the supply response in LDCs and Brazil also have a significant impact on the world price. The way
some upstream, downstream and side-sectors (energy) are treated also plays a role, because the effect
of sugar reforms also depends on the behavior of the processing sector and on the linkage with the
ethanol market. However, a major explanation of the differences across models lies in the different
response of EU supply to a particular policy shock. The EU is the second largest exporter of sugar,
principally due to its support policy, and the fourth largest importer, mainly because of its
development aid policy. Changes in the EU net trade position have a significant impact on the world
market equilibrium.
Inferring the effect of the 2005 sugar reform (yet to be implemented), and, a fortiori, the effect of
multilateral trade liberalization on EU supply is cumbersome. The present EU sugar policy is complex
and it is understandable that modelers have taken different routes to cope with the difficulty of
representing adequately all the components of the Common Market Organization (CMO) for sugar:
two types of production quotas ("A" and "B") facing different supported prices, high specific tariffs,
preferential access under import quotas, a safeguard clause, the possibility of producing out-of-quota
sugar for the world market, levies for funding exports of in-quota sugar, etc (see Van der Linde et al,
2000, for a complete description of the sector, or Frandsen et al, 2003, for a briefer one). It is difficult
to assess EU production costs and rents. Producers expect significant changes in prices and quota
allocation and some hope for some compensation. That is, information on costs is often subject to
strategic behavior and can hardly be trusted. Production quotas have been in place for more than 30
years and the administrative price has shown little variability. This makes it difficult to infer the effect
of changes that would induce large variations away from the present equilibrium. Because of the two-
tier production quotas, it is unclear how the quantity produced would respond to price changes. The
problem is made worse by the interaction between the agricultural and processing sector. Indeed,
there is evidence that part of the support to the beet sector is retained by the processing sector, which
will be also affected by reforms. Because of high fixed costs and the need to find suppliers of beet
within limited distances, strategies of processing firms are likely to interact with those of the farm
sector and affect the overall EU supply response, in a way largely unknown to modelers.
In brief, the uncertainty about EU supply response under different policies is a particular problem, and
assumptions in this area appear crucial in explaining the outcome of any given model. Two issues
appear particularly important: the level of costs and rents under production quotas; and the modeling
of the supply of C sugar. By driving the EU supply response, assumptions regarding these two issues
play a large role in the results obtained by the different authors working on market liberalization and
policy reform in the sugar sector.
EU production costs. A major problem in modeling EU sugar supply is to assess which prices and
costs actually drive production. The EU CMO sets an intervention price for sugar, from which a base
price for beets is derived, but market prices may be different from regulated prices (Swedish