The sugar sub-sector in African-Caribbean- Pacific (ACP) countries in the post-2017 era: Impacts of European Union production quota elimination and ACP-EU reciprocal preferential access on ACP sugar market and trade The sugar sub-sector in Africa-Caribbean-Pacific (ACP) countries in the Post-2017 Era: Impacts of European Union production quota elimination and ACP-EU reciprocal preferential access on ACP sugar market and trade by Manitra A. Rakotoarisoa (FAO) Kaison Chang (FAO) Market and Policy Analyses of Raw Materials, Horticulture and Tropical Products Team Trade and Markets Division Food and Agriculture Organization of the United Nations FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS Rome, 2017 The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned. 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FAO information products are available on the FAO website (www.fao.org/publications) and can be purchased through [email protected]. © FAO, 2017 Cover photographs: ©FAO/Pius Utomi Ekpei ©FAO/Giuseppe Bizzari ©FAO/Jon Spaull ©Morguefile.com Table of contents Page Acknowledgements vi Executive summary vii 1. Introduction 1 1.1 Motivation 1 1.2 Objective of the study 1 1.3 Approach 2 1.4 Overview of the sugar industry in selected ACP countries 2 2. Analysis of the trade and welfare impacts of the elimination of the EU sugar production quotas on ACP countries 4 2.1 Model description and implementation 4 2.1.1 Model description 4 2.1.2 Production quota elimination 5 2.1.3 Reciprocal preferences between ACP and EU 6 2.1.4 Data aggregation, model closure and scenarios 7 2.2 Simulation results: impacts of the abolition of the EU production quota 8 2.2.1 Welfare impacts 8 2.2.2 Impacts on sugar trade and production in the EU and ACP countries 11 2.2.3 Food security implications 12 2.3 Other simulations and sensitivity analyses 13 2.3.1 Using different rates of increase in output 13 2.3.2 EU sugar output increase based on technologycal progress 16 2.3.3 Allowing unemployment in the EU 18 2.4 How do these results change with reciprocal preferential agreements between EU and ACP countries? 19 2.5 Summary 21 3. Analysis of the impacts of the eliminatiion of EU sugar production quotas on small producers and workers in selected ACP countries 21 iii 3.1 Country selection and approach 21 3.2 The sugar industries in Fiji, Guyana and Madagascar 23 3.2.1 Fiji 23 3.2.2 Guyana 25 3.2.3 Madagascar 26 3.3 Impact of EU quota production elimination on small farmers’ income in selected countries 30 3.3.1 The model 30 (a) Impacts of the fall in export demand on small farmer’s revenue 30 (b) Determinants of the vulnerability to demand shocks 33 3.3.2 Key characteristics of surveyed small farmers 33 Fiji farmers 33 Madagascar farmers 34 3.3.3 Estimates and results 35 Impacts on farm revenue 35 Correlation between the revenue impacts and farm characteristics 38 3.3.4 Sensitivity analyses 39 3.3.5 Guyana farmers and workers 41 3.4 Summary of the findings and related policy implications 41 4. Alternatives for the ACP sugar industry after 2017 42 4.1 The major alternatives envisaged 42 4.1.1 Targeting domestic and regional markets for refined sugar 43 4.1.2 Diversification at the industry level 44 Energy production (ethanol, biomass) 44 Other products 45 4.2 The envisaged approaches 46 4.2.1 Increases in production, land uses and yields 46 4.2.2 Increasing competitiveness 46 4.3 Summary and remarks 48 5. Conclusion and some policy implications 49 5.1 Approach 49 5.2 The main findings and implications 49 • A free EU-ACP sugar market will improve ACP welfare but reduce ACP sugar trade balance 49 • Competitiveness at farm and industry levels remains an issue 50 iv • Impact of the new European Union sugar regime on the ACP economies 50 • Livelihood of farmers is at risk and reforms are needed 51 • Diversification at farm level is important 51 • Market reforms to be continued 52 5.3 Limitations of the study and the way forward 53 References 54 Appendix 1. The aggregate regions and countries in the model 56 Appendix 2. Industry-agreed targets for Fiji’s sugar industry 57 v Acknowledgements This report benefits from the field survey data provided by Aimée Razafimaminirina (Madagascar), Gavindra Raimnarain (Guyana) and Saimone Johnson (Fiji). The authors thank Josef Schmidhuber, Maximo Torero and all reviewers of this report. Thanks also go to Sari Gilbert for editorial comments and Valentina Banti and Laura Stella for their kind administrative assistance. Technical support from Patrizia Mascianà and Rita Ashton who formatted this report is gratefully acknowledged. Remaining errors are the authors’ own. vi Executive summary European Union sugar production quotas will be abolished on 30 September 2017, signaling the European Union’s move toward self-sufficiency in sugar, and the end of preferential access of the Africa-Caribbean-Pacific (ACP) sugar to the European Union markets. ACP countries export about 1.7 million tonnes of sugar per year to the European Union and in many of these ACP countries sugar revenues represent significant shares of both national income and agricultural income, providing for noteworthy direct and indirect employment. The precise magnitude of the impact that the loss of these export markets will have on both the overall economy and welfare of small sugar farmers and workers, especially in ACP countries, remains unknown. The purpose of this study is to analyse the impact of the elimination of the European Union sugar production quotas on ACP sugar production and trade, as well as, on welfare (including farmers’ welfare) and to examine the feasible options that the ACP sugar sub- sectors are considering to mitigate the brunt of this policy change, particularly as it will affect sugar farmers and workers. The approach taken in this study involves three distinct steps. First, the study examines the macroeconomic and trade impact on ACP countries of the European Union sugar production policy shift. To gain a better understanding of the welfare impacts of the sugar policy changes on a heterogeneous group such as the ACP, we have divided the ACP countries into two broad income categories, the higher income group (average GNI per capita USD 8 500 per year) and the lower income ACP. The second step is a re-examination of these macroeconomic and trade impacts at the country level, with the focus on three ACP countries, namely Fiji, Guyana, and Madagascar. Using the field surveys conducted between November 2014 and February 2015, the effects of the European Union quota elimination are re-examined in depth, specifically to determine just how the elimination of European Union quotas and the reciprocal preferences will affect the income and welfare of sugar farmers and workers. The final step focuses on the feasible policy alternatives in these three countries, all of which will need to find a way to allow their sugar industries to adjust to the post-2017 era when reciprocity of preferential access is installed and when the European Union production quota is finally abolished. These alternative policies will allow us to draw broader policy implications for the impacts of the sugar policy changes on the ACP countries as a group. The base case scenario indicates that the elimination of European Union production quotas could lead to a 10 percent increase in European Union output and a 25 percent decline in ACP sugar exports to the European Union. This will cost the ACP sugar industry an annual loss of about USD 255 to 298 million, the bulk of which will be borne by the lower-income ACP countries. Moreover, total welfare in the ACP countries will decline by USD 74 million per year. A welfare loss of this entity, stemming from the fall in exports to the European Union, will cut domestic production (both price and input uses) and lead both to a loss of employment and to capital flight out of the sugar industry. Consumer welfare will increase slightly in ACP countries, due to a 1.0 to 2.0 percent decline in sugar prices, but sugar intra-trade among ACP countries will decline significantly, while intra-trade of sugar in the European Union is expected to increase.