HL Deb 23 March 1995 vol 562 cc1356-81

6 p.m.

Lord Middleton rose to move, That this House takes note of the Report of the European Communities Committee on the Reform of the EC Sugar Regime (Fourth Report, HL Paper 28).

The noble Lord said: My Lords, the sugar regime within the common agricultural policy remains virtually unchanged since it was introduced 27 years ago. The reforms which are considered in our report are those proposed by the Commission and, as drafted, will have the effect only of ensuring that the Community can perform its obligations under the GATT agreement. The proposals were not finalised until late November last year and the Council has given them only preliminary consideration. Sub-committee D's inquiry was carried out so that our report on the regime and on the reform proposals could be made before decisions were taken in Council.

During our inquiry we had the advantage of the expert assistance of Mr. Ian Sturgess of the Department of Land Economy at Cambridge, as our specialist adviser. Our thanks are due to the many witnesses who gave evidence, both oral and written, and I am grateful for the highly professional work of our Clerk, Mr. Mitchell, and for the support of my colleagues.

It will be apparent from our conclusions that we consider the Commission's proposals to be inadequate. The regime is overdue for reform, with or without the GATT agreement. The fact that these GATT-driven proposed changes are the minimum necessary demonstrates once again the painfully slow path towards CAP reform being taken by the Community.

The details of the existing sugar regime are quite complicated and are set out in Part 2 of the report. The main features are: price setting, import levies, production quotas and export refunds. Sugar within the Community is produced from beet grown under a system of national quotas. Annual output of white sugar under the system is about 16.2 million tonnes. In the UK production and marketing are organised by British Sugar, which allocates the national quota among growers and owns the refineries. The regime also undertakes under the Sugar Protocol of the Lomé Convention to buy and import, levy free and at a guaranteed price, about 1.3 million tonnes of raw cane sugar from certain African, Caribbean and Pacific states and India. About 85 per cent. of the ACP quota is refined in the UK by Tate & Lyle.

Under the regime, market prices are supported by intervention prices which are set both for raw cane sugar and for white beet sugar at a level normally well above world prices. Intervention prices are maintained by export restitutions.

Surplus sugar in the Community has not been stored, thereby creating extensive sugar mountains, but it has been dumped onto the world market at prices subsidised by the producers themselves by means of levies. The regime is therefore considered to have been budget-neutral, which explains the lack of pressure for reform in contrast to that on the other CAP regulated commodities, such as milk, beef, grain, oil and protein Crops.

There is something to be said for a system which makes relatively small demands on the Community budget, which has guaranteed a regular supply to consumers, which has made the sugar beet crop one of the most profitable for growers and which has maintained a stable and prosperous countryside in many parts of the Community.

In the UK both beet growing and processing have become very efficient and productive in recent years. Much money has been invested in the beet industry and employment created, both directly and in the ancillary industries.

Raw cane sugar imports have provided an assured market to certain third world countries whose economies might collapse without that outlet. Where we have a high level of investment in a thriving and efficient industry—as is certainly the case in the UK—we must have very good reasons for recommending policies which might upset a complex industrial structure. We have therefore to look at the effect of the present sugar regime.

First, the quota allocation has been more than generous, so that, with the exception of Portugal and the UK, all member states have quotas which meet or exceed the amount they consume. Taking account of cane imports, the Community currently produces some 17.8 million tonnes of which it consumes 11.9 million tonnes. The balance of 5.9 million tonnes is for export, the greater part of which is subsidised. This dumping amounts to more than 25 per cent. of the whole of the world free market in sugar.

Secondly, over-production and subsidised exports from the Community have a depressing effect on the world sugar market. Estimates vary between a 5 per cent. and a 20 per cent. lowering effect on world prices, which is not helpful to the economies of cane sugar-producing countries outside the Lomé Convention.

Thirdly, sugar quotas are handed out to member states irrespective of whether they are geologically or climatically suited to beet growing. Despite national grant aids, Italy and Spain can barely meet their national quotas. So the system does little to encourage efficient production.

Fourthly, the EU intervention price for sugar over the past 15 years has on average been about double the world price. Consumers in the Community therefore pay very dearly for stable prices and secure supplies. For industrial sugar users, high input prices mean reduced competitiveness.

Fifthly, the Community's beet price paid to producers has to be high enough to pay for levies which go to pay for the export restitutions. In effect, therefore, it is the consumers who pay ultimately for the over-production and subsequent dumping on the world market.

Sixthly, it is arguable whether it is beneficial in the long run by such means as the Lomé Convention artificially to stimulate production in the ACP countries, thereby locking them into cane growing and making them economically dependent on one crop.

Lastly, enlargement of the EU to include the central and eastern European countries is high on the Community's agenda. In our October debate on our report on trade with eastern Europe it was clear that any strategy for enlargement that was not based on thorough reform of the CAP would be futile. It would be quite unrealistic to suppose that the EU's current sugar regime, even modified by the proposals under review, could be extended to cover the large potential beet production in Eastern Europe.

For all those reasons, there is a powerful case for reform of the sugar regime. The questions, therefore, are: how far do the Commission's proposals satisfy the Community's obligations under GATT? How far do they go to achieve the kind of radical reform that we have so often called for, now and in the past? Our report concludes that the answer to the first question is: most of the way; the answer to the second is: not at all.

The 1994 GATT agreement on agriculture covers the period 1995 to 2000 and does not challenge the system of quotas and guaranteed prices. The Community's obligations under the agreement fall under three headings: domestic support; market access; and export competition. Under all these headings the obligations are already met, or will be met, without difficulty.

However, the GATT requirement that the present variable import levy will be replaced by a tariff, to be reduced over five years, will have the effect of drawing the EU sugar market more closely to the world market. This could mean that, towards the year 2000, some Community countries will be obliged to import, or the Community will have to reduce its support prices. The Commission proposes that provision should be made to enable beet quota levels to be reduced year by year to stay within the GATT commitments. But annual adjustments will not provide a sound base for long-term investment in the industry.

In addition, the proposals are that storage payments on what is known as C sugar should be discontinued; that preferential imports of raw cane sugar to Community refineries should be guaranteed; and, lastly, that national aids to the beet sector in Spain, Germany and north Italy should be phased out while allowing a 50 per cent. reduction only for the rest of Italy.

We conclude that, while we endorse the last three of the Commission's proposals—except for the concession to Italy—we take the view that the proposals, as a package, amount to no more than minor modifications to the existing regime. They amount to the bare minimum that is necessary to perform the EU's GATT obligations up to the year 2000. The opportunity to reform the sugar regime has not been seized. As we say in Part 5 of the report, which summarises the opinion of the committee, by continuing to insulate prices within the EU from the forces of the world market, the regime is a major source of instability in world prices. The quota reductions proposed by the Commission will not come near the 20 per cent. reduction, which would still leave the EU self-sufficient in sugar. There are no specific proposals for a reduction in export subsidies, and no concessions are made to the increasing demand for sugar substitutes.

Most importantly, consumer interests appear to be totally disregarded and the challenge presented by the future accession of the CEE countries is ignored. As we say at the end of our report, the adverse effects of the sugar regime on consumers and users, on world trade and on economic efficiency should be tackled by phased price cuts and with, where appropriate, phased compensation to growers. Substantial cuts should be made in the quotas, so as to penalise high-cost production, and they should be planned now, before they become inevitable. We also put forward the suggestion that, while a quota system persists, serious consideration should be given to mechanisms for making the quotas tradable among growers of sugar beet.

