmers at an average of 64.2 percent of the price cut as part of
the CAP single farm payment. The "A" and "B" quotas are merged into a single production quota,
with no quota cuts, unless market situation demands such a measure. The reform offers the possibility
for member states to reduce production quotas. However, the reform allows coupled payments when
production falls in excess of 50% of the historical quotas. In addition, some 1.1. million tons of sugar
will be made available for countries which produced C sugar in the past (firms that overshot internal
production quotas will be able to access extra quotas against a 730 euro per ton one off payment).
Finally, some national aids persist, which could limit the fall in production in the least efficient
4
regions.
In Table 2, the "Scenario 1" column presents the outcome of the EU reform of the sugar sector. The
figures between parentheses are variations in percentage compared to the baseline. Here, we assume
that the compensation for the reform provided to the beet producers are decoupled payments, and has
no impact on output (an assumption that we also use for the single farm payments in the baseline).
Our econometric estimates of national supply curves for seven countries, and those that we calibrated
using EU Commission estimates of costs of production, suggest that several countries will not be able
to economically produce all their quota at a price of 405 euros per ton. For example, in the case of
Italy, we estimate that production could decrease by roughly 20% after the cut in intervention price,
given the supply elasticities. According to our estimates, a significant share of the EU production
seems to rely on production costs that exceed the 405 euros per ton. However, the possibility of
coupled payments might limit the fall in production to 50% of the initial quota even in least efficient
4 Note that at this stage, the reform was only adopted by the Council, and that we rely on a draft
regulation.
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