Sugar cooperatives restructure to combat foreign threats, low prices
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American Crystal Sugar, a grower-owned cooperative which operates this modern processing
plant in Moorhead, Minn., has had to forfeit sugar to the government for the first time in 20 years. Photos courtesy American Crystal Sugar |
by Pamela J. Karg, Field Editor
There is nothing sweet about the U.S. sugarmarket.
Raw sugar prices have been hovering about 25 percent below their historical average and refined sugar prices bottomed outlast fall. A self-supporting sugar industry program has turned to government support. Good weather, a large domestic sugar crop, government-guaranteed import increases and trade disputes with Mexico and Canada have soured the outlook for the industry.
As prices took a nearly unprecedented free-fall in late 2000, however, growers and their cooperatives began their own slicing and dicing to determine how to weather the economic lumps. Sugar cooperatives are cutting costs to improve operating efficiencies and have anteed up money to study whether to own a greater share of the farm-to-consumer processing chain. They continue to educate political leaders about the realities of U.S. sugar policy. In the process, American sugar growers might turn their sour grapes into sweet successes through innovation and perseverance.
Processors forfeit sugar, PIK offered growers
Weak prices have caused many sugar operations, including American Crystal Sugar Co. of Moorhead, Minn., to forfeit sugar to the government for the first time in more than 20 years. James Horvath, president and CEO of the sugarbeet grower's cooperative says, "Turning sugar over to the government is not something we do lightly. However, market conditions at this time make forfeiture a viable alternative."
Under the sugar price-support program administered by USDA, processors may pledge sugar as collateral for nine-month loans. If market prices are below the loan rate for sugar, the processor may forfeit sugar to USDA instead of repaying the loan.
Horvath pointed to a number of factors that combined to push U.S. sugar prices to their lowest level since the mid-1980s. Foremost among these are trade and domestic policy issues. Traditionally, USDA managed sugar imports to balance supply and demand. Horvath says a number of recent actions by government policy makers have limited USDA's ability to use this tool to the extent it has in the past.
"In the Uruguay Round of theWorld Trade Organization negotiations, the government agreed to import at least 1.25 million tons of sugar each year, regardless of whether the U.S. market needs the sugar or not," Hovarth says. "This means that foreign sugar coming into the U.S. is causing pressure on prices."
Another source of price weakness within the U.S. sugar market is something called "stuffed molasses." This mixture of sugar and molasses, made in Canada and brought into the United States, wreaks havoc on the industry. Horvath says that stuffed molasses imports will displace at least 100,000 tons of domestic sugar this year.
Finally, he says, there is potential for an increase in sugar imports from Mexico. Under the North American Free Trade Agreement (NAFTA), that country can ship unlimited amounts of sugar into the U.S. market after it pays a"second tier tariff." Mexican sugar production has grown dramatically since implementation of NAFTA in 1994. Because of sharp declines in world market prices, Mexican producers divert some of their surplus here.
"When NAFTA was being negotiated, the second tier tariff provision did not look like a threat to U.S. producers," according to Horvath. "Now, because of the very poor prices available in the world market, paying the second tier tariff and shipping sugar into the U.S. is beginning to look more attractive to Mexican sugar producers."
Trade issues are compounded by a large domestic sugar crop this year. "Some U.S. sugar producers were blessed with a very good crop this year, both in cane and beet areas," Horvarth says. "This is certainly a part of the supply/demand balance. Even though American Crystal's shareholders harvested fewer tons in 1999 than in 1998, we are getting more sugar per ton. Putting these two factors together, our total sugar production will be about the same."
Poor domestic prices have forced American Crystal to forfeit sugar to USDA. "The Sugar Program approved by Congress in 1996 gives sugar producers the loan program as a way to ensure the market is balanced," Horvath said. "Last fall, forfeiture to the government was the best financial alternative for our shareholders. However, our long-term interest is to bring the market back into balance. If that can be accomplished, we anticipate prices would return to the levels normally provided by the Sugar Program."
On the grower side of the supply equation, USDA's Commodity Credit Corporation (CCC) offered a Payment-In-Kind (PIK) diversion program. The PIK program offered sugar beet producers the choice of diverting from production a portion of their crop in exchange for sugar held in CCC inventory. CCC Executive Vice President Keith Kelley reported that producers submitted 5,022 acceptable bids to participate in the program. Sugar beet acreage diverted from production totaled 101,832.9 acres.
