MOORHEAD, Minn.-American Crystal Sugar will default on a government loan of $71.2 million under a program that provides relief when a glut of sugar depresses prices.
David Berg, president and chief executive officer of American Crystal Sugar, said forfeiting the sugar put up as collateral for the loan was the best option given very low sugar prices.
"Everything we have under loan we do intend to forfeit," Berg said. "Today it's about the best place we have to sell sugar."
The loans end with the crop year, which concluded Oct. 1.
The forfeiture, which is the result of sugar being cheaper and more plentiful than at any time in the past decade, is under a U.S. Department of Agriculture loan program.
Moorhead-based American Crystal Sugar holds about one-fifth of the $355 million in loans held by sugar processors at risk of defaulting.
The regional loan rate for sugar, for American Crystal and other processors in the area, is around 23 cents a pound. The market price for raw sugar is about 21½ cents a pound.
Defaulting on the loan, which is a way the government supports the price of sugar, does not present a financial "hit" for American Crystal, Berg said.
"Actually, it's beneficial to our financial health," he said. "This is the way the sugar program is intended to work."
Forfeited sugar will remain in warehouses until the government decides what to do with it.
Despite the forfeiture, American Crystal soon is beginning its annual sugar harvest as normal, Berg said, and he does not expect the current sugar supply glut will mean idling plants.
The loan forfeiture is unusual but not unprecedented for American Crystal. It defaulted on government support loans in the 1990s during similar market conditions, Berg said.
"Part of the cycle, I guess," he said.
The price of sugar has plunged because of high domestic production and an influx of sugar imported from Mexico, entering the U.S. at an all-time high.
Berg was traveling Monday to Washington for another round of talks as a member of the sugar industry's Mexico Task Force.
Policymakers seem to be waking up to the unintended problems the free trade pact with Mexico has caused to the domestic sugar industry, Berg said.
"I have the feeling it's starting to get some traction," he said. "It is costing the government some money."
Ordinarily, the government supports sugar prices indirectly through sugar import quotas, so there is no direct taxpayer subsidy. Because of the North American Free Trade Act, however, that doesn't apply to Mexican sugar.
But when the government must step in and buy sugar through support loan defaults, a direct subsidy results.
An industry analyst predicts that sugar processing profits over the next five years will see lower annual growth rates than in the previous five years.
IBISWorld, which tracks the sugar industry, predicts that annual growth for the $9.9 billion sugar processing industry will grow at an annual average of 1.2 percent from 2013 through 2018.
That compares to a 4.5 percent average annual growth from 2008 to 2013, according to IBISWorld.
The industry has benefited from increased demand since 2009, although demand has softened.
American Crystal is the leading American sugar processor, with 15.1 percent of the market, IBISWorld's rankings show.
It is owned by about 3,000 shareholder growers who plant about 500,000 acres of sugar beets in North Dakota and Minnesota.