I am sorry to end on a rather sour note, by saying that my committee found the Commission's arguments for justifying inertia to be unconvincing and unsubstantiated. I beg to move.

Moved, That this House takes note of the Report of the European Communities Committee on the Reform of the EC Sugar Regime (Fourth Report, HL Paper 28).—(Lord Middleton.)

6.13 p.m.

Lord Mottistone

My Lords, I should like to thank my noble friend Lord Middleton for so clearly introducing the report and for so clearly explaining the problem that the European Community sugar policy presents both to other producers in the world and to its own consumers. I have to declare an interest as a parliamentary adviser to the Biscuit, Cake, Chocolate & Confectionery Alliance, which in its turn advises me and which is a leading member of the United Kingdom Industrial Sugar Users Group, which gave important evidence to Sub-committee D.

It was my privilege to be a member of that sub-committee from the mid-1970s to the mid-1980s. During that time one of our important reports was on EC sugar policy, in March 1980. I am delighted to see that the noble Lord, Lord Mackie of Benshie, is to speak later, because he was also a member of that sub-committee at the time in question. This time I hope that the noble Lord agrees with much of what I have to say.

Our recommendations at that time, which included a reduction in prices and a reduction in production, were very similar to those of today-15 years later. In 1980, the Community was also castigated for a deliberate policy of high prices towards other sugar exporters, which it was stated appeared to be one of selfishness and cynicism. My noble friend Lord Middleton did not actually use those words, but much of what he said would endorse that earlier report. Indeed, that is reflected in paragraph 75 of the report that we are now debating.

Turning to the report, it is particularly worth noting the written part of the Tate & Lyle evidence on pages 34 and 35 of the Minutes of Evidence. It commits it, on the public record, to favouring a market-oriented reform of the regime and defines the way in which it believes such a reform can be achieved without damaging its competitive position. Clearly Tate & Lyle would not say that if it thought that the reform would adversely affect the market for ACP sugar producers.

On another point, I understand that it is suggested that the users are benefiting by the price stability that is provided by the regime. The UK (UKISUG) representatives gave very effective answers to that in answering questions Nos. 190 to 197 on pages 58 and 59 of the Minutes of Evidence.

The sub-committee's conclusions are eminently sensible, and are consistent with a long series of reports on sugar in the Community by the Court of Auditors; in academic studies by Professor Tangermann and Professor Marsh; earlier opinions of the European Parliament; and the last UK Monopolies and Mergers Commission report, to name but a few. The real problem is to discover how we convert such a mass of common sense into something which is politically practicable.

The weight of lobbying on behalf of the status quo is indeed impressive. Clearly, the very facts that only 4 per cent. of arable farmers have a sugar quota and that having such a quota is so profitable mean that there are very prosperous farmers sharing and defending the privileged position that the regime provides for them. A number of the major European beet sugar processors are farmers' co-operatives—most notably, SudZucker, which owns Sucreries Tirlemont, as well as over a third of German production, and has been vertically integrating by buying German sugar, confectionery and ice-cream manufacturers. Such firms are unlikely to take a political line that would discomfit their members. Having said that, however, it is surprising that the other 96 per cent. of arable farmers are not vigorously demanding their share of this bonanza.

Similarly, it is surprising that countries that would gain substantially from liberalisation, such as France, Belgium and the Netherlands, have been so complacent. Clearly, if farmers had property rights in their quotas and could sell these across national boundaries, as the sub-committee proposes, these countries and the UK would tend to accrue more quota since they are the sensible places to grow sugar beet in the European Union, and their farming industries are, in general, appropriately capitalised and have appropriately sized farms. One has to wonder at their reluctance actively to seek reform. Your Lordships may know that the Budget Committee of the European Parliament is seeking to include, in its Amendments Nos. 1 to 4, in the parliament's Agricultural Committee's opinion a proposal that the new regime should be for two years rather than for six years. I suggest that this is an excellent opportunity to keep the campaign for sugar reform going.

I strongly support that proposal. It would indeed be helpful if Her Majesty's Government were to agree to take up this point if and when the parliament carries it. Can my noble friend the Minister tell us whether our Government will take any action to support those amendments of the European Parliament and have plans for action thereafter?

In conclusion, I congratulate the Select Committee and its Sub-committee D on once again providing an excellent report. Above all, I pray—and I mean that I pray, because there does not seem to be any other way of achieving it—that the summary in paragraph 80 of the report becomes a reality well before the end of this century.

6.20 p.m.

Viscount Waverley

My Lords, I also should like to be associated with previous remarks in thanking the noble Lord, Lord Middleton, and his committee. Sugar is an important subject. There are many interested parties to the regime, not least Tate & Lyle. But I believe that the committee and the Minister understand their position. The committee accepted a written submission from the ACP London Sugar Group but did not examine the ACP issues in any great detail. I regret that. I believe that it might be helpful to address the concerns of ACP sugar producers. I am chairman of the Lomé Parliamentary Group and am committed to the welfare of our friends in the developing world.

Sugar producers are often responsible for the greater part of the foreign currency earnings of their countries. I need not remind your Lordships that those nations in most cases do not have a lot going for them in terms of revenues. We in Europe, as good citizens of the world, must ensure that equitable arrangements are entered into. Life can be hard when earnings from sugar are affected. If we abuse the trading advantage, it will come back to haunt the United Kingdom and our European partners.

There are two key issues with the ACP: agree additional quantities and determine what minimum price will be paid. However, price is the real issue. The European Union needs as much ACP sugar as possible but seeks to acquire those additional quantities at what may be unrealistic rates. In ACP countries there is a clear need for stable export earnings, which in any case have been substantially eroded since 1986. New arrangements are overdue. I urge HMG to use their all within Community institutions to secure additional access for the ACP at the full domestic rate. The UK is by far the most important market for ACP sugar, although France, Finland and Portugal are also significant customers.

It is appropriate to remind your Lordships that the protocol was signed when world market prices were between two or three times higher than today's equivalent. The protocol clearly states that: the Community would undertake for an indefinite period to purchase and import specific quantities of cane sugar which originate in the ACP states and which these states undertake to deliver, at a price within the range of prices applicable within the Community".

The sugar protocol is about trade, not aid. It is an equitable trade instrument based on a long-standing mutual interdependence between ACP suppliers, the cane sugar refiners and European consumers. I submit that the price at which sugar is traded under the protocol is not a "privileged price", as the report concluded. It is based on the same price as we afford to our own farmers. Indeed, the amount is less because the price of sugar in the Community is ex-factory for EU producers, including the French overseas departments.

A key consideration is that ACP producers have to bear the costs of inland and ocean freight in transporting the sugar to the European markets. The socio-economic importance of the sugar protocol to the ACP sugar producers is immense. The sugar industry directly employs 35 per cent. of the active working population in Swaziland, 14 per cent. in Mauritius and more than 12 per cent. in Fiji. Sugar accounts for 97 per cent. of agricultural export earnings in Barbados, 98 per cent. in Fiji and 74 per cent. in Swaziland; and the sugar industry represents 30 per cent. of the total GDP of Guyana.

The report concluded that it is not in the long-term interests of the ACP to put all their eggs in one sugar basket. The ACP sugar industries understand that and continue to explore further possibilities for diversification. However, nothing is as suitable as growing sugar cane in the fragile ecosystems of the ACP countries.

