Could the Irish sugar industry have been saved?

I have been amazed by the media spin put on the European Court of Auditors’ report into the implementation of the EU’s sugar regime reform in 2006. This reform resulted in Greencore deciding to close the only remaining Irish sugar factory in Mallow, thus signalling the end of beet-growing in this country. The reform cut the price of sugar beet by 36% while removing 30% of the EU sugar production quota over a four year period. It is simply not credible to suggest that the Irish industry could have survived in this new environnment.

Headlines in the Irish Times and on RTE suggest that the Mallow plant closure was ‘needless’ quoting the Irish member of the Court of Auditors, Eoin O’Shea to that effect.

“Without sugar reform, it’s quite possible that the sugar factory in Mallow would exist and sugar growers would be growing,” said Eoin O’Shea, Ireland’s member of the Luxembourg-based audit body. Asked if the plant’s closure was needless, Mr O’Shea said that was “the inescapable truth of the court’s report.”

It is not rocket science to state that, in the absence of the reform, sugar production would have continued in Ireland. Indeed, at a protected price of €44 per tonne of beet, beet was a profitable part of the arable farmer’s rotation and Greencore could make money from its refining operation.

However, the reform did take place, necessitated by the EU’s obligations under the World Trade Organisation and its trade commitments to the poorest countries in the world. The Court of Auditors criticises the design of the reform on a number of grounds, but to conclude that the Irish industry could have remained viable in this scenario is an exercise in escapism.

The Court notes that one objective was to contribute to a more competitive sugar industry, and that this was to be achieved by concentrating quota reductions in the least competitive areas. The audit criticises the Commission for the absence of data on the productivity of individual factories and for the fact that data on the overall competitiveness of sugar production in different Member States was somewhat dated. The auditor’s view seems to be that the Commission should have collected data on the productivity of each of the 200 or so sugar factories and then required the 80 factories with the lowest productivity to close. We might describe this as the Gosplan approach to industrial restructuring.

Instead, the reform was based on a voluntary restructuring approach where the decision to abandon or remain in production was made by each individual sugar company in the light of the substantially lower institutional prices for sugar beet.

However, by the end of the first two years, the voluntary approach was not working and the amount of quota renounced was far below the Commission’s target. So, in year 3, the Commission announced that it could be forced to make an explicit, uncompensated, quota reduction on all factories but focusing especially on factories which had offered no quota reduction to date, by definition the more efficient suppliers. As a result, 47% of the renounced quota came from factories in the more efficient producing regions. The Court concluded that

“This situation calls into question the effectiveness of the measures introduced to ensure the future competitiveness of the sugar industry from the perspective of the producers. In particular, the measures introduced from third year of the reforms were not sufficiently targeted to achieve the desired objective”.

The Commission responds that an explicit targeting approach would neither have been feasible nor politically acceptable. It defends its approach by pointing that out that Member States with high profitability in beet production now account for 78% of EU quota (compared to 68% before the reform) where Member States with low profitability now hold 5% of the EU quota (compared to 12% before the reform).

The Irish situation is, rather curiously, commented on in a stand-alone paragraph where the auditors noted that the sugar company, which “defined itself as one of Europe’s most efficient producers” had closed down “its large, modern and potentially efficient sugar factory”. It noted that this decision had been justified on the risk of the lower prices reducing the supply of sugar beet to an uneconomic level. The implication that seems to have been drawn is that the Irish plant had the misfortune to be hit by the blunderbuss approach of the Commission and would have escaped closure if a more targeted strategy had been adopted.

This is just Alice-in-Wonderland stuff. Ireland was always a marginal sugar beet producer within the EU. Arising from the closure of the Carlow factory the previous year, many midlands beet growers had already decided they could not supply beet to Mallow because the extra transport cost would erode their margins. Yet the beet price was going to fall from €44 to €26 per tonne which would have seen many more growers exiting the industry. Greencore had made the decision to exit the industry in the first year of the reform, and well before the Commission’s revised proposals in Year 3 which were the particular subject of the auditors’ criticisms.

