Friday, March 7, 2008

"Sour times for sugar sector"

(Published March 8, 2008 in The Guadalajara Reporter)

January 1, 2008 was a distempering milestone for the Mexican sugar industry. After years of restricted trade between the U.S. and Mexico per NAFTA laws negotiated 14 years ago, tariffs and other regulations were finally phased out and the sugar market, as well as other agricultural sectors, was left open to the caprice of the global market.

The bouleversement in the agricultural markets has not sat well with groups on many ends of the business spectrum; Mexican farmers spent the end of January marching the same trajectory Pancho Villa took during his 1914 march into Mexico City, ending in the Zocalo of Mexico City where they burned tractors in protest.

The farmers insisted they would not be able to compete with highly subsidized U.S. growers and that th
e Mexican government has not done enough to protect them. Despite efforts on both sides of the border to maintain the previous restrictions, a bid to renegotiate trade laws was dropped in early February.

The tariff eliminations catch sugar producers between a rock and hard place. Take the case
of Grupo Azucarero Mexico (GAM). Located here in Jalisco, it’s the second largest sugar producer in the country, turning out eight percent of the nation’s sugar from their four mills, but fast losing ground to international sugar producers.

Hilda Alvarez, a head accountant working in GAM’s administrative offices in Zapopan, explained that NAFTA’s recent opening of agricultural trade is one impetus edging GAM downward; Mexican sugar simply can’t compete with cheap U.S. imports. In fact, Mexico will boast a 500,000-ton surplus this year and produces more than enough to cover domestic demand, but still imports cheaper sugar so as not to sell below production costs.

But GAM knew long ago tha
t NAFTA would have a deep effect, said Alvarez, and planned ahead for this day. “To prepare us, our CEO made trade with sugar companies in Brazil in order to share information about costs of production.”

It is not NAFTA that is most affecting GAM’s production costs, Alvarez believes, but the unions that represent sugar mill workers.
Alvarez said the sugar unions’ power and demands have become too strong. Because the growing and production period divide the year in half, a union’s refusal to work during the essential processing time will cost the company a great deal of time and energy.

In November 2006, union workers at Jalisco’s largest mill in Tala went on strike: over 1,000 union members in the milltown and thousands more nationwide petitioned for the consistent payment of their workers’ pension plans after retirement. The group demanded 3,000 retired workers be caught up for stopped payments as far back as 1998. They claimed industrialists were ignoring agreements that provide for fair pay.

The strike ended within a week, but another threatened in January of 2007 when the union claimed the issues unresolved. The strikes put 1,500 tons of sugar produced per day at risk. To an estimated 2.5 million people employed in the sugar industry, guarantee of payment has become increasingly important in the weakening market.

Sugarcane farmers also stopped deliveries to mills last December to protest their falling payment, which is based on the 50-kilo load’s selling price in the Mexico City market. Alvarez said that last year in January and February, a 50-kilo load of sugarcane, the raw product the company buys to process, cost 350 pesos. Today it costs around 270 pesos and the price is dropping.

The government created a plan last year to bolster sugarcane prices to maintain fair wages for farmers. But the plan came into effect at the beginning of this year, the same time as trade restrictions were lifted by NAFTA.

Consequently, the dawning of 2008 was a double blow for GAM. The price for raw materials suddenly rose at the same time they were forced to sell at lower prices to compete with international markets.

The only players that appear to benefit from the sugar market’s surplus are industrial consumers, soft drink or baked goods companies who can buy the sugar at its domestic crisis price or buy on the international market, often from Brazil, a country that faces little union pressure and whose climate is conducive to a longer, more productive growing period than Mexico.

“Those companies can buy sugar at lower prices than before, but the consumer doesn’t know,” Alvarez said. “The last consumer has not noticed any changes in the price of products they buy, although the sugar has lower prices than ever.”

Presented with a multilateral industrial nightmare, GAM is working to recover its losses.
“We’re looking for opportunities to lower costs. One option is in energy,” said Alvarez. The mills are able to generate ethanol from reprocessed bagazo, the leftover chaff from sugarcane; producers are currently investigating the costs.

Alvarez does not project company layoffs, at least for the time being, and said it would most likely affect the administrative area of the company, not production workers.
It is not clear if the sugar market will in fact fall into the chaos many analysts have projected this year, but Alvarez expressed fear that it would continue along its descending path if not more strictly regulated.

“The government needs to do something,” she said. “If prices keep getting lower, no one will be able to support this.”