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Big Sugar

BY James McNair
by James McNair on 9/23/00.

Like corn in Iowa, sugar cane grows tall, thick and green as money on the tamed swampland south of Lake Okeechobee.

Broken up occasionally by fields of sod, rice or winter vegetables, the nearly infinite expanse of sugar cane takes root naturally in the area's rich, black soil. As sugar goes, so go the towns of Belle Glade, Pahokee, South Bay and Clewiston. Were it not for the sugar crop, a livelihood credited with generating $2.1 billion a year toward the South Florida economy and 33,000 jobs, the lake towns would be left with grass farms, cattle ranches, fish camps and two state prisons.

Serene as the setting might seem, Florida's 425,000-acre sugar patch is tense with turmoil.

On Aug. 31, two of Florida's three big sugar processors - Florida Crystals and the Florida Sugar Cane Growers Cooperative - forfeited $17 million worth of raw sugar to the government rather than pay back federal crop loans with cash. If market conditions don't improve by Sept. 30, U.S. Sugar Corp. will be joining its brethren in surrendering a combined $141 million in collateralized sugar. Expecting the worst, Big Sugar laid off 327 employees - 9 percent of its workforce - on Sept. 8.

The forfeitures mean that, for the first time in 15 years, American taxpayers are footing a hefty bill for the federal program of propping up sugar prices and restricting imports. Those who oppose the program smell an opportunity to move to a more free-market policy.

"We think we're in a good position to take a crack at it next year," said Martin Baker, press secretary to U.S. Rep. Dan Miller, an anti-sugar Republican from Bradenton. Miller and other Congress members have failed year after year to gut the sugar program.

Florida's cane millers aren't the only culprits in dumping sugar into federal coffers. Although a failure to pay back $158 million would be big, sugar beet refiners in midwestern and western states stand to renege on a much bigger scale. Beet refiners have already forfeited $44 million in sugar collateral. More than $251 million in beet loans come due next Saturday.

Sen. Richard Lugar, chairman of the U.S. Senate's Agriculture, Nutrition and Forestry Committee, noted in July that the sugar program is becoming "increasingly unmanageable."

"The mid-session review projects that the current program will cost taxpayers over $1 billion and result in the accumulation of over 5 billion pounds of sugar in government inventory between now and 2005," Lugar said. "We can no longer permit this program to continue on this indefensible path." LOSING SITUATION It isn't a good time to be in the sugar business.

In the United States, raw sugar is selling for about 181/2 cents a pound. The problem with that price is that sugar mills owe the federal Commodity Credit Corp. 191/2 cents to produce and ship that pound of sugar. The CCC bankrolls about one tenth of Florida's sugar crop.

In the mid-1990s, U.S. prices ranged between 21 and 24 cents a pound, and cane millers and beet refiners repaid their loans. But when the Farm Bill of 1996 was signed into law, the profitability of sugar began to decline.

The 1996 law was also known as the Freedom to Farm Act. It stripped away some of the programs that insulated farmers from bad markets, such as payments for idling land and for not producing certain commodities. In exchange, it gave farmers more leeway in what they could produce.

As markets soured for grains such as wheat and corn, many midwestern farmers turned to a commodity that was still protected by price supports - sugar beets. Consequently, beet growers went on a tear, upping production four straight years and hitting a record crop in the federal fiscal year ending Sept. 30. All the while, sugar output from cane was breaking its own records.

In agriculture, too much of a good thing can be disastrous, and the surge in sugar caused inventories to rise and prices to fall. In February, July and August, the spot futures price for a pound of domestic sugar dropped below 17 cents. By Friday's market close, the price had crept back up over 191/4 cents, still not high enough to forestall another wave of forfeitures.

"Unless something happens to increase the price of sugar above the range it's been in the last several months, we're going to have to seriously consider turning that sugar over to the government," said U.S. Sugar spokeswoman Judy Sanchez.

U.S. Sugar is Florida's biggest sugar producer. It has more than $32 million in loans due Sept. 30.

The U.S. Agriculture Department took two unusual steps this summer to boost sugar prices. First it bought $54 million worth of sugar on the open market, which didn't faze prices at all. Then it offered some of its surplus sugar to beet farmers in return for taking acreage out of production. About 100,000 acres were idled, and prices returned to the 18 cent level.


George Wedgworth, president of the Florida Sugar Cane Growers Cooperative in Belle Glade, is bracing for a second round of forfeitures. If it happens, the co-op will have met its $56 million loan obligation in 2000 by ceding title to 140,000 tons of sugar. The co-op will be responsible for storing the sugar. It is building a warehouse just for the occasion.

