WTO decision to ban subsidies hits British sugar companies

Shares in British sugar companies fell yesterday after a multimillion-pound package of European Union subsidies was branded unlawful by the World Trade Organisation.

Shares in British sugar companies fell yesterday after a multimillion-pound package of European Union subsidies was branded unlawful by the World Trade Organisation.

The WTO ruled $1.4bn (£780m) of subsidised EU sugar exports are illegal, handing Brazil a second victory in two months in its campaign against Western support for farmers.

The ruling also came four days after the EU, the US and Japan agreed in principle to eliminate agricultural export subsidies and open up their markets to developing countries.

Although the leaked ruling had been expected, it knocked shares in Tate & Lyle by 2.3 per cent and Associated British Foods, which owns British Sugar, by 0.25 per cent.

The EU refunds the difference between the domestic price, which is higher than that on the world market for exports of surplus sugar produced under quota. "ABF and Tate & Lyle make a lot of money out of sugar because of the subsidies, so this means they will be less profitable," said Nicola Mallard, an analyst at Investec Securities.

WTO arbitrators supported claims by Brazil, Australia and Thailand that aid to EU producers distorted world prices, the Brazilian government said.

The ruling will probably be published in September and an appeal will be decided within three months. The EU will then be given a deadline to comply or face sanctions. "This has been an important step in the elimination of distortions in agricultural markets," said Celso Amorim, the Brazilian Foreign Minister. In June Brazil won a WTO ruling that US cotton subsidies violate trade rule.

Susan Esserman, a former US trade negotiator and partner at US law firm Steptoe & Johnson, said: "The broader significance of this ruling is that they have added pressure on the EU and US to make meaningful concessions on agriculture in the current trade round talks."

Oxfam, the development charity, welcomed the ruling. "The onus is on the EU to act now to reform that regime in a way that benefits the poorest countries," said Jo Leadbeater, head of its Brussels office.

"This ruling is a triumph for developing countries and a death knell for unfair EU sugar export subsidies, which undermine poor farmers' livelihoods and deny them the chance to trade their way out of poverty."

Tate & Lyle, which receives €153m (£101m) a year in subsidies according to Oxfam, said it would not comment on a leaked ruling.

Brussels pre-empted the ruling last month when it unveiled the biggest shake-up of the sugar industry in four decades, calling for huge cuts in guaranteed minimum prices and export subsidies.

Under the plan, which needs to be approved by EU agriculture ministers, export subsidies will be cut by €1.3bn, the overall production quota of 17.4 million tons will drop 16 per cent, and there will be compensation for producers that leave the sector. According to Oxfam the EU pays €3.30 in subsidy for every €1 produced.