There is a view that Greencore wanted to exit the industry to develop their sites for their property value, a view sustained by the large investment subsequently made by property developer Liam Carroll in the company and its significant planning application in 2007 for a €500 million development proposal including business, tourism and residential elements. But Greencore’s decision to close the plant was made in March 2006, before either of these events. In the absence of the reform, there is no reason to doubt that Greencore would still be refining sugar in Mallow today.

Politicians have jumped on the bandwagon:

Ireland East MEP Mairead McGuinness said: ‘It is very clear that the Commission has questions to answer arising from the Court of Auditors report. Lessons need to be learned.
‘The sugar reforms resulted in the complete loss of the Irish sugar industry.’

Fine Gael Agriculture, Fisheries and Food Spokesperson Andrew Doyle said the report leads to the inescapable conclusion that the Government of the time was asleep at the wheel.

Labour Agriculture Spokesperson Sean Sherlock said that in the wake of the finding, serious questions arise as to the suitability of Mary Coughlan for high office.

In fact, a proper reading of the Court of Auditors’ report supports none of these conclusions. The simple fact is that sugar beet production in Ireland was not economically viable at the current price of €26 per tonne of beet, which itself is well above the (volatile) world sugar price. Nothing in the way the Commission implemented the 2006 sugar reform alters this fact.

21 thoughts on “Could the Irish sugar industry have been saved?”

  1. We subsidise the growing of turnips in Leinster house

    Germany subsidises its solar energy industry.

    The Fed is creating a dollar mountain.

    We can do better then just growing turnips.

    Economists need to understand that we live in a political economy and always have – the only difference now is that our units of account is not money.
    The whole global monetory system is in turmoil, how can you attribute value ?
    In a imperfect monetory system the only mechanism to counter imbalances in a distorted market is goverment funding.
    The fact of the matter is beet growing is a more productive use of land then growing grass so therefore that is a primary good.

    If you follow the lodgic of your argument we stop the IDA as it distorts the market , stop all pretence of goverment , lets stop all discourse and allow the “market” rip on bank credit coupons – oh yes we did that didn’t we and look where we are now – up to our eyeballs in debt created by our debt overlords.

    We do not live in a perfect market – never will as all markets eventually concentrate power and enslave its workforce – the governance in a republic is to restrain these forces from reaching a critical mass of absolute power.
    But I guess we are past the point of a self governing republic and perhaps never were – onwards and upwards to a better word of infinite subsidy of banks and their debt.

    This attack on all industry has to stop – the banks want to reduce capital outlay until we are all rummaging in the dirt digging for turnips with our bare hands.

  2. “Could the Irish sugar industry have been saved?”

    Of course it could.

    All it required was political will.

    Now we have no sugar industry.

  3. KC
    While I sympathize with you, there are no good reasons for continuing subsidies in Ireland or anywhere else in the EU.

    Your support for them means that you enshrine an artificial support for land value.

    Why? That was at the CORE (oops!) of the GREEN jersey debacle, from which you are obviously still reeling.

    Farmers have had their day and now land prices must plummet. Good! Find a crop in which we can grow interferon or other high price pharmaceuticals. Grow market crops so Ireland need not import them? WE have no shortage of labour ……

    “Free” credit policies are at the heart of the market disruptions you lament! These are gone for three decades or so, plenty of time even for the lazy Irish to found a bio industry based on plentiful rain and cheap land. Malinvestments! They make vital matters such as food and land policy infra dignitatem as people race around “making money”!

    Now where did all of that getcha?

    Would you like the job of Minister for Subsidies? You’d be very popular setting all the market woes to rights!

  4. @Pat Donnelly

    The lack of redundancy in global trade is a weakness that is not being priced into the market – monetory distortions are now much bigger then any fiscal generosity – my point is that the market is fake but also its effects are unseen as the costs do not affect Goverment debt directly.