European consumers pay a fair price for sugar and European taxpayers pay a relatively small and, more importantly, a very stable amount of money to run the policy. The total quantity agreed under the sugar protocol has not changed since 1974, although the refiners' needs have increased. There now exists in the EU a sizeable deficit of raw cane sugar for refining, mainly in Portugal. Since 1984 the ACP have asked that the import arrangements for Portugal, especially as regards the four traditional ACP suppliers to the Portuguese market, be included in the sugar protocol or a similar arrangement. But to date, despite repeated requests and joint declarations, the arrangements for Portugal have remained, in the vernacular, "transitional".

The ACP is not seeking to supply additional sugar for which there is no market or no need. The need has been clearly identified in the four refining member states, as explained in the Commission's proposals. Furthermore, we should recognise that the ACP is not trying to elbow aside domestic sugar production. It has only asked to supply what cannot be produced domestically, including the raw cane sugar produced in French overseas departments, although there is no doubt that the ACP states have more than enough sugar available fully to meet the required amount. There is now a very great advantage in GATT for European sugarbeet growers and processors to import as much ACP sugar as possible. The Minister will be aware of the technical reasons for that, arising from the agreements reached during the Uruguay Round of multilateral trade negotiations.

Just as the EU needs ACP sugar, there is a clear need in those countries for a stable level of export earnings from sugar, and those earnings have been eroded substantially since 1986. The new arrangements are now well overdue. I urge HMG to use the full weight of their power within the Community institutions to secure the additional access for the ACP at the full domestic price.

To conclude, I have two questions for the Minister. I have not given advance warning; so I would, of course, accept a written reply, although an answer now would be helpful. First, what is the criteria that the Commission will adopt in setting the price for the additional quantities? Secondly, will the Minister confirm that compensation will be paid to ACP sugar cane producers and associated industries if the Commission, in line with HMG policy, cuts sugar prices by 12 per cent. in the next three years?

6.30 p.m.

Lord Reay

My Lords, I strongly commend the report to anyone who happens to require an introduction to the arcane subject of the European Community's sugar regime. It provides a lucid exposition of the matter, which owes much to the masterly grasp of the subject possessed by our specialist adviser, Mr. Sturgess, of the Department of Land Economy at Cambridge University.

The European Community's sugar policy is one—I was going to say of hideous complexity; but in fact it possesses a certain beauty, so intricate is it; so balanced between so many interests; so discreet in its operation and so expensive in the elements from which it is constructed. As one discovers this extraordinary bureaucratic artefact, like some antique clock still in working order, one is tempted to say, "If it works, why fix it?" But, like an antique clock, while it can with loving care and expensive maintenance be made to function, cheaper and more efficient alternatives are today available.

In an era of CAP reform and of pressures for further reform, the European Community's sugar regime is an anomaly. Sugar has already become much more profitable than other crops, at the consumers' expense, with farmers, we heard, queueing up to apply for quota. The European Community consumer pays twice the world price for sugar and perhaps two-thirds above what he or she would pay if European Community and world prices were allowed to find their natural relationship. Such an expensive regime at once provokes competition and requires it to be suppressed. Import levies keep out imports. The development of alternative sweeteners is precluded by extending the quota regime. That is a particularly pernicious, even obscurantist, development, which prevents the consumer from benefiting from trends towards substitutes—perhaps healthier substitutes—and penalises European Community manufacturers in world markets. It is indeed one of the mysteries of the regime that it attracts so little odium.

As our report shows, despite sometime claims by the regime's protagonists that it is budget neutral, in fact it costs the budget around 1 billion ecu per year. But the bulk of the costs—including the costs of the export refund levy raised on B quota producers—are met by the consumer, not the taxpayer, as my noble friend Lord Middleton explained. Community sugar exports, of which over half are subsidised, now account for about a quarter of the world market. That depresses the world price and hence the incomes of farmers in other parts of the world, in particular developing countries, including ACP producers.

The solution to that waste of resources is a gradual reduction in support prices. If that were carried far enough the need for quotas would disappear. That is the route the Government would like to go down and I hope that they will not be pushed into abandoning that course prematurely because of insufficient support in the Council at the outset. The Commission proposes quota reductions as and when required to enable the Community to meet its agreed GATT commitments. As the government letter of response to the report notes, a mechanism which would distribute quota cuts fairly and rationally between member states is very difficult to devise".

There are in fact strong arguments for excluding the United Kingdom from the first round of quota cuts. The UK is one of the few member states whose B quota is set as low as 10 per cent. of its A quota, yet whose beet sugar industry's efficiency, measured by yield, is today among the top four in the Community. But to demand exemption when sacrifices all round are being sought is of course not an easy diplomatic task. Moreover, Tate & Lyle, who would much prefer, I understand, an unregulated market in which cane was able to compete freely with beet, is adamant that the Commission's proposals unfairly penalise cane at the expense of beet and threaten cane refiners' supplies. The Government will need to press that case too.

Where I do not entirely go along with the committee is in the hopes it pins on making quotas transferable. I have objections on two grounds. First, by creating capital value, it would reinforce a vested interest. Secondly, I doubt that it is politically practicable. It would be a major innovation to allocate quotas to farmers rather than, as at present, to member states and, through member states, to processors. And I have difficulty in seeing governments agreeing to the sale of quotas across member states' boundaries; yet only if such transnational transfers are allowed can any serious improvement in efficiency be attained. It is between member states that levels of efficiency vary dramatically, not within member states. Within member states, processors must to some extent be free to offer quotas to the more efficient farmers. I should welcome the Minister's views on that subject, in particular his opinion on whether internationally tradeable quotas are feasible or even in what, or any, circumstances in his view desirable. I shall also listen closely to what my noble friend Lord Marlesford says, who, judging by the forceful case he put in committee, is likely to disagree with what I say.

The committee and the Government are, I believe, right to be much disappointed with the Commission's proposals. As the Government said in their reply, inertia will send the wrong signals to producers",

and, do nothing to pave the way for the changes that the accession of Central and East European States would require".

Or, as the committee put it in paragraph 61, The next 3-4 years offer a breathing space but unless the Community takes advantage of this by anticipating change it will again be defending a highly protective regime against further demands for liberalization".

The Government have a right to be proud of the role that they played in securing the reforms in the CAP which have already been achieved. I am inclined to agree with what the Minister of Agriculture said earlier this week in another place when he suggested that the supertanker (the CAP) has begun very slowly to respond to a change in course. But, as the Government are the first to recognise, nothing like enough has been achieved. The Government must persevere on all fronts, all guns blazing. They have right firmly on their side; and history; and Sub-Committee D.

6.37 p.m.

Lord Marlesford

My Lords, sugar is no novice to political controversy. I believe that Benjamin Disraeli, early in his career, once started a speech in another place with the words, "Sugar, Mr. Speaker", and was howled down and unable to continue. When I listened to the noble Viscount, Lord Waverley, with his most fluent advocacy of the cause of the cane sugar producers, I remembered reading not so many years ago that wonderful history of the Caribbean by Dr. Eric Williams in which he describes how the cane sugar lobby—the West Indies sugar lobby—was the strongest lobby there had ever been in the House of Commons, much stronger than the National Union of Mineworkers ever became. He also advises us that he discovered that in the early part of the 19th century, when the German chemists were working on the possibility of beet replacing cane as an economic source, the sugar lobby, pace the British Government, tried to bribe the German chemists to falsify their results. History tells us that it was an offer that was contemptuously discarded—obviously not an efficient effort at bribery.