Fifty-five sugar cane growers belong to the co-op, including subsidiaries of U.S. Sugar and Florida Crystals, which is owned by the Fanjul family of Palm Beach. The co-op acts as a harvesting, milling, refining and marketing arm for the growers. At the end of each year, it disburses profits in the form of dividends.

Wedgworth said the co-op will have to be more efficient than ever in the coming year. Its proposed budget calls for a slight increase, but total salaries will be lower, primarily because of departing - not laid-off - employees, he said.

"Our projections are that the return on investment for the year we are currently in will be the lowest that our growers have had in probably three decades," Wedgworth said. "The coming year looks pretty dismal. I think we're in for several months of poor prices."

Co-op member John Hundley Jr. knows all about the paucity of profit in sugar. His family's company, Hundley Farms, is a heavily diversified operation with sugar cane, sod, rice and vegetables in Palm Beach County; citrus and cattle in Brevard County, and cotton, peanuts and vegetables in southwest Georgia. His sugar crop, though, isn't carrying its weight.

"In times like 1999, we made four times the profit on sweet corn than we were making on sugar," said Hundley, 32. "This year I think we'll be lucky to break even on sugar cane."

Unlike other crops, sugar cane is planted and harvested, then regrows for up to five years of production. As a result, farmers don't decide to plant sugar cane - or not plant it - in concert with market undulations like, say, corn or snap beans. Moreover, sugar growers tend to make longer-term commitments and seldom sway from that view in the face of marginal prices, threats to the sugar program or bad weather.

Hundley is one of those in for the long haul. He said the low prices could eventually force him to cut spending on equipment, chemicals and fertilizer, but not yet. Nor does he foresee having to take any drastic measures, in part because the company carries no debt and is doing well in cattle and sod.

Still, Hundley regrets that the co-op didn't satisfy its federal crop loans with cash.

"Forfeiting sugar is not something we want to do. No one wants to say we're going to grow this crop because we can forfeit it," Hundley said. "Obviously our intent is to sell that sugar. But at current prices, it's a no-brainer."


At the moment, Hundley's portion of the forfeited sugar is housed in a co-op warehouse the size of a Boeing 747 hangar. The yellow-brown sugar is piled nearly 50 feet high and is pushed around by front-end loaders that seem like Tonka toys. Within a week, American taxpayers may own enough co-op sugar to fill the warehouse.

Florida Crystals, the umbrella name for the Fanjuls' Okeelanta, Osceola, Atlantic and Kloster Farms operations, isn't conceding that it will forfeit 73,000 tons of sugar this week instead of paying off $26 million in crop loans with cash. It doesn't expect to be laying off any of its 3,000 employees.

Jorge Dominicis, a spokesman for the Fanjuls, said the company is content not to tinker with its business plan. Nonetheless, the White House-connected Fanjuls plan to see that U.S. farm policy is changed back to its liking.

"I think it's obvious that Freedom to Farm didn't work out like everybody hoped," Dominicis said. "We're going to be one of the many voices that's going to advocate a better policy."

Precisely the words of the people who want Congress to dismantle the sugar program.

"We've argued all along that this program long ago outlived its usefulness," said Art Jaeger, assistant director of the Consumer Federation of America in Washington, D.C. "It's been increasingly hard for USDA to hold the thing together, and that's what's caused all these problems."


Even as the Clinton administration is trying to deal with sugar surpluses and overproduction, it has a major fire to put out on the sugar import front. Mexico contends that NAFTA gives it the right to sell more than 500,000 tons of sugar in the United States - where prices are double that of the world price. The government contends that the correct amount for the federal year beginning Oct. 1 is 116,000 tons.

American sugar producers blame Mexico for part of their price woes. Jaeger doesn't buy the argument that U.S. prices are low.

"If the price is so low, why are all these people switching from corn and wheat to sugar beets?" Jaeger said. "That low price doesn't seem to be discouraging anyone from growing sugar, which just perpetuates the problem. Government bends over backwards to insulate growers from the market."

That position was echoed by Patrick Burns, environmental policy director for Citizens for a Sound Economy, a Washington think tank.

"This is an ancient program that should have been abolished long ago. We're talking 1930s Roosevelt-era socialism," Burns said.

"It's nice to call it agricultural subsidies, but this is corporate welfare," he added.