By reducing the 2000 harvest, the PIK program helped lower government inventory costs, alleviate the current over-supply of sugar resulting from changes in supply conditions, and consequently strengthen sugar prices. CCC transferred title to 277,349 tons of refined crystalline sugar to participating producers, or their assignees, on Dec. 1. The acres diverted from production by the PIK program represented about 7 percent of acreage planted to sugar-beets. Transfer of this sugar will result in about a $555,000 reduction in monthly CCC storage-related outlays. The sugar transferred from CCC inventory also represented about 7 percent of the expected fiscal year 2001 domestic sugar production from sugarbeets.
Testifying before the Senate Agriculture Committee in late summer, Horvath said that his farmer/owners "are supportive of this (PIK) concept. We believe it achieves several worthwhile objectives for the industry and the government." He listed these benefits:
- It helps reduce the current oversupply of sugar by cutting the number of harvested acres this year.
- It saves USDA the responsibility of obtaining and managing large amounts of purchased or forfeited sugar.
- It starts the industry down the road to balance an over-supplied market.
- It saves the government money.
Nevertheless, Horvath emphasized that PIK does not eliminate the need for USDA to purchase additional sugar. In a letter to then-Agriculture Secretary Dan Glickman, the domestic sugar industry representatives said, "We cannot emphasize too much how important we believe it is that USDA issue an announcement immediately of an additional sugar purchase, in a significant amount, to avoid CCC sugar loan forfeitures."
In a September 2000 editorial, The Miami Herald weighed in on the sugar situation. "The full impact of the failure of the 1996 Freedom to Farm Act will be felt in South Florida as sugarcane growers forfeit their crops in lieu of repaying $141 million in government loans," the editorial reads. "Among Midwest beet farmers, the losses to tax-payers are likely to be much greater, $251 million... In theory, Freedom to Farm and the weaning of farmers from government controls had a lot going for it. Even today, the U.S. Department of Agriculture can point to studies showing that farmers are generally better off than they would have been under the programs that had government telling farmers what to plant and guaranteeing minimum prices. However, the new policy isn't working for all the - farmers or all the commodities, and the sugar program is one example."
Diversifying, owning operations
American Crystal Sugar, the largest U.S. sugar beet processor, is owned by nearly 3,000 grower/shareholders in the Red River Valley of North Dakota and Minnesota. Throughout the 1990s, American Crystal and other partners formed
several marketing agencies in common (MAC) and joint ventures to expand marketing and to diversify agricultural opportunities for area farmers.One marketing agency in common, United Sugars, was started in 1993 by American Crystal; Minn-Dak Farmers Cooperative, Wahpeton, N.D.; and Southern Minnesota Beet Sugar Cooperative, Renville, Minn. By pooling their resources, the three co-ops formed the nation's largest beet sugar marketing company. In 1997 amid heavy blizzards and a 500-year flood, United States Sugar Corporation, a Clewiston, Fla., sugarcane grower and processor owned primarily by employees and two charitable foundations, joined the venture. That addition increased United Sugars' share of the U.S. market to 25 percent. That same year, American Crystal introduced Pillsbury Best, the country's first national brand of sugar.
The three Upper Midwest sugarbeet cooperatives had developed close working relations in 1979 by forming Mid-west Agri-Commodities, a marketing agency in common. American Crystal, Minn-Dak and Southern Minnesota Beet Sugar Cooperative are partners in the organization that markets molasses, beet pulp and other byproducts. American Crystal has a 46-percent ownership interest in ProGold LLC. The corn syrup plant in Wahpeton, N.D., was organized as a farmer-owned, value-added processor in 1996 by Golden Growers Co-op, American Crystal Sugar and Minn-Dak Farmers Cooperative. It began operations just before high-fructose corn syrup prices dropped by 28 percent. Operating
losses caused the new cooperative to lease its plant to Cargill, which manages all aspects of its operations. Operations were halted temporarily Jan. 16.American Crystal Sugar Company has a 50-percent ownership interest in Crystech, LLC, which was formed to acquire, construct, finance, operate and maintain a molasses desugarization facility at the Hillsboro, N.D., sugar factory. The Crystech facility came on line in 2000.
Success of the Minnesota and North Dakota sugar beet cooperatives has inspired western U.S. sugar farmers to explore ways to capture a greater share of the consumer food dollar. Growers are bidding to buy sugar plants owned by Tate & Lyles Western Sugar Co. and by Imperial Sugar's Holly division. Frank Eckhardt of the Colorado Sugarbeet Growers Association believes farmers will raise the money and the plants will come under farmer ownership.