Now we are faced with looking once again at a part of the common agricultural policy, and once again we are reminded that in so many ways the CAP is, as the Chinese once said of Hong Kong, a problem left over from history. There is a tremendous reluctance, as Marx used to teach us, that anyone should ever disturb a cosy status quo which they have enjoyed or are enjoying. What we have tried in an extremely modest way to do is to look a little bit at changes which may be able to be made.

I do not think there is ever any point in trying to reform the CAP by saying what it ought to be. We must always start from where it is and see whether we can, step by step, make some marginal improvements to it. I should like to focus—in this, my noble friend Lord Reay will not be surprised, although I hope that he will not be disappointed by what I say—on the recommendations in paragraph 78 of the sub-committee's report, which proposes that while sugar beet quotas exist they should be the transferable property of growers. That point was referred to by my noble friend Lord Middleton at the end of his speech and also by my noble friend Lord Mottistone, I felt with some approval. I shall take a few moments to put to your Lordships, and particularly to my noble friend the Minister, a little of the thinking, of some of us at least, behind the objective.

Presumably, one of the prime objects of CAP reform must be to reduce the cost of that policy to the consumer and to the taxpayer. That must mean that agriculture should be as efficient as possible, which means that subsidies through support prices should be as low as possible. That must mean that gradually the higher cost producers, and therefore those who are least efficient, should give way to the lower cost producers and those who are more efficient. Obviously—this is the basis of the CAP—that must involve a fair deal for the less efficient producers; those who might lose out. They must be compensated. Indeed, the whole CAP is based on compensating people, largely by letting them continue to do things that it is not economic for them to do.

If one starts from the proposition that what we do not want is further burdens on the taxpayer and the consumer, it is obvious that that compensation should not come directly from the taxpayer or the consumer. It should come from the more efficient producers. That is why I should like to see a system set up whereby the efficient producers paid the less efficient producers for selling them the right to produce. The great precedent for this, where it has worked really well, is in the case of milk quotas in this country.

Milk quotas were created from nothing when it was decided that it was necessary to limit milk production. Perhaps here I should declare an interest because, although I am a farmer who does not grow sugar beet, I am a farmer who produces milk. Milk quotas were created from nothing. They are an asset of considerable financial magnitude. Often the value of the milk quota is greater than the value of the land. An economist would ask the question—I would not presume to answer it: I wish the noble Lord, Lord Peston, were here to do so, but there are probably other noble Lords who can—who has actually created that financial asset; from whose pocket has it come? I would suggest that it is the same as the story of the Englishman who goes on holiday to a remote island where he is much esteemed. By the end of his holiday he writes a cheque to pay for everything that he has enjoyed. The cheque is treasured and passed from hand to hand but never cashed. The question is, "Who paid for the Englishman's holiday?" The answer is that no one pays. It is a very efficient way of creating an asset as a means of getting greater economic efficiency. Of course, had milk quotas been produced and not been made transferable, production would have been frozen into an inefficient and undesirable pattern. So transferability and tradability were absolutely crucial. The system has worked well.

We have already had a response from my right honourable friend the Minister of Agriculture to the sub-committee's report. It was a little lukewarm to our proposal for transferability of sugar beet quotas. First, there is a vested interest. Currently, the sugar beet quotas are effectively the property of the sugar producers. It is they who allocate to the farmers the right to produce sugar. It is not something which is of any particular value to them at the moment but they have a relatively arbitrary right, although in practice it continues to go to those who occupy that piece of land, to decide who produces sugar. I would suggest that it is perfectly practical to transfer that right, without disadvantaging the sugar refiners, to the sugar beet growers.

My right honourable friend said: there is nothing in the existing Community rules to prevent a sugar processor, subject to any agreement he may have concluded with growers, from allocating contracts in such a way as to maximize efficiency".

That suggests—perhaps my noble friend will enlighten us—that it would be technically feasible and would not be against Community rules to do it. My right honourable friend the Minister also said: To negotiate the necessary change in Community rules on quota allocation would obviously be difficult".

That is a challenge to the Government: any reform of the CAP is axiomatically difficult, My right honourable friend went on to make the following comment. This is a little more depressing. I have such high regard for my right honourable friend. It is so uncharacteristic that I almost wonder whether he wrote the words himself. He said: Even if there were a prospect of achieving it, we incline to the view that assigning quotas to growers instead of (or in addition to) processors might increase the difficulty of doing so. It might also make more difficult the eventual abolition of the quota system, if that seemed obtainable at some future date".

That is a statement where the ideal is seen as the enemy of the practical. It is saying: how should the sugar regime —how should the CAP even—be reformed overall?—and do not let us take any step which might possibly hazard that. That is not an approach to reform. I am saying that the more efficient we can make agricultural production within the CAP the lower, by definition, the price we have to pay to the producers and the lower, therefore, the subsidy; and in many cases the better it will be for the noble Viscount and his interest.

I conclude by saying that I hope that the Government will take this seriously and perhaps move on to discussing the matter at least with their colleagues in Europe.

6.48 p.m.

Lord Mackie of Benshie

My Lords, I have enjoyed the debate, or parts of it, so far. I enjoyed the speech of the noble Lord, Lord Marlesford. He talked a certain amount of sense. I should like to open my remarks by congratulating the noble Lord, Lord Middleton, on his report. It bears all the signs of his long experience; the old fox—I beg his pardon—the old hand at work, taking in the practicalities of the political position, which is essential.

I take a slightly different standpoint from the noble Lord, Lord Mottistone, who has been advocating for years the rights of that wonderful, altruistic body, the manufacturers of biscuits and anything which uses sugar. To hear him speak, one would think that farmers were the most appalling profiteers, rolling in luxury, while the poor manufacturers were having a terrible time doing their duty—

Lord Mottistone

My Lords, not all; 4 per cent. of them.

Lord Mackie of Benshie

My Lords, however, I believe that the original purpose of the CAP was right and proper. It provided a degree of security in order to secure the production that we needed for food security in the European Community, as it was then. What has happened is that as time has gone by the market has been forgotten. I believe in the market, but I also believe in some form of protection for the primary producer who normally cannot organise himself in the way that the manufacturer and the buyer of his produce can. What has been wrong is that, as the European Community has grown, the economic facts have been ignored and for political reasons time and again agriculture Ministers have ignored the advice of the Commission and put up prices to a level where we have production on a scale which has done great harm to the producers in New Zealand, Australia and elsewhere.

I still believe in protection for primary producers, but in a sensible way and not in the way it has gone on in the European Union to date. We are now in a position where something must be done about it because of the GATT reforms and the enormous cost of paying the large subsidies required.

We have also got into a situation where the social effects of removing subsidies altogether would be devastating in many areas. To that end, the report has very sensibly advocated that compensation be paid where that is going to occur. I believe that farmers in this country have a very good case for holding on to the quota they have. We have to make the quota system work. That means a constant effort by Her Majesty's Government and other sensible people to get the quota cut to a size where we no longer export subsidised sugar onto the market. Twenty five per cent. of world trade comes from the European Community and, as has been said already, that has done great harm to the ACP countries and developing countries producing sugar. The system can be made to work to a degree.

