Brussels is looking to cut EU sugar prices - that trade at three times the world prices - by over 40 per cent and quotas by around 16 per cent, according to a draft proposal submitted by the European Commission.
The EU currently spends €1.3 billion in subsidies to its sugar producers. As the world's biggest importer of sugar in 2000 the trading bloc bought €674 million worth of sugar from developing countries, more than the combined total imports by the US, Japan, Australia and Canada.
Reporting in an analyst comment this week, investment bank Goldman Sachs claims that the draft proposal has not only bigger cuts than expected but will also move in a shorter timeframe.
"Our expectations were for these cuts to take place over a 5-6 year period whereas the draft indicates that the EC wants these cuts to come into effect as early as July 2005 and is looking to phase them over three years," write the analysts.
The bank had also previous indicted that he likely outcome would be a 30 per cent cut in support prices and 10 per cent reduction in quotas.
The draft proposal, put forward by the EU agriculture commissioner Franz Fischler, is now under discussion internally between the different directorates of the Commission prior to the finished proposal to be released on 14 July this year.
"This draft document is not in the public domain," a spokesperson for the Commission told FoodNavigator.com today. German and Dutch press this week have also reported on the draft proposal.
Critics to the heavily-supported European sugar regime say the subsidies and quotas are not only a barrier to trade for developing exporting sugar countries but also prop up an artificial regime to the benefit of a handful of sugar processors.
"It is time the EU sugar cartel of major processors and big farmers was brought into the real world," Jo Leadbeater, head of the EU advocacy office at the international charity Oxfam said recently.
A recent Oxfam study of European sugar industry, that included Südzucker of Germany, British Sugar and Tate & Lyle of the UK and France's Béghin Say, estimated that six of the largest processors received export subsidies totalling €819m ($977m, £538m) last year.
The EU puts the annual budgetary cost of export subsidies at €1.3bn, but the study found it provided a further €833m a year in "hidden" support to cover the difference between production costs and export prices. Every €1 of EU sugar exported cost €3.30 in subsidies.
But leading European sugar processors and ingredients companies are preparing their finances for imminent change to the EU sugar regime that will slice away existing revenues.
"The stocks with the biggest profit exposure to EU sugar include Danisco (46 per cent of the group), ABF, that owns British Sugar (34 per cent) and Tate & Lyle (25 per cent)," report the Goldman Sachs analysts.
Tate & Lyle is less vulnerable because it produces its sugar from imported cane at a lower cost but Danisco and ABF use EU grown sugar beet.
Danish firm Danisco is looking to build on the ingredients arm of its business in a bid to cushion the impact of a cut in sugar subsidies. Last week the firm reported an acceleration in organic growth for ingredients and sweeteners for the last quarter of a, if not, lacklustre year - up from 5 per cent at the 9 month stage to 9 per cent in the fourth quarter.
Global sugar prices are currently pretty flat due to a surplus on the market and according to a recent report from British Sugar the prices are low mainly because of the ten-fold increase in exports from Brazil (to over 10 million tons) in the last 10 years.
"Brazil has been able to expand its exports of sugar to the world market only because of repeated massive devaluations of its currency which have artificially reduced its production costs. The Brazilian sugar industry has also been supported by cross subsidy from their heavily government-supported bioethanol industry," said the leading UK sugar company.
Although a key player on world sugar markets, the EU is lagging far behind Brazil, which now dominates exports. The EU-15's share of the world market amounts to 13 per cent for production, 12 per cent for consumption, 15 per cent for exports and 5 per cent for imports.
Its share in world production, consumption and exports has declined, whereas Southern Hemisphere countries have steadily gained importance. Australia, for instance, exports 85 per cent of its crop.