    I just need to walk outside my door to see the effects of monetory subsidy everywhere – the efficient market does not exist today – fiscal triage may be the only mechanism left to stop the bleeding in capital creation given the CBs willingness to spend to infinity to subsidise non industrial transactional masturbation.

  5. The sugar industry in Ireland dates from the economic war era when deV aimed for complete self sufficiency. It was absurd that some of the best land in the country was dedicated to growing a crop that could be grown cheaper elsewhere.

    Now if only they had tried to retrain the farmers and convert the land to market gardening to provide vegetables… (one of the few agricultural products that are unsubisidised by the EU)

  6. I would tend to agree with Alan Matthews. In general, artificial supports for non-viable industries are a bad thing. However, equally, artificial restrictions on successful industries are a bad thing. So, while I would agree with Alan Matthews that Ireland posssesses no comparative advantage in relation to the growing of sugar beet, and that, in an era of global free trade, market forces were inevitably always going to lead to the demise of the sugar industry in Ireland, it should not have been sacrificed at that time unless, simultaneously, artificial quotas in relation to milk production in Ireland, an area in which Ireland does have a comparative advantage, were either abolished or increased. I know that they are due to be lifted around 2015 (I think), but that is a decade later than when the sugar industry was sacrificed.

    While I am no farmer, I assume that land used for growing sugar beet could equally well be used for dairying. Had the land previously used for growing sugar beet been simply transferred to dairying (maybe it was? – I simply don’t know), the farmers who owned the land would now be enjoying a huge boom. The most recent figures show (a) milk output prices up almost 50pc y-o-y in August (b) volume of milk output up 18pc y-o-y in September (c) volume of output in the dairy manufacturing sector up 31pc y-o-y in September.

  7. I would tend to agree with Alan Matthews. In general, artificial supports for non-viable industries are a bad thing.

    Does this include the banking industry?

    As for milk prices; farmers are getting paid as much for their milk now as they were in the early 1990’s—in nominal terms. Given your attitude towards free-market thinking in relation to sugar beet, I expect you’d support the dairy and meat industries in this country going the same way. Just keep in mind that agriculture is one of the few domestic industries in this country that produces actual tangible goods for export.

  8. JTO,

    Milk prices are up by 40+ % y-o-y but from a near 20 year low; volume is up because of the atrocious weather in 2009 (Ireland under quota by 11%).

    Which leads to the point that Ireland’s milk production is capped by quotas (til at least 2015). The capital cost to new entrants into dairying is huge. And the simple fact of the matter is that the numbers of dairy farmers Europe wide consistently falls each year would suggest that even without quotas increases in dairy production will be very slow and not 50% by 2020.

    Sugar beet cannot be grown in Ireland for €26 a ton, full stop. Fodder beet (with lower inputs) is at break even at €30

  9. EU sugar production hardly appears “sustainable” yet.

    Despite the short term spike in sugar prices – presumably driven by the ethanol fuel fiasco – EU prices are still above world prices (see chart 3 in the report).

  10. Of course they could have been saved but the sites were targeted by developers with “big ideas”. Liam Carroll led a consortium to buy the Mallow, eventually he ended up worth less than a bag of the stuff. Sugar is a strategic resource and as the world population grows so will does demand for sustainable supplies. Every bit of sugar coming into this country is now imported and the site values have plummeted. Great thinking by Greencore and Irelands strategic thinkers. Put the ships on the high seas and keep bringing the stuff to ireland! Meanwhile, the expertise to grow, process, market, distribute and sell the stuff is being lost. Mary Coghlan was duped!

    Glass bottle site, same agenda same players someone needed the “site” to flog to DDA and fools now all glass has to be driven north and the jobs are gone! Losses on the site? Of course, NAMA paid 38 million that represented an 87% write down. And what about Irish and what about all that valuable land down the docklands?

