Defending their turf
Growers see co-op’s legislative action as
essential to future of nation’s sugar industry
By Dan Campbell, editor
e-mail: dan.campbell@usda.gov
f American farmers weren’t supposed to grow
sugarbeets, surely there would be no Red River
Valley quite possibly the world’s most perfect
garden for cultivating the crop. Not only
do sugarbeets love the black-clay soil of this
river valley that both divides and unites Minnesota and
North Dakota , but the rainfall is more than adequate in
most years to raise the crop without irrigation. And the cold
winters allow the crop to be piled outdoors and stored for up
to 200 days or more, creating
a longer processing season
that helps maximize
factory utilization.
But the world is a fiercely
competitive place when
it comes to production of
sugar and other sweeteners.
Indeed, some 110 nations
grow sugarbeets or sugarcane,
and many of them
seek to export their surplus,
even if it means dumping
sugar at prices below the
cost of production in order
to “buy” market share.
About 25 percent of the
world’s sugar goes into foreign
trade, and virtually
every producing nation
uses some kind of tradedistorting
sugar subsidies to support their producers.
High fructose corn sweeteners also are taking an increasingly
large slice of the nation’s sweetener pie (55 percent in
2000, up from 16 percent in 1970, according to USDA). And
artificial sweeteners also jockey for their place in the food
ingredient trade.
So despite all of the Valley’s natural advantages, growers
here have their work cut out for them if they want to maintain
their market share. About 55 to 60 percent of all sugar
produced in the United States, and 90 percent of all of
America’s beet sugar, is processed and marketed through
producer-owned cooperatives. In the Red River Valley, the
nation’s largest sugar co-op, American Crystal Sugar Co.,
just celebrated its 30th anniversary.
The roots of the co-op go back to 1935, when area growers
began organizing the Red River Valley Sugarbeet Growers
Association, which ultimately purchased the privately owned
American Crystal in 1973. Today, the company markets about
18 percent of the nation’s sugar. It is often looked to as a role
model for new-generation co-ops and as a blueprint for how
farmers can buy a major processor (see sidebar).
Other U.S. producer-owned sugarbeet processing co-ops
include: Minn-Dak Farmers
Cooperative, Southern
Minnesota Beet Sugar
Cooperative, Amalgamated
Sugar, Michigan Sugar and
Western Sugar Cooperative,
the latter two having been
formed in 2002 when growers
acquired plants that
were formerly investorowned.
Legislative actions seen
as crucial to industry’s
future
Sugar producer Mark
Nyquist spent much of the
past winter in his farm shop
repairing and overhauling
cultivation and harvesting
equipment in preparation
for the 2004 growing season. Nyquist whose father served
as American Crystal’s board chairman and grandfather was a
founding member of the board has spent many another
long night in the farm office, preparing for this season by
pouring over the farm’s financial books, doing cost analysis
and budget projections, filing tax reports and doing all the
other paperwork which is now just as necessary as seed and
fertilizer to produce a crop.
During the course of this season, Nyquist will consult
closely with an agronomist from the co-op to produce the
best crop he can both in terms of tonnage and sugar content.
When harvest season rolls around in mid-October, he’ll
also coordinate closely with the co-op regarding harvest timing
and delivery. Nyquist says he takes pride in knowing the
co-op operates five efficient sugar processing plants up and
down the Valley, and that its joint marketing venture
United Sugars has an expert team of agents selling the
co-op’s sugar worldwide.
Just as important as all those co-op functions, Nyquist
says, is American Crystal’s legislative effort. The United
States has been under intense pressure in trade negotiations
to open up the domestic market to more imported sugar.
American Crystal and other co-ops and industry trade organizations
have had to go to a full-court press to make certain
that their industry’s position is represented in these talks.
The North American, Central American and Australian free
trade agreements have all been tracked closely in America’s
sugar-producing states.
Although more imported sugar is gradually being allowed
into the nation, the industry’s legislative efforts have been
generally successful in limiting these increases to manageable
levels. But Nyquist and his fellow growers say their co-op
and the industry must continue to make their voices heard.
