A sour economic outlook awaits sugarbeet farmers as the Montana harvest begins with domestic sugar prices at a 30-year low.
Sugar prices have fallen to levels not seen since the 1980s because of oversupply. Processors, including Western Sugar Cooperative, have begun defaulting on government operating loans, surrendering collateral sugar as payment instead of cash.
In south-central Montana and northern Wyoming, the sugar industry contributes about $70 million a year to the economy.
Another $257 million in federal operating loans comes due at month's end. The downturn comes after record sugar prices were set just a few years ago.
"Three or four or five years ago we had about two years of poor sugar cane harvest around the world and at the same time the European Union decided that they could no longer support production as they had in the past. We ended up with low sugar production and prices went higher," said Gary Brester, Montana State University economist. "When you have record high prices people want to participate more. We had more normal weather. Brazil started producing more sugar than ethanol and supply increased."
Current sugar prices are half of what they were two years ago, said Phillip Hayes of the American Sugar Alliance farm group. The price has fallen 30 percent in just the last year.
Global oversupply is part of the problem, Hayes said, but the biggest challenge for U.S. farmers is sugar produced in Mexico.
The terms of the North American Free Trade Agreement allow Mexican sugar to flow freely into the United States, whereas imports from non-NAFTA countries are regulated. Mexican sugar production has more then doubled in recent years. Much of that bumper crop is being exported to the United States.
"We got here because of Mexico, plain and simple," Hayes said. "The Mexican sugar industry has been setting quite a few dubious records lately. Mexico has sent a record amount of sugar to the United States, 2.1 million tons, compared to 1.1 million tons last year. Before 2008 it was about 60,000 tons a year."
As a result of the sugar glut, the U.S. Department of Agriculture has been accepting sugar from U.S. processors to cover government-backed operating loans. Terms for the sugar buy are spelled out in the federal farm bill, which guarantees farmers a set minimum price for sugar, paid for by the USDA, whenever market prices fall below 21 cents a pound and it appears producer repayment of operating loans is in jeopardy.
In August, the USDA accepted 83,000 tons of sugar from U.S. producers, with sugar used as loan collateral. Because the USDA accepted the sugar at above-market value, the government will have to absorb the difference of what's still owed on the loans, about $34 million. Similar transactions are expected to occur repeatedly until the market glut is eased.
The USDA then sells the forfeited sugar at a loss to ethanol producers and to sugar refineries who take the sugar in trade at prices significantly lower than they might pay for imported product. In theory, the USDA's intervention reduces the sugar glut both by keeping imports out of refineries and by finding a new market-ethanol-for excess sugar.
It's been 12 years since the USDA has taken sugar as payment. Farm groups say the program is much cheaper for taxpayers than annual farm subsidies.
However the food and beverage industry argues that U.S. sugar policy means a constant loss for taxpayers who as consumers pay sugar prices propped up by the USDA regulation.
Sugar farmers argue that all sugar producing countries have market distorting programs and that the United States shouldn't change its policy unless other countries do the same.