The decision to remove storage aid - taken at a meeting of E.U. farm ministers last week - will mean the cost of carrying over sugar for export from one year to the next will no longer be shouldered by the E.U. sugar budget.

Instead producers, and in particular exporters, will have to make a commercial decision on whether to carry stocks or not, which could lead to more seasonality in supply with gluts during the harvest period and tightness later in the crop year, traders and analysts said.

"There will be more pressure on the price in crop than in the past and we may see a period of uncertainty while both sides (producers and buyers) face off," said Chris Pack head of research at C. Czarnikow Ltd.

However, he said that while there may be more concentration of selling during harvest there was no risk of the E.U. running out of supply in the off-crop period. Given that E.U. producers are generally better financed than many of their cash-strapped counterparts in emerging markets, the rush to sell to ensure cash flow will be less urgent.

The decision to abolish storage aid was part of a new E.U. sugar regime approved by E.U. farm ministers last week. While they agreed to maintain production quotas, fixed prices and export refunds for a further five years, they decided to reduce quota tonnage, end minimum stocks and abolish storage aid. The new regime will be reviewed in 2003.

Under the E.U.'s previous system, producers paid a levy into E.U. coffers while the rebate paid back came out of the E.U. sugar budget. The levy formed part of the intervention support price that was then passed on to consumers. With its abolition, producers and exporters will have to either absorb the cost of find a way to pass it onto consumers.

Major E.U. producers such as Denmark's Danisco (K.DNS) and British Sugar, a subsidiary of Associated British foods (U.ADF), have already said they will endeavor to pass on the costs to protect their margins.

"The abolition of aid will require companies to plan more carefully. (Before now and) within reasonable limits they could carry over (C sugar) production to the next year without costs," Christoph Berg, analyst with F.O. Licht said.

He adds that it could mean a drop in C, or non-quota, sugar output, which totaled 4.7 million tons in 2000-01, as producers attempt to reduce their risk.

"We will see a structural decline in output and this is a first step," he said.

In addition, as the intervention price, including the levy, formed part of the calculation for weekly export refunds awarded by the E.U. Commission, exporters expect that their earnings will be hit as the refund for quota sugar will be reduced by EUR20/ton with the levy disappearing.

"It will mean that (producers) are going to add to the sell price...but not by as much as the total cut, it will cut their revenue but it's difficult to say by how much." said Alain Jeanroy, head of the French Beet Growers Association.

Danisco, Europe's fourth largest sugar producer, last week said it expected that its earnings would be hit by 5% to 10%, or $6 million to $12 million.

Reforms Chip Away At Protectionism

Despite the abolition of storage aid, Danisco, along with other E.U. producers, mostly welcomed the new regime, saying it would ensure some stability to the market structure for the next five years.

However, the changes could introduce an element of competition to the market, analysts say, bringing a partial victory for the forces of reform within the E.U. Commission.

"If companies sell early and have no sugar left it will be sourced from elsewhere in the E.U., which could increase an element of competition and break up regional cartels," Licht's Berg said.

The Commission reforms are the tip of the iceberg, analysts and traders say. Along with the "everything but arms" deal to open E.U. markets to more exports from the 48 Least Developed Countries, the Commission decision will gradually undermine the regime, they say.

Most parties involved agree that complete liberalization would be unacceptable and costly to the E.U. in terms of compensation payments. Bu while no rapid changes are on the cards, further pressure is expected in the run-up to the review period in 2003.

"The Commission reform forces have made progress - it will be liberalization through he back door - anything else is unrealistic, it's not viable," Berg said.