“One stroke of the pen in Washington, and it could
potentially eliminate the sugar industry in the Valley,”
Nyquist says while walking through one of his fields. “The
world market and related political issues increasingly control
our destiny,” adds
Nyquist, who spent several
years after college as
a pit trader in the dog-eatdog
world of the Chicago
Mercantile Exchange before
returning to take over the
family farm in 1996. He still
trades part time, mostly in
the winter, but sees the
farm and sugarbeets as
his future.
Fast track deals a
major concern
David Kragnes,
who grows about
1,400 acres of sugarbeets,
wheat and barley
near Felton,
Minn., shares
Nyquist’s concerns.
“We’re worried that
we could be sacrificed
if we aren’t active legislatively,”
says
Kragnes, a board member
of both American
Crystal and United
Sugars. Fast-track trade
deals are of particular concern,
he stresses, because if
approved, they can’t be
amended by Congress.
“In this battle, we want the
export subsidies [of foreign
nations] reduced before we
reduce our border protection,”
Kragnes says. Unlike grain, sugar
has a very finite shelf life. “Sugar
has a life-span of one year,” says
Kragnes, who, like Nyquist, was
born and raised on his family farm.
“After that, it turns into brick.”
Small countries produce sugar
under labor and environmental conditions
that would never be tolerated
in the United States, Kragnes notes.
The domestic industry currently
supplies 85 percent of the nation’s
sugar, with 15 percent imported.
“By rationing up and down the level of
imports, the government has been able
to control the supply and demand and
therefore control market conditions,”
says American Crystal President and
CEO James Horvath. “They have
done a pretty good job of doing that
over the years.”
But in 2000, a glut, brought on by a
number of factors, forced the nation to
adopt a payment-in-kind (PIK) program
which American Crystal lobbied
for to remove excess
supply from the market.
American Crystal employs a
full-time lobbyist, Kevin Price,
in Washington. Although
these days his home is in the
corridors of the Capitol and its
office buildings, this native of
the Red River Valley is equally
at home in the beet fields and
knows what’s at stake for
growers in the trade talks.
“We cannot sit back and wait
for things to fall in our lap,”
says David Berg, the co-op’s
vice president for operations.
“You have to find out what the
issues will be, propose solutions
and then work like heck
to get it done.”
The PIK program is a case
in point, Berg says. “Within two weeks
of the concept being floated, Kevin
and I were in the offices at USDA of
the people who administer the program.”
With them was Earl Pomeroy,
North Dakota’s member of Congress,
who worked on the legislative authorization.
“Our efforts helped make it
(the PIK) a reality. When we see
opportunity, we are not shy about
going out and getting it done. Not just
the co-op, but the whole industry benefits
from our efforts.”
In the Australian Free Trade talks
this past winter, the United States elected
to totally exclude sugar, based on a
decision that Australia was a developed
country and therefore didn’t need any
increased access to the U.S. market.
“We were obviously very pleased with
that outcome and we believe that it
should become the template for future
trade deals,” says Horvath.
One major concern on the international
front is that if Mexico were to
switch from using sugar to high fructose
corn sweeteners in its soft drinks
(as does the United States), it would
result in a sudden surge of sugar
imports perhaps 2 million tons, or
20 percent of total U.S. consumption,
which would be allowed under
NAFTA, Horvath notes.
“We are working toward a new
agreement that sets a specific amount
of sugar that Mexico can bring into the
United States and a specific amount of
high fructose corn syrup that can go
from the United States to Mexico,”
Horvath says. “The industries are relatively
close to coming up with that
deal, from my perspective. This, of
course, will ultimately need to go to
each of the governments for negotiation
and implementation.”
Sugar factories: use ‘em or lose ‘em
One major reason for so much government
involvement in sugar production
worldwide, Berg explains, is that
once a sugar factory shuts down, it
very seldom starts up again. The cost
of retrofitting a plant that has been
idled for even a few years and the
toll that temperature and humidity can
take on a shuttered operation make
it very unlikely it will reopen successfully.
