Sugar industry takes on government quota U-turn

Sugar manufacturer British Sugar Overseas (BSO) and Poland's sugar lobbies lodged an indictment against the Polish government at the Constitutional Tribunal for reducing sugar production quotas and increasing them for isoglucose, a sugar substitute. The government increased the isoglucose quota from 40,000 metric tons to 60,000 in June, while decreasing the sugar quota from 1.54 million tons to 1.52 million. The sugar lobbies and BSO, which owns the country's largest sugar factory in Glinojeck in eastern Poland, are challenging the economic and business sense of the government's decision, arguing that the policy gives isoglucose manufacturers an unfair advantage. "First of all, we question the legality of it," said Stanisław Dziedzic, the business development director and a member of the board of BSO Poland. "Second, while everyone is fighting for quotas in the European Union (EU), (Poland) is trying to give it away, and it's a very shortsighted view." As a result, the Sugar Producers Chamber of Commerce (CIG), the Polish Sugar Producers Association (PZC) and BSO have taken their case to the Constitutional Tribunal. They argue that sugar quotas cannot be freely augmented by the government since Poland's Sugar Law states that sugar quotas must be based on production in the year 2000, Dziedzic said.

The Economy Ministry would not comment on why sugar quotas were reduced, and added that work on a document justifying the move was still underway. The Agriculture Ministry was unable to provide its position on the indictment as the WBJ went to press. Sugar producers also are challenging the government's economic reasoning in upping quotas for isoglucose, a liquid sweetener derived from wheat and used in ice cream and soft drinks. They see the move as a way to support Poland's wheat producers, an area of farming they say will become less viable than sugar beet production after EU entry. "The currency in the EU is beet," Dziedzic said. "On entering the EU, Poland will have a 20% decrease in cereal prices and a 50% increase in sugar beet prices." BSO is particularly angered by what it sees as the government's betrayal of its interests as a strategic investor. When strategic investors bought into the Polish market, their privatization bids were based on the value of Poland's sugar quota. By increasing quotas for isoglucose, the government reduces the value of BSO's investment, Dziedzic said. "As foreign investors, we are disillusioned with this move by the government," he said. "It undermines the investment to date and any future investment." The British sugar firm also says that the government gave U.S. food-processing giant Cargill, Poland's sole isoglucose producer, an unfair advantage by boosting isoglucose quotas.

Because BSO had to finance restructuring costs and employee packages at its factories, the company says it effectively paid for its quotas - expenses avoided by Cargill, whose factory was a greenfield investment, according to Dziedzic. "What the government is doing is reducing the national quota for sugar … and giving Cargill … an isoglucose quota, a direct replacement for sugar," he said. "And they're doing this at no cost." Andrzej Różycki, the president of Cargill, said that the isoglucose quota was not unfair for BSO since the cost of building a new isoglucose factory equaled the price paid by the British sugar firm for its production facilities. The current isoglucose quota of 60,000 metric tons a year enables Cargill to use only half the production capacity of its isoglucose factory and supply only a quarter of domestic demand, estimated at 240,000 tons a year, he said. "Both companies are in exactly the same situation," Różycki said. "They have an existing capacity and expect to be allowed to produce. We have an isoglucose capacity that is suppressed by 50% - even under the new regulations. I guess that the capacity of BSO is suppressed by less than 50%." The sugar quota reduction comes at a difficult time for Polish sugar factories, which have an average production capacity of only 24,000 metric tons of sugar a year and cannot compete on cost with EU factories, which average 120,000 tons a year, Dziedzic said. "Poland has a very short time to restructure this industry," he said. "It's going to be like the Big Bang, and Poland will just have to compete with EU factories." Despite the weakness of the Polish sugar industry, the sugar quota reduction will have only a limited impact on producers and growers, said Zygmunt Smoleński, a professor at the Institute of Agricultural and Food Economics (IERiGŻ) in Warsaw. "It seems that wheat producers simply got a better deal from the government than the sugar beet producers," Smoleński said. "The sugar quota reduction is just 20,000 tons, and I don't see it as a significant problem. It annoys sugar beet growers simply because Cargill has taken a part of their market."