We should not forget that sugar beet is a very useful crop. It did more to transform the county of Norfolk, of which I know a little, than any other crop. It has all the virtues of going down deep and aerating the soil. It is only a part of a rotation. It cannot take up the major part of anyone's land. In that regard, talk from the noble Lord, Lord Mottistone, of sugar beet farmers revelling in wealth is a little out of place. To compare sugar beet with winter wheat, as the Ministry does here, is quite wrong. There is nothing easier to grow that winter wheat. One sows it and sprays it and then the great combine lashes into it and it is taken away. It is one of the most mechanised and easy crops to grow. One can use a large proportion of one's land for winter wheat. It can be grown as a single crop quite successfully.

Sugar beet is an entirely different thing. It is a major consumer of labour. There are costs of every kind. Sugar beet has to be dug up in appalling weather. It has to be taken to the roadside and loaded. One has to hold up the noble Lord, Lord Middleton, when he wants to go to the station. It is a different crop with a different concentration altogether to winter wheat. It is ludicrous to show in a table how much more profitable it is to grow beet than winter wheat. Of course, it is more profitable.

If one wants to take it to a ridiculous level one should consider the strawberry grower. In a good year he can take in something like £5,000 to £10,000 a acre. That is more profitable than growing winter wheat. Therefore, I do not believe that that particular argument washes.

The other point concerns crying over the poor consumer. I know that if one takes each item and says that it is only a small part of the budget one comes to a ridiculous point. But in fact in Britain, according to the table, the price of sugar to the consumer in American cents is 42.64. In all the other EU countries it appears to be more, but it is only half of what it is in Tokyo and less than what it is in Washington DC, where it is 43.09 cents compared with 42.64 cents in London.

Sugar appears to be very cheap in developing countries and in Brasilia which grows a lot of cane sugar. When it comes to the manufacturers screaming about price, as they do frequently, the fact is that if one takes any object in the shops nowadays and looks at what sum goes to the farmer as a proportion of the price, it is immensely small.

Taking all these factors into account, the Government should be doing their absolute best to see that the total quota ABC—it is a ridiculous computation, although I know the difference between ABC—in this country is held on to. It fulfils the objectives put forward by the noble Lord, Lord Marlesford, because it is competently produced and is doing a good job for this country. When one looks at the proportions in the other table, one can see that, apart from Portugal, this country produces less from the consumption of sugar than any other country in the EU. I hope that there will be a hard fight by the Government on that point.

I must take up the point of saleable quotas. They have distorted the position in potatoes and milk in quite an extraordinary manner. What the noble Lord said about the quota being worth more than the land is true in many cases. We appear to have got into a ridiculous position. It is true that if we had tradable quotas throughout the whole Community they would end up where the most efficient farmers and processors are. It would also be very difficult for the processor because one cannot buy a quota to grow sugar beet unless the processor in that area is willing to take it. So one really cannot have the same freedom as one has with milk, because milk can be produced and plenty of people are willing to buy it.

Lord Marlesford

My Lords, I thank the noble Lord for giving way. He is absolutely right. That is one of the factors which determines the price of the quota and who will buy it. Nobody would buy a quota if they were not able either to grow the crop efficiently or to deliver it. As I have said, that can determine the price of the quota. It is economic market forces at work.

Lord Mackie of Benshie

My Lords, I accept that. Nobody will buy a quota at a peak price if their local factory will not process the product. The opportunity for farmers in Scotland to grow beet was removed. That could have been done with great efficiency in the east of Scotland, but the factory was taken away from us. The poor Scottish farmer is left with winter wheat and similar crops. That is not very good for us.

I like the report in many ways. It points out many useful and sensible things. I do not think that politically it is possible for us to have a fair system of free trade and open competition in this. I believe that there will be some form of allocation of grant in this business for some time to come. The European Union must get the price down to a reasonable level. There is no doubt that Poland and Hungary will push for membership—rightly so—and very much sooner than some people think. They will also become efficient producers very much quicker than we have assumed in the past. As I have said, I like the report, but I do not think that the wish expressed in it will come true in terms of moving on to a system of open competition. We must therefore make the best of the present system and ensure that it works sensibly.

I hope that the Minister will be sympathetic to the British farmer. Last month the Foreign Secretary made a speech to the German Society for Foreign Affairs in which he stated: If Poland, Hungary, the Czech Republic and Slovakia were to join the Union tomorrow, with the Common Agricultural Policy and structural funds operating as they do today, the bill would be around 100 billion DM a year. Neither Britain nor Germany would be willing to pay. So we must get on and reform the CAP and adapt the structural funds. This will not be easy. The beneficiaries of the status quo will protest. But their protests cannot be allowed to obstruct enlargement". If that is the attitude and if the Foreign Secretary has any influence, I hope that at least the Minister will endeavour to protect British interests as far as he can.

7.3 p.m.

Lord Carter

My Lords, I join other noble Lords in congratulating the sub-committee and its chairman, the noble Lord, Lord Middleton, on producing an excellent analysis of a complicated support regime. We have had an extremely interesting debate. In a debate on sugar we have had references to antique clocks, Karl Marx and Benjamin Disraeli.

I should say immediately that the European Commission can hardly be accused of a burst of frenetic activity in the way in which it has approached reform of the regime. As I understand it, the future of the regime is now not likely to be discussed until the meeting of the Council of Ministers at the end of May. Indeed, there could well be further delay after that. It would be helpful if the Minister could say something about the timetable and whether the target date of 1st June will be reached.

When considering this regime and others, I sometimes wonder whether the Eurocrats have any concept of commercial reality or the rhythm of the farming seasons. I suppose that a bureaucracy that announces a reduction in the set-aside percentage for the current season in December—some two to three months after winter-sown crops are planted—can hardly be expected to announce its proposals for the reform of an important crop regime in a timely fashion.

The committee draws attention well to the way in which sugar quotas have worked to the disadvantage of the UK in terms of the amount that has been allocated. I have to say on that point that the performance of the Government in 1981 over sugar beet quotas and in 1983 over milk quotas betrays a certain failure in negotiating on behalf of the British position. I put it no more strongly than that.

The report analyses well the substantial imperfections of the sugar regime, especially as far as consumers are concerned. I shall return to the question of tradable quotas at farm level later, but I must point out that I find one statement regarding the effect of the regime a little hard to follow. I refer to paragraph 12 on page 8 which states: since quotas cannot be sold, high cost production is maintained in some regions and the total cost of EC production is unnecessarily high".

There is a problem here which applies to all of our reports. When we talk about a "region", it would be helpful if it could be made clear whether we are talking about a region within a country or a region of the European Union. There is obviously an important distinction. As we know, the location of sugar beet growing in the UK is largely a matter of distance from the nearest factory. Sugar beet is a bulky crop to transport. There are large areas of the country in which it cannot be grown because there is no factory to take it within an economic distance.

Unless I am missing some obvious point, I cannot see why the making of quotas which would be tradable within the UK would have much effect on either the efficiency of the process or the cost of production at farm level. The argument might stand up if quotas were tradable across national boundaries, but I suspect that that would produce as many problems as it would solve. Anyway, it is politically a non-starter. The noble Lord, Lord Reay, made that point. As I have said, I shall return to the point about tradable quotas at farm level later.

The arguments for an increase—or at least for no cut—in the UK quota are persuasive. In the real world of EU negotiations, with trade-offs and deals on the side, I wonder how easy it would be to achieve that when it is proposed by the Commission to phase out national aids in Spain, Germany and northern Italy and to reduce them by 50 per cent. in central and southern Italy. In passing, I cannot help but admire the sheer chutzpah of the Commission in making a 50 per cent. distinction in aid levels between different areas of Italy. As your Lordships will know, chutzpah is defined as "shameless audacity".

