(Editor’s note: A story similar to the one below was published in the June 29 edition of the Agri-Pulse newsletter. That story included a reference to retail prices for refined sugar. That reference has been removed in the following story because those prices do not reflect what refiners are paid for their product. Agri-Pulse will publish a similar clarification in its July 6 newsletter.)

WASHINGTON, July 29, 2016 -The U.S. government is trying to renegotiate an import agreement with Mexico in order to staunch a flow of sugar into the U.S. that’s hurting U.S. refiners, sources tell Agri-Pulse

“As is the case with all trade agreements, implementation problems have appeared after the agreements were signed,” American Sugar Alliance spokesman Phillip Hayes said. “There are several implementation issues, including the continued dumping of subsidized Mexican sugar, suppressed refined sugar prices, and inadequate supplies of raw sugar going to U.S. refiners.  It remains our hope that the governments of the United States and Mexico can determine how to improve operation of the suspension agreement.” 

The U.S. Commerce Department ruled in September that Mexico was subsidizing its sugar imports, allowing exporters to dump product into the U.S. at 40 percent below market prices.  In order to avoid U.S. retaliatory tariffs, Mexico signed onto a “suspension agreement” that would limit Mexican shipments. 

The agreement worked in the sense that overall Mexican sugar exports dropped, but it failed in another way. Mexico began exporting more sugar that could go straight to the U.S. market or to melt houses, bypassing U.S. refiners and cutting them out of the process and profits. Melt houses are able to take sugar that is not fully refined, liquefy it and then run it through a fairly basic processing to make it suitable for human consumption.

The results have been shrinking margins for U.S. refiners, according to sources who asked not to be named because of the sensitive nature of negotiations now being held between the U.S. and Mexico.

“It’s creating a problem for U.S. cane refiners that don’t get enough raw sugar,” one source said. “The consequences you can see in the market is that raw (sugar) prices have gone up dramatically because cane refiners are competing for relatively scarce raw cane supplies. And the refined price has been dropping sharply since (the U.S. market) has been inundated with Mexican sugar.”  In other words, refiners are getting hit twice – first by a lack of available raw sugar to refine and then by lower refined sugar prices.

“The U.S. government regards that as a problem, so they’re looking at ways to make some modifications to the suspension agreement,” another source said.

Hayes said the American Sugar Alliance believes that continued Mexican dumping is the primary reason behind the failure of the suspension agreement. 

“By far, the biggest issue in the sugar market right now is the fact that