“Therefore, most countries try very
hard to keep the revenue stable to
their growers so that they produce
enough to keep the plants operating
over the long term,” Berg says. To do
this, “the 14 largest sugar-producing
countries all intervene, in one way or
another, through interest rate subsidies,
direct payments, tariffs, export
enhancements, etc.
“Relying on foreign sugar
can work for a time, but when
prices spike upwards, your
consumers will pay through
the nose, if they can buy
sugar at all. Most people here
don’t know what they pay for
sugar because the price is
affordable and stable so it’s
not an issue for most
Americans. That hasn’t always
been the case,” Berg says.
When the United States
becomes dependent on foreign
suppliers, it can become
vulnerable: think oil or coffee.
The U.S. imports nearly all of
its coffee, and those prices
periodically spike and have
climbed steadily. “When coffee
prices soar, people are
outraged; ‘How can they do that to
us?’ they ask.” But there’s not a lot
Americans can do about it, he notes.
Even though U.S. sugar policy has
maintained a stable supply at an affordable
price, “the program keeps getting
beat up, because you look at the world
price for raw sugar and see it at six
cents a pound. Domestically, it’s around
21 cents a pound. How can we justify
that? Well, the average cost to produce
sugar worldwide is 18 cents a pound;
the average selling price for the past
five years has been 8 cents a pound.
You can’t sell a product long-term for
less than half the cost of production. At
least you can’t do it unless there are
subsidies going to the producers.”
U.S. grain industry groups are often
proponents for free trade deals. So
U.S. trade negotiators have the unenviable
position of making someone
angry regardless of their stance. Other
critics of U.S. sugar policy, including
the candy and bakery industries, say
American consumers would benefit
from lower food prices if the U.S.
market was open to more imported
sugar.
“But the only way sugar can sell at
such low prices is if you are getting a
government subsidy,” Berg maintains.
“Once a producing nation meets its
domestic sugar needs, they put the
surplus on the world market at whatever
they can get for it, because
whatever they earn is gravy. It’s a
dump market that doesn’t reflect the
economics of producing it. If people
say they want 6-cent sugar, they must
realize that were it not
for the domestic sugar
supply, they would likely
be paying 18 cents to
20 cents or possibly a
lot more.”
“The domestic price
in the United States is,
in fact, in the lowest
one-third of the world,”
Horvath says. “The
United States doesn’t
export any sugar,” he
stresses, and limits
domestic producers in
order to balance supply
and demand. “The
result is that every sugar
exporting country
would like nothing
more than to get a bigger
chunk of the United
States market.”
To put the picture into perspective,
Horvath says the U.S. sugar market is
about 10 million tons, of which U.S.
growers produce 8.5 million tons. More
imported sugar, he says, would result in
lost sugarbeet acreage in America.
“By taking away [sugarbeet]
acreage...there will be more corn
planted, more soybeans planted in this
particular area, creating an oversupply
there as well. It would result in lower
prices and in more deficiency payments.
It is a serious problem.”
Co-op buys plants to
maintain acreage base
As a result of the market glut in
2000 and 2001, the 2002 Farm Bill
reinstituted a marketing allotment system
to better balance supply and
demand. In 2002, USDA set the allotment
at 7.7 million tons, raising the
bar to 8.5 million tons in 2003.
“The [sugar portion] of the 2002
Farm Bill was designed to fix the oversupply
problem,” Horvath says.
“Market allocations were established so
each of the companies in the United
States had the ability to market only a
certain amount of sugar.”
For American Crystal, that would
have meant cutting back acres by about
10 percent, which Horvath says would
have threatened the co-op’s ‘critical
mass.’ “We would have had to cut back
from 500,000 acres to 450,000 acres.
That would have increased our fixed
costs and driven down returns to our
grower-owners. So we had to look at
that as a serious situation and search
for ways to solve that.”