The committee makes short work of the argument that we need a sugar regime of the sort proposed to ensure stability in the market and security of supply. I am sure that that approach is correct. It is interesting to note, purely historically, that the main reason that we have a sugar beet industry at all in this country is founded on the arguments about security of supply and providing employment, which were adduced in the 1930s. Obviously, security of supply became extremely important during the war, but that is now a piece of history.

I am almost convinced by the committee's response to the Commission's argument that the regime must be maintained intact to provide the machinery to meet the European Union's obligations under GATT. The reason that I am not completely convinced by the committee's argument is the uncertainty over exactly how the GATT commitments will be achieved in the European Union and the possible effects of the accession of the eastern European countries at some time in the future. One can see—albeit extremely reluctantly—why the Commission wants to avoid a root-and-branch reform in that uncertain situation. It is the natural reaction of the bureaucrat. I still think that the Commission is wrong, but I think I can understand its nervousness and its wish to make haste slowly in that respect.

The committee is certainly correct in accepting the Commission's assertion that the existing sugar regime, or something like it, can exist alongside the regimes for the combinable crops—cereals, oilseeds and proteins. In terms of its production and marketing characteristics, sugar beet most resembles oilseed crops. It is a pure industrial crop, with animal feed byproducts. It is grown and stored on the farm and moved to comparatively few processing plants. As we know, as a source of farm income, it has worked extremely well for those growers who have been allocated a quota.

I am surprised that the committee was surprised by the Commission's failure to mention the consumer interest. I am tempted to ask in the jargon, "What's new?". When was the Commission last concerned about the consumer interest in almost anything it does in the CAP?

I am always sceptical of price forecasts as a result of changes in the European support policies. In that context, it is instructive to look back at the forecasts made in 1992 for 1994 and 1995 prices as a result of the MacSharry reforms. We know that as regards most agricultural products prices are much higher than were then forecast. In this country that was largely due to devaluation and not to the effect of reforms. However, as regards a regime that subsidises the product as heavily as does the sugar regime, there must be some effect on world prices if it is reformed.

At paragraph 65, the committee makes the point that without a sugar regime, which is extremely unlikely, users could buy sugar at a price 40 per cent. below the present price. However, I do not see that the committee describes the mechanism by which such a reduction would be passed on to the final consumer, bearing in mind the concentration in market power in the sugar industry. The committee is right to point out in paragraph 66 that the regime encourages high cost production in unsuitable regions. I repeat that we should always define what we mean by "region"—

Lord Middleton

My Lords, perhaps I may explain. Regions are not coterminous with member states' boundaries. For instance, the noble Lord mentioned the difficulty in respect of Italy. One region of Italy grows sugar beet easily and profitably but another region could not be a worse place to grow sugar beet. We refer to that as a region.

Lord Carter

My Lords, that explanation was extremely helpful and it is as I understood the position. However, reading the report quickly one may think that the regions were national and not across the Community. Throughout its existence a feature of the CAP has been that it has not led to the encouragement of efficient production in the right areas, or regions, and it is hardly surprising therefore that that is built into the sugar regime.

The committee is right to point out the Commission's failure to deal with the possible effects of the accession of the central and eastern European states and the effect of that on the sugar regime. I suspect that the real reason for the Commission's omission is that it does not have the first idea about how to deal with the problem. The noble Lord, Lord Mackie of Benshie, referred to the Foreign Secretary saying that the cost of accession would be about £50 billion. That can be compared with what was said only this week by Mr. William Waldegrave in the agricultural debate in the Commons. Referring to the accession of the eastern European countries, he said: It is not so much pressure from the financial guideline as currently drawn that will help us in that regard; our first calculations show that the entry of at least the so-called Visegrad Four countries could probably be financed within the guideline on present, post-MacSharry policies. However, there would none the less be a large increase in cost".—[Official Report, Commons, 21/3/95; col. 172.]

I believe that that is the first time the position has been expressed by the department. I can see that the noble Earl the Minister is surprised and obviously communications within the department are not good. I believe that the Minister is saying that because of the savings within the budgetary guideline, if we are below it, the cost of eastern European entry could be met and we could remain within the guideline.

I considered the effect of that statement on the sugar regime and others. I believe that when in 1999 we renegotiate GATT the eastern European countries will not by then have joined. Perhaps within the GATT negotiations it would be feasible to begin to build in the effects of the accession of the eastern European countries within the early years of the next century. I do not expect the Minister to reply to the point tonight. When one compares the figure given by the Minister of Agriculture for the cost of the eastern European accession, those given by his colleague the Foreign Secretary and others that are being mentioned, it is obvious that no one has the first idea what the actual cost will be.

The Minister made much of the analogy of the tanker—that the agricultural policy is slowly changing course—and that was picked up by the noble Lord, Lord Reay. Perhaps it is changing course but the oil slick is certainly not getting any smaller.

I was interested to note that at paragraph 73 the committee flirted once again with a variant of the bond system. It suggested that producers leaving the industry could be compensated by a buy-out scheme financed by the industry. It is certainly an interesting variation of the traditional idea of the bond, which would be financed by taxpayers. But when the committee refers to "the industry" it actually means the consumer. That point was made in opening by the noble Lord, Lord Middleton.

The committee's conclusion in paragraphs 74 to 80 was an excellent summary. However, I wonder whether it has really thought through the political agricultural and economic results of the tradable quotas which it suggests at paragraph 78. For once I shall pray in aid the Government's view as set out in their response to the report. I shall not quote it in full because that was done by the noble Lord, Lord Marlesford. The Government state: we incline to the view that assigning quotas to growers instead of (or in addition to) processors might increase the difficulty of doing so".

That is, of improving the regime. They continue: It might also make more difficult the eventual abolition of the quota system, if that seemed obtainable at some future date".

I wish to deal with the interesting points that were made by the noble Lord, Lord Marlesford, on the tradability of quotas. First, that will do nothing for new entrants. If one has to buy a sugar beet quota, it will be extremely hard for a new entrant to join the regime. We know that the price of a quota is an artificial price for a bureaucratic construct. From my experience, I argue that the ability to buy quota—of course, I refer to milk quota—is not related to efficiency but to one's command over capital and income stream, Often, that has as much to do with inheritance as with efficiency.

I was interested to hear the noble Lord's analogy—I do not believe that it would be rude to describe it as his free market ideology—which was expressed by proving that there is such a thing as a free lunch. He appeared to imply that although the capital asset would be created, it would be done without any real cost to anyone. Money used to buy quota is not available for what I would describe as "useful investment". It is merely a money transfer between farmers with no obvious effect on agricultural production and investment. It is a money transfer for the exchange of an artificial licence to produce.

There is a great deal more to be done on the proposal before one can agree with it. However desirable it may be in theory—and I emphasise "in theory" - if we were to give sugar beet quotas a monetary value, and if they were to be tradable across national boundaries, it would in practice create distortions between farmers, regions in each country and member states.

Lord Marlesford

My Lords, I was trying to make the point that the price paid for the quota is part of the profit that a more efficient producer can make compared to a less efficient producer. Therefore, that profit is being, as it were, shared. The level at which the quota reaches its price depends on many factors. One of them is the price at which one can sell the production. If there is greater production by more efficient rather than less efficient producers, a lower price can be paid to all producers. Therefore, all I am saying is that that would be a means of enabling cuts to be made in the support price for the product.

