Member states. If we assume that these (draft) provisions will maintain at least half of the national
output, we find that the in-quota production would fall by 1.5 million tons relative to the baseline.
This is this reduction that we introduce in the GE model.
The EU15 no longer produces C sugar after the reform. The decrease in intervention price reduces the
incentive to "overshoot". Indeed, the asymmetric loss described in equation (4) between one unit
below or over the targeted quantity is now reduced to a few euros per ton, an amount too small to
justify overshooting. The overall simulation of the reform with the GE model suggests that the
combination of the decrease in in-quota sugar and C sugar, EU production will fall by 2.7 million tons
of white sugar. This estimate is likely to be an upper bound given the possibility left for national aids
and for coupled payments in case of large fall in production, and the extra quota that could be
purchased by most efficient regions (the draft regulation states that sugar undertakings that produced C
sugar during the marketing year 2004/2005 may request from the Member State where they are
established the allocation of an additional quota). Our estimates suggest that the decrease in EU
production after the reform will be more limited than what has been forecasted by the Commission
(EU Commission 2005). The Commission estimates rely on a proposal where coupled payments were
not allowed, and where quota mobility between countries was allowed. Our figures are consistent
with an average EU production cost of 370 euros per ton, a reference price of 404 euros per ton for
white sugar and a world price of 261 euros per ton.
Figures in Table 2 show that the fall in beet prices is larger in percentage terms, than the fall in sugar
price. Our figures are therefore inconsistent with the draft regulation that specifies that the minimum
price for sugar beets will be reduced by 39.5% only. However, we find that the reform exhausts the
rents to the processing sector. At some point, the adjustment will need to be borne by beet growers.
Our finding is obviously linked to our assumption that some of the unit costs of the processing sector
are difficult to reduce, such as energy and labor costs. However, we believe that, even under
alternative assumptions on the sharing of the rents, processors are likely to put pressure on the farm
sector, and that it is unlikely that the 36% decrease in the price of the final product can be compatible
with a 39.5% decrease in the price of the beet input, given the low elasticity in the demand of other
inputs.
The fall in prices only results in a slight expansion of consumption. The EU demand for sugar is very
inelastic in our GE model. Such a low elasticity is questionable. However, it is noteworthy that
opportunities for substituting sugar for sweeteners are limited: unlike the US one, the EU soft drink
sector does not use large quantities of isoglucose that could be replaced by beet sugar even if the latter
became much cheaper. Other studies also find little expansion of consumption following lower sugar
prices (Eurocare 2003).
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