NEW YORK (Dow Jones)--U.S. sugar producers fear that the proposed U.S.-Central American Free Trade Agreement will be approved by Congress this spring and that an influx of foreign sugar will hurt their livelihoods as soon as next year. Cafta will likely be up for a vote in April or May and could go into effect as soon as next January.

Cafta would lower tariffs between the U.S. and Costa Rica, Nicaragua, El Salvador, Guatemala, Honduras and the Dominican Republic.

Sugar beet growers outside the Red River Valley stand to suffer the most under Cafta, industry members said.

"If Cafta is approved, we'll be disappointed and the sugar industry will be in a contest to see who survives in a low-price environment," said Jim Horvath, president of American Crystal Sugar Co. (ACS.Xx) in Moorhead, Minn. "Whether it will be approved is too close to call. There don't seem to be enough votes in favor at the moment."

U.S. Imports Could Rise 110,000 Tons Yearly

Cafta could bring in another 110,000 tons of sugar annually to the U.S., in addition to the Mexican sugar that may come in under the North American Free Trade Agreement or Nafta, Horvath said.

The Mexican and U.S. sugar and sweetener industries have been trying to resolve a sweetener dispute between the two nations under Nafta.

The entry of extra foreign sugar could trigger the marketing allocation system under the 2002 Farm Bill, and result in the release of some of the more than 500,000 tons of government-stored sugar, Horvath said.

The U.S. sugar program and its marketing allotments can only operate at no expense to taxpayers if imports are kept below a certain level. Domestic support is based on limiting imports from government-subsidized and low-cost foreign producers.

Cafta may set a template for other trade deals, like the proposed U.S.-Thailand free trade agreement, Horvath said. "Thailand exports 5 million tons a year now, which is half of U.S. consumption," Horvath observed.

If Cafta is approved in May, it would likely go into effect on Jan. 1, 2006. The back months or the 2006 contracts in the U.S. domestic sugar (No. 14) futures on the New York Board of Trade are already a little weaker than the 2005 contracts, reflecting concerns that Cafta will be passed, industry members said.

Beet Growers Outside Red River Valley At Greatest Risk

If Cafta is approved, the highest-cost U.S. growers, mainly beet producers in western Colorado, Nebraska and Montana, will be hurt the most initially, said Michael Swanson, agricultural economist with Wells Fargo Bank in Minneapolis. Beet growers in the Red River Valley, encompassing Minnesota and the Dakotas, and Florida and Louisiana cane growers operate at lower costs, while the high-fructose corn sweetener industry is the least-cost U.S. sweetener producer, he observed.

Under Cafta, the U.S. government will likely have a "phase-in period" for the pact, softening the blow to growers as was done under Nafta, Swanson said. In addition, the government may give a one-time compensation payment to sugar growers, like those given to tobacco producers after termination of the federal tobacco program in 2002.

Horvath of American Crystal disputed those prospects, however, saying that a phase-in period wasn't agreed to in the Cafta negotiations and that there is no authorization for a compensation payment.

Vertically Integrated Florida Growers In Strongest Position

The entry of an additional 100,000 tons of foreign sugar yearly if Cafta is approved should result in a 3%-4% decline in U.S. grower prices, said Andrew Schmitz, food and resource economics professor at the University of Florida. His forecast is based on economic modeling done in 2004 with his son, Troy Schmitz, a professor at Arizona State University. If an extra 500,000 tons of foreign sugar enters a year, U.S. grower prices should fall 10%-12%.

Andrew Schmitz said that Florida growers are the most vertically integrated of all U.S. sugar producers and might not suffer as much under Cafta as other U.S. cane and beet producers.

Three giant Florida growers - Flo-Sun Inc., US Sugar Corp. and Sugar Cane Growers Cooperative of Florida - all process the sugar they produce, Schmitz observed. Some of their refining capacity can probably be used for imported raws.

While Cafta's approval would trim U.S. sugar prices and hurt growers, any domestic price projections at this point are really just educated guesses, industry members said.

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