In part to help maintain its acreage
allotment, American Crystal in 2002
and in 2003 acquired four plants in
other parts of the nation: Moses Lake,
Wash., Sidney, Mont., Torrington,
Wyo., and Hereford, Texas. The
Torrington plant has been leased to the
new, Denver-based Western Sugar
Cooperative, while the plant in Sidney
is being operated under a wholly
owned subsidiary of American Crystal,
called Sidney Sugars Inc. The Texas
and Washington plants are being left
idle, with no plans to put them back
into production.
Nyquist says the plant acquisitions
represent a solid business strategy. “I
support the cooperative’s aggressiveness
in purchasing these other plants.
We’re not trying to push anyone out of
the market we’re just defending our
turf. To do that, we need to acquire
these plants just to keep the same share
and acreage base.”
When the sugar
market took a dive in
2000, some investors
quickly fled and a number
of plants were put
on the block. Some
other plants were
bought by producers
(such as Western Sugar
and Michigan Sugar).
“There isn’t much else
you can do with a sugar
factory; so some got
sold at fire-sale prices,”
Berg says. Since then,
the market has been
generally stable, with
producers earning reasonable
returns.
Kragnes says farmers,
with their commitment
to the long-range
future of their industry, make the ideal
party to own the processing and marketing
operations. But he says he’s
worried that talk regarding possible
changes in the co-op model could
lessen grower control of the industry.
“The bedrock of American farm
cooperatives has always been, and must
continue to be, the Capper Volstead
Act,” which gives them the power to
jointly market their crops and products.
“If you start messing with the
definition of a co-op, I fear you could
jeopardize Capper-Volstead,” Kragnes
continues. “I’m not happy with any
changes that allow large investors to
get their foot in the door and buy a
piece of our co-ops. Control follows
the money.”
No option but
to remain on guard
Giving up on the trade battle is not
an option for the U.S. sugar industry.
“It takes a lot of lobbying, and this coop
has been and will continue to be
a strong advocate for its members
on the legislative front,” Kragnes says.
So has the American Sugarbeet
Growers Association, the Red River
Valley Sugarbeet Association and a
number of other farm industry groups.
With sugarbeets grown in 14 states,
Kragnes says the industry can muster
considerable clout in the halls of
Congress.
But much as farmers might like to
think otherwise, Nyquist says he does
not believe the average American
consumer cares if their sugar is U.S.
grown or not. “They want good quality
cereal, cake mix or whatever at the
most affordable price. If those products
are made with sugar from Brazil
or Cuba, well...I’m not sure there is a
whole lot of loyalty there. I don’t
know that locally grown sugar can
command a premium.”
Nor do most consumers stop to
think what would be lost if the sugar
industry stopped providing jobs and
economic synergies that boost the
standard of living throughout the
Upper Midwest and other regions
where it is grown, he says.
The impact of losing sugar would
ripple far beyond the sugar industry if
beet farmers are forced to shift to
other crops, such as grains and potatoes.
The University of Idaho did a
study in 2001 which projected that in
just Idaho, if the 200,000-plus acres of
sugarbeets were switched to potatoes,
growers of the latter crop would lose
$105 million annually.
American Crystal alone has an
annual economic impact of over $1.5
billion in the communities where its
members and employees live and
work.
The multiplier effect of actual dollars
and jobs generated by the nation’s farm
economy is often estimated at a factor
of seven, and some have estimated that
20 percent of the nation’s workforce is
involved in the food and fiber system,
ranging from production through processing,
distribution and retailing.
Nyquist says his basic outlook
remains “cautiously optimistic.” That
was not the case in 2000, when sugarbeet
payments fell to $32-$36 per ton
and margins were near breakeven levels
for most producers. “I was not very
optimistic then at all. There was real
cause for concern.
“Despite all of our natural advantages,
it is not easy to compete against
third world countries with labor costs
that are a small fraction of ours and no
environmental standards,” he says.
“We can’t go down to their standards,
and it’s awfully hard to bring them up
to ours. So through their co-ops,
growers must remain vigilant.”