"This goes back to 1974 when we wanted to buy the Great Western Sugar plants," Eckhardt says. "But a man named White got them, who then sold them to the Hunt Brothers in the early 1980s. When they went bankrupt, Tate& Lyle North American Sugars bought them. Every 10 to 12 years, we've had to go through somebody else buying them. When times were tough, private investors got out and growers had a chance to get in, but times were tough for us, too," Eckhardt explains. However, current owner Tate & Lyle - based in England and one of the world's largest sugar industry players - has been receptive to a farmer buyout.
"They're offering the plants at their appraised value. Because the farmers have been investing in the plant, silos and equipment all along, we have $12 million in equity built up. We would have had more, but we lost it all when the Hunt Brothers went broke. So now we will only need to pay $78 million for the plants instead of the $90 million they're appraised at, " Eckhardt explained.
To buy the six sugar plants - one each in Montana and Wyoming, and two each in Colorado and Nebraska -several western organizations banded together to form the Rocky Mountain Sugar Growers Cooperative. Included in the founding group is Eckhardt's Colorado sugarbeet bargaining association, for which he serves as board treasurer.
"It seems as though there's only enough profit for one entity anymore, and a cooperative has more latitude in operations and sales," Eckhardt said.
Western sugar growers are hearing the message. The co-op is asking growers to commit $185 per acre of planted beets, with $35 per acre due by Feb. 1 and the rest a month later. The co-op is seeking commitments representing about 185,000 acres in the four states.
The sale faces a March 3 1 deadline. There are over-subscriptions in Montana, and Wyoming is right on target with the amount of acres that have been contracted in the past to supply the plant, said Rick Rodriguez, vice president of the Big Horn Basin Beet Growers. Big Horn Basin is a partner in the farmer buy-out effort."We were a little skeptical going into this, but I'm meeting with my growers this morning to go through some more questions they have. I'd have to say everyone is fairly positive about this. There's even a few growers who have decided not to go in, but they sure hope it works out because they don't want Rodriguez farms to suddenly be marketing 1,500 acres of (pinto) beans," Rodriguez said. The Basin area has a short growing season and crop production mainstays are malt barley on contract for Coors beer, some seed crops, sugarbeets and dry beans. Rodriguez and his father, Paul, plant about 1,500 acres of sugarbeets. Switching to another crop could upset the agricultural market balance in the Big Horn.
"Even the guys downtown realize the importance of sugarbeets to this area. It's a $30 million industry here, when you consider growers and employees at the Lovell plant,"
Rodriguez added. "I just got a $100 check from the local Kiwanis to put towards our feasibility study costs. And we've received money from all three cities in the area - Powell, Cody and Lovell - as well as Big Horn and Park counties. The state didn't have any money, but did help us secure a $25,000 USDA grant."Eastern Colorado may be a bit over-subscribed and western Colorado is still uncertain, Eckhardt added about his home state.
"The average age of farmers is a little higher in the western region. They have a few more options because of the continued population growth and land pressures, and if they don't have children coming into the business, this is a hard decision to make. If we do this right, those older farmers who do come in can make some money," explains Eckhardt, who farms 1,750 acres of sugarbeets, onions, potatoes, edible beans, shelled corn and silage corn at LaSalle, Colo., near Greeley. The fourth-generation farm includes his two sons. Some years, his sugar acres are the second- or third-highest income generators in the operation.
"Sugarbeets have just worked a lot better in our rotation and with the price fluctuations for different commodities," he says. "With different trade policies coming into play, prices to farmers haven't been too good. So we just feet that, as a cooperative, we could do better with marketing and keeping prices more stable for farmers."
By mid-January, it was uncertain what Nebraska growers would do. While a number of them had put up a $2-per-acre fee to fund the feasibility study, Nebraskans now have a second option to consider after Imperial Sugar Co. announced its Holly Sugar plants in Wyoming and Montana may close due to financial troubles.
Randon Wilson, a Salt Lake City lawyer working on both proposals and providing assistance to similarly affected Michigan beet growers, said Western and Holly growers have talked about joining forces if their efforts succeed. That won't happen if too few growers back the Tate & Lyle buy-out, he told the Scottsbluff, Neb., World-Herald. Nebraska panhandle growers "have got a clear choice," said Wilson, who helped Idaho and Oregon beet growers buy Amalgamated Sugar Co. in 1997. "They either save the (local) industry or sentence it to death."
Eckhardt added that, if the grower buyout fails, Tate &Lyle say they will shut down Western Sugar's factories after contracts with growers expire in 2003. He and other organizers don't think that way; they foresee a sweeter future.