    “During the mad summer of 2007, at the very fag end of the Celtic Tiger, Rothwell’s takeover bid was gatecrashed by not one but two rivals. The Moonduster Consortium — consisting of Philip Lynch’s One51 and the Doyle Shipping Group — amassed a 21 per cent stake, while property developer Liam Carroll accumulated a 29 per cent shareholding.” From http://www.irishseashipping.com/news/2009/05_2009/05_2009.htm

  11. The cold climate northern European and North American sugar beet industries could not compete with the tropical and sub tropical sugar cane industry. We can grow potatoes and export them to Cuba and other Caribbean islands as well as countries in the sugar cane belt.

  12. @Alan Matthews

    “It is simply not credible to suggest that the Irish industry could have survived in this new environment.”

    We need to define what we mean by Irish Industry.
    I have just listened to another Alan, a Cork farmer whose father set up the Carlow sugar factory and worked in the Mallow sugar factory.
    He says that the EU is now importing 20% of Sugar needs. Also no consideration was given to production of ethanol or other enegry by products from sugar or the fact that we need to focus on agricultural based industry, where we should have a competitive edge in the production of raw materials.
    It may not be liberal economics but unless we understand the old Arthur Griffith statement we are going to be wiped off the face of the earth.
    “If we do not support the Irish workshop, we must support the Irish workhouse”.
    Let me put this another way.
    From the point of view of the State finances, what is the current cost of employing one person???
    I really would like to see that calculated. Personally I believe that at low wage levels, it is close to zero.
    It should be a simple process to improve employment starting with a zero labour cost.

  13. @JTO.
    “So, while I would agree with Alan Matthews that Ireland posssesses no comparative advantage in relation to the growing of sugar beet,”

    Why then, according to the other Alan (the Cork farmer) have Finland and Greece managed to retain their sugar beet production.?

    And before I am encouraged to buy a one way ticket out of here, what does Ireland have a comparative advantage in, if not industry based on agricultural raw materials?

  14. @Joseph Ryan
    Can I ask if you understand the theory of comparative advantage? From reading your posts I’m inclined to suspect not.

  15. @Hugh Sheehy.

    “Can I ask if you understand the theory of comparative advantage? From reading your posts I’m inclined to suspect not.”

    I am not an economist and possibly wouldn’t know the theory of comparative advantage if it hit me on the head.

    But coming from the land, albeit a long number of years ago, I don’t understand how the Finns could grow beet any cheaper than we could. After that, it would be down to processing cost. And given the lack of moisture in Greece, I doubt they could grow beet any cheaper than we do either.

    In addition, I would like to know in economic terms what is the cost from the point of view of the State finances of employing a person right now. I believe that it is possibly close to zero, if that person is unemployed. So our comparative advantage, as I understand that term in English, should be further improved.

  16. Within the protective womb of the EU, Ireland has a comparative advantage based on subsidised production of agricultural raw materials. Out in the real wider world no such advantage exists.

    Ireland has its wits which have wilted badly in the last three years. Hopefully in the next few years we will all come tour senses and Ireland will once again become a nation worthy of respect.

  17. @Joseph Ryan
    The first important thing about the theory of comparative advantage is that it isn’t a theory of competitive advantage or of absolute advantage.

    Understanding the theory, even in its most basic form, is not trivial. The theory meets a threshold once given to me for something that deserves to be taught in university…that it is important, non-obvious, and true.

    The Wikipedia article on the topic is probably a good place to start, and a description of the difficulties around the theory in an op-ed piece from someone I don’t always agree with, Paul Krugman. (see below)

    Application of the theory to the Irish sugar case would be difficult since the markets are all so messed up with subsidies, but essentially the Finns don’t have to be absolutely better at making sugar beet than us. They just have to be comparatively better. (i have no idea if they are) Read up on it…it’s worth it. You’ll be better off than most politicians and journalists once you’ve understood it.

    http://web.mit.edu/krugman/www/ricardo.htm

    Oh, please do not take anything here as me being patronising in any way. There are many areas where I am vastly ignorant and comparative advantage is not an area where my knowledge is more than superficial. It’s just one of those areas where I’ve often seen misunderstanding of the topic lead to abortive conversations…..and understanding it often leads to a majors “Aaaah, that’s what they mean” moment.

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