Continued: Looking to add some sugar to fuel tanks

Ethanol plants across the country may soon sprinkle sugar on their mostly corn diets, thanks to free trade and Mexico.

It's one of the finer points buried deep in the sprawling farm bill legislation on Capitol Hill that may pass as soon as this week, and it's a point with significant importance for state farmers, the largest group of sugar beet producers in the nation.

The government-supported market controls that prevent cheap imported sugar from collapsing the U.S. market have come under threat this year. The final provisions of the North American Free Trade Agreement went into effect Jan. 1, removing all barriers between the sugar industries here and in Mexico.

No one knows how much more sugar will come north -- or even whether growers in Mexico will use the unrestricted access -- but the possibility has so alarmed the domestic sugar beet industry that it sought an escape clause. It found it in ethanol.

The farm bill provision mandates the use of sugar for ethanol each year in an amount equal to the sugar imports that come in above and beyond U.S. food consumption needs, shielding the domestic sugar industry from dumping by Mexico. It would require the government to buy excess sugar and then sell it at a loss to ethanol plants.

"We admit the fact that this is going to create a cost," said Nick Sinner, executive director of the Red River Valley Sugarbeet Growers Association.

Early estimates on that cost: about $1 billion through 2017, according to the Congressional Budget Office. Other parts of the world already use different forms of sugar to produce ethanol, most notably Brazil, which became energy independent two years ago, producing ethanol from sugar cane. But sugar wouldn't amount to a major source of ethanol for this country, with most estimates predicting a low-single-digit percentage of total U.S. ethanol production from sugar farmers.

The ethanol provision is supported by U.S. Rep. Collin Peterson, chairman of the House Agriculture Committee and the representative from Minnesota's Seventh District -- sugar beet territory.

And though the Bush administration has hinted that it might veto any provision that calls for deflecting imported sugar into ethanol, Peterson said he doubts any sugar provisions will provoke a veto.

"I would be very surprised," the Democrat said Thursday in a call with reporters shortly after the first meeting of the farm bill conference committee. "I don't think that's a consideration that anyone has paid much attention to."

Two additional provisions in the proposed bill would further support domestic sugar farmers. One calls for reserving 85 percent of U.S. market share for the domestic industry. Imports currently account for about 20 percent of U.S. sugar consumption.

A second measure calls for an increase -- almost 3 percent in the House version of the bill, and 6 to 7 percent in the Senate version -- of the 22.9 cents per pound loan rate that the government pays farmers under the sugar program. A legislative effort to eliminate both provisions failed last summer on a 282-144 vote in the House.

Critics of the sugar program say it props up sugar prices at rates higher than the world price, with consumers paying more for candy and soda as a result. The Government Accountability Office says the cost of the sugar program to consumers and food companies amounts to $1.9 billion annually.

The industry says that sugar prices here compare favorably with those in other developed nations, which also use subsidies and tariffs to control prices. And the average price of U.S. sugar, when adjusted for inflation, has fallen in recent years: Sugar today costs about 15 cents per pound less than it did 20 years ago, according to Bureau of Labor Statistics data.

Sugar-industry supporters also point out that the price of candy and soda wouldn't change by much if sugar was cheaper, as sweeteners typically account for a small portion of the final cost of a consumer-packaged good.

Another reason why consumers would likely not see cheaper sugar under free trade rules, according to R. Dennis Olson, a sugar policy expert at the Minneapolis-based Institute for Agriculture and Trade Policy, is greed: Candy and food companies would simply take more profit if their sugar costs fell, he said, pointing to behavior patterns common in other food industries.

Imports account for more sugar consumption in the United States today than five years ago, but much of that growth has come from Mexico and Central American countries covered by new trade agreements. The growth of Mexican shipments to this country alone has been dramatic, from about 7,300 tons 15 years ago to an anticipated 475,000 tons this year, according to the U.S. Department of Agriculture.

But Mexico's growth has come on the backs of other countries. "If you increase imports from one country, you have to take away from others," said Paul Ryberg, president of the International Sugar Trade Coalition. His group represents growers in Africa and the Caribbean who have quotas to supply 1.1 million tons annually to the United States, but have seen their market share fall because of the free trade agreements. About 40 countries in all have quotas to sell sugar here, accounting for about 20 percent of all sugar consumed domestically.

Farmers have watched that number climb in recent years, particularly after Hurricane Katrina in 2005. The domestic high-fructose corn syrup industry typically exports huge volumes of syrup to Mexico, displacing Mexican sugar and leading to higher exports of Mexican sugar back here.

"The immediate future is a little less ominous, because the price of corn has made the price of high-fructose corn syrup go up," said David Berg, president and CEO of American Crystal Sugar Co., the Moorhead, Minn.-based cooperative.

The state's three sugar beet cooperatives have fought lately to keep their members focused on sugar beets, traditionally the state's most profitable crop, as prices for corn, wheat and soybeans have soared along with demand. American Crystal's annual shareholders meeting this month revealed that a lot of farmers were thinking about those prices and about whether they could plant crops other than sugar beets, though they are required under contract to grow a certain amount of sugar beets.

Berg said the cooperative plans a 15 to 19 percent drop in production this year, after two years of bumper crops, which should allow its 3,000 members across 850 farms more land to grow some of the more-profitable crops.

"People understand that this too is cyclical and sugar beets have been good over the years and will be stable for years to come," said Sinner, of the Red River Valley Sugarbeet Growers Association, whose members own American Crystal.

The farm bill, which has already consumed more months of debate than originally planned, faces a Friday deadline for passage before old laws take effect. "If we get to Thursday or Friday and we don't have a resolution, I don't know what will happen," Peterson said. "I have no backup strategy."

Matt McKinney • 612-673-7329