Lord Carter

My Lords, I understand the argument entirely but the fallacy is the assumption that efficiency gives the producer command over the income stream which enables him to buy the quota. In fact, milk quotas have shown that the ability to buy quotas depends on whether you are an owner/occupier who has inherited the farm and have no rent to pay or if you have heavy borrowings and so on. I believe that we should leave the point now and perhaps discuss it outside the Chamber. But I am not convinced on the argument that we should not be storing up trouble for the future if we were to make the quotas fully tradable.

With that one proviso on the committee's report, I repeat my congratulations to the committee and its chairman—the noble Lord, Lord Middleton—on producing an excellent report.

7.20 p.m.

The Parliamentary Secretary, Ministry of Agriculture, Fisheries and Food (Earl Howe)

My Lords, I should like to begin by echoing the comments of other noble Lords and by congratulating my noble friend Lord Middleton and the committee on the thoroughness of their analysis of what is a complex regime and the Commission's associated proposals. The committee took evidence from the wide spectrum of interests involved in the sugar sector and, although faced with a large number of often conflicting arguments, it has succeeded in producing a report which sets out clear views on the regime, the Commission's proposals and ideals for change. The Government welcome the report and agree with its underlying theme that the sugar regime badly needs to be reformed.

Before discussing the substance of the report, perhaps I may respond to the noble Lord, Lord Carter, by bringing your Lordships up to date with developments in Brussels on the Commission's proposals. At the time the proposals were issued, last November, it seemed there would be pressure on the Council to take an early decision. In the event, that timetable slipped, but the indications are that the Presidency will be seeking to press towards agreement at next week's meeting of the Agriculture Council. The debate we are having today is therefore very timely and will contribute to the Government's preparations for the Council negotiations.

The Government have long been critical of the sugar regime, which, as my noble friend Lord Middleton said, has changed little since its introduction in 1968. High support prices in the Community encourage the production and export of a large surplus and work against the interests of both domestic and industrial consumers. Further, the quota regime does not reflect the relative efficiency of production among member states; nor does it encourage efficiency. We had hoped that the Commission would have taken the opportunity of the current review to undertake a thoroughgoing reform of the regime.

Therefore, like the committee, we were disappointed by the limited nature of the Commission's proposals. Those do little more than introduce provisions to enable production quotas to be cut, if necessary, for GATT purposes and modifications to elements of the cane sugar supply arrangements necessitated by the end of the Portuguese transition period. In particular, the proposals make no recommendations for any reductions in support prices.

The Government agree with the committee that reductions in price are necessary to reduce the imbalance with other arable crops, to benefit consumers and to respond to GATT pressures. The minimalist approach adopted by the Commission will send entirely the wrong signal to producers who will have to face up to continuing GATT pressures and, as the report points out, the prospect of the accession of Central and Eastern European states. It can not be right to encourage producers to believe that the regime can continue unchanged indefinitely.

The main elements of the GATT agreement to affect sugar are requirements for a 36 per cent. cut in the level of export refund expenditure; and a 21 per cent. cut in the volume of subsidised exports compared with the 1986–1990 base period. That means that, in the year 2000–01, expenditure will be limited to 497 mecu and volume to 1.277 million tonnes—excluding a quantity equivalent to ACP imports.

It is difficult to predict exactly how these limits will affect the sugar regime because of the number of variables affecting EU consumption and world prices. Depending on assumptions used, production cuts needed can range from minimal to over 500,000 tonnes. The Commission has taken the optimistic view that the effect will be minimal. GATT also requires a 20 per cent. reduction in border protection, which may, in the latter years of the GATT period, lead to pressure on Community prices—but again, as the noble Lord, Lord Carter, said, much depends on the level of world prices. Like the committee, we believe that it is better to prepare now for those changes by planned reductions.

We agree with the committee that the prospect of accession of the Central and East European States to the Community should have been considered by the Commission. Their accession would require major changes to Community agricultural policy as a whole. That is essentially because of the very significant budgetary consequences of applying the CAP in its present form. Further, the CEE countries, under GATT, have only very small entitlements to make subsidised exports. It is difficult to consider in isolation the detailed effects on sugar of absorbing these countries into the Community, but accession will clearly put more pressure on the regime.

We share the committee's conclusion that there should be a planned, phased reduction in support levels. In Brussels we have argued for a 12 per cent. price reduction over three years, followed by a review. In answer to my noble friend Lord Mottistone, I should say that we share the view that a 6-year regime as proposed is not satisfactory. However, I would say to the noble Lord, Lord Mackie, that we do not agree that price reductions should be accompanied by compensation to growers. We believe compensation should be considered only as a transitional measure to enable growers to adapt to sudden and significant reductions in prices. We see no need for it at all if prices are reduced gradually over time. For sugar, it also has to be remembered that there is a considerable margin for price cuts before compensation could even become an issue. Before the 1992 CAP reform package introduced the concept of compensation, cereals prices were cut significantly whereas sugar prices changed little. Therefore, sugar has more than a little catching up to do.

Sugar prices are seriously out of line with those for other crops. Including agrimonetary changes, sugar prices have been cut by only about 4 per cent. since 1985. Cereals prices have seen cuts by around 19 per cent. before compensation was offered under CAP reform. Therefore there is scope for price cuts before the question of compensation need arise.

It is said that the sugar regime is self-financing. It is true that levies on growers and processors cover the costs of disposing of surplus quota sugar with the exception of a tonnage equivalent to imports—essentially sugar brought in under preferential arrangements, mainly from the African, Caribbean and Pacific countries and India. Similarly, storage aids are covered by levies on sugar when it is first marketed. The net budgetary cost is therefore relatively low. However, as many noble Lords have said, the cost is passed on to consumers in the form of higher prices.

The noble Lord, Lord Carter, wondered how any price cuts might be passed on to consumers. It would be surprising if competitive pressures did not result in the benefit being passed on to consumers in the form of lower prices. The Consumers in Europe Group, in its submission to the committee, indicated clearly that consumers would pay less for both sugar and products containing sugar—such as biscuits, drinks and confectionery—if prices were cut. Obviously, where sugar is only one of several ingredients, that would contribute to keeping down end product prices but would not lead to substantial price cuts.

My noble friend Lord Reay made some wise comments about quota cuts. The committee recommends a cut in the overall Community quota of up to 20 per cent. However, as the report notes, and as the noble Lord, Lord Mackie, will doubtless be pleased to hear, quota cuts are not our preferred method either for adjusting the regime to meet GATT commitments or as an instrument of reform. The Government believe that action on prices is a better means of discouraging surpluses and of directing production towards the more efficient producers and member states. Mechanisms for distributing quota cuts among member states tend to be arbitrary and based on criteria which disadvantage the UK. However, if there have to be quota cuts, we share the Committee's view that they should be based on member states' past performance and levels of self-sufficiency, which supports our argument in Brussels that cuts in the UK quota are unjustified.

The committee suggests that consideration should be given to the idea of a right of quota ownership for growers and then making that quota transferable. That point was raised especially by the noble Lord, Lord Carter, and by my noble friends Lord Reay and Lord Marlesford. Certainly it has theoretical attractions as a means of facilitating a more efficient allocation of production. However, I have to say that we have doubts whether such changes would really be practicable or lead to lower costs and thus lower prices. It would require fundamental changes to the regime and add yet another layer of rules and regulations. As my noble friend Lord Reay pointed out, it would imbue quota with capital value, and would make simplifying and dismantling the regime at a later date even more difficult.

If the object is to move production towards the more efficient, the Government believe that the most effective means is to bear down on support levels and allow the market to operate. It is high prices and the quota system as such which allow inefficient production to continue. I should tell my noble friends Lord Marlesford and Lord Reay that the alternative is for the contract arrangements between processors and growers to be modified to allow more flexibility. That could be done under current rules with the agreement of both parties. I see that my noble friend wishes to intervene. I give way.

Lord Marlesford

My Lords, I am much obliged. My noble friend said that it is desirable to "bear down" on the less efficient producers by price. The answer is that one would have to compensate those people who are forced out by cuts in prices experienced right through Europe up until now. Further, if one had to compensate them, one would have to do so with someone's money. The advantage of the quota system is that compensation comes from those who remain in the business rather than the taxpayer or the consumer.

Earl Howe

My Lords, I understand my noble friend's point. However, I have already argued that we do not believe that compensation would be warranted if price cuts took place gradually over a period of years. If there were a sudden cut in price, I agree that there would be a case for compensation. However, there are other difficulties involved.

Introducing transferable grower quotas would require fundamental changes to the regime, since quotas are expressed in terms of sugar and are allocated to member states, which then distribute them to sugar processors. Sugar processors contract with growers for the quantity of beet needed to meet the national sugar quota, and that varies from year to year according to growing conditions and productivity improvements. Clearly, the determination of growers' quotas would not be straightforward and would involve government, growers and processors in a bureaucratic exercise which is currently settled by commercial contracts.

My noble friend Lord Reay asked what the Government's view was on the international transfer of quotas. As my right honourable friend said in his reply to the committee's report, the movement of sugar and sugar beet production across national frontiers to more productive areas would be needed to make a real difference to the overall efficiency of production. To negotiate the necessary change in Community rules on quota allocation would obviously be difficult. The Government have not yet achieved that in any other sector where quotas apply. Moreover, to echo a point made by the noble Lord, Lord Carter, it is also not clear that giving a right of ownership to a transferable quota would create any increase in real wealth as less resources would be available for land, machinery and inputs. So, it is purely a point of economics. Capital would be tied up in quota and, if anything, I believe that that would, in turn, increase pressure to maintain prices at high levels to maintain the asset value of the quota. I do not believe that it would act as a depressant on price levels.

The committee also suggested that quota auctions and industry-financed restructuring schemes should be examined. Indeed, my noble friend Lord Marlesford spoke eloquently in favour of that broad idea. Again, I would agree with my noble friend that such schemes have attractions as a means of shifting production to the more efficient. But we have doubts about the negotiability of cost-effective schemes. As the committee acknowledges, there are strong producer interests in the regime and it would be difficult to avoid an outcome which did not impinge on consumers or the budget. That is a further reason why price reductions remain our preferred method of adjustment.

As regards the Commission's proposals, we welcome the Committee's support for the modifications to the cane supply arrangements, which should benefit both our refining industry and developing country suppliers. The noble Viscount, Lord Waverley, dwelt particularly on the ACP countries. Perhaps I may make a few points about the sugar protocol. Neither the GATT Uruguay Round nor the review of the regime will affect the provisions of the Lomé Sugar Protocol, which is of indefinite duration. Clearly, if EC prices change, the price to the ACP will have to be negotiated with that in mind. However, that is fully consistent with the protocol provisions. As my noble friend Lord Middleton said, that gives the ACP countries the right to export 1.3 million tonnes of cane sugar to the EC every year at zero import levy and annually negotiated prices which, in practice, have been equivalent to the EU intervention price. But it does not guarantee any particular level of income. In addition, the ACP countries will be able to benefit from additional access provisions under the Commission's proposals, although the supply terms have yet to be determined.

Although the Commission has indicated that priority will be given to ACP supplies as far as possible, the proposal does not exclude imports from other countries. However, as the noble Viscount said, it is clearly in the EU's interest to obtain the bulk of the supplies from ACP, since the Community's GATT export commitments are calculated net of a quantity equivalent to ACP and Indian imports.

The Commission's proposals define refiners' maximum needs, but do not guarantee a definite supply. They provide for arrangements to import a shortfall calculated according to a set formula. That is an improvement on the current arrangements. But it is not possible for the EU to dictate to the ACP/Lomé countries how much they should send or to whom. The formula will also not take account of any further substitution of raw cane sugar for refining with raw cane sugar for direct consumption, whether from ACP or DOM suppliers. If imports of such direct consumption sugar continue to increase, there will be a deficit of sugar for refining.

The noble Viscount, Lord Waverley, asked whether the ACP producers would be compensated in the case of price cuts. I should say that we will continue to support the ACP case for the right to supply more sugar to the EC cane refineries at preferential terms of access. But if EU prices are cut, import prices also need to be cut to maintain the viability of our cane refining industry. As for Community producers, as I have said, we do not agree that there is a need for compensation.

The noble Viscount also asked what criteria the Commission will adopt in setting the price for additional quantities. That will be a matter for negotiation. Obviously, the price will need to be sufficient to attract the suppliers in order to secure the necessary supplies at reasonable cost. I am afraid that that is as far as I can go at present.

We also agreed with the committee that storage refunds for non-quota "C" sugar should be abolished as proposed by the Commission. Like the committee, we are not convinced that abolition will affect security of supply. We agree with the Commission that the aid is unnecessary and acts as a stimulus to non-quota production. Its abolition will reduce storage levy charged, which should feed through to lower prices to consumers, which we would welcome. We believe that the decision to carry forward non-quota sugar should be a commercial judgment and not related to the availability of subsidy. Abolition of the refund should not affect the security of supply, since processors will still be able to carry over non-quota sugar if they wish and already existing Community regulations require processors to hold a minimum level of stocks, as a contingency measure, in addition to normal stocks. We also have an alternative source of supply in the form of refined cane sugar.

On national aids for the beet sector, we agree with the committee that aids in Spain and Germany should be discontinued and there should be no prolongation of any of the Italian aids. In conclusion, I am grateful to the committee for its report. The broad thrust of what the committee has recommended is very much in line with our own thinking. We too are frustrated by the lack of significant change proposed by the Commission, but I am bound to say that, sadly, this reflects the attitude of the majority of member states. But the recent GATT agreement has forced the Commission to look at the sugar regime and propose the introduction of some curbs to it. The pressure to change the regime will not go away and we will, in the current negotiations and in the future, maintain our efforts to seek greater rationalisation. I should like to thank the committee for the opportunity its report has provided for this helpful debate, which ensures that a close examination of the sugar regime is not overlooked.

7.40 p.m.

Lord Middleton

My Lords, I thank my noble friend the Minister for his reply on behalf of the Government and I thank noble Lords who have taken part in this debate. I took the vulpine attribute of the noble Lord, Lord Mackie, to myself as a compliment. I am grateful to him. I have a great respect for foxes. I note with much interest that there is little difference between the Select Committee's views about the sugar regime and its reform, and those of the Government. We agree that Community production should be curbed through the price mechanism. In view of the political practicalities, the committee recommends quota reduction in addition. How much emphasis should be laid on either of these control methods is hard to judge at this stage. The Government will go hard for price control, and they may well be right, if they can get it. If our report and this debate contribute in even a small way to giving added weight to pressure upon the Community to speed up CAP reform, then our efforts will not have been in vain.

On Question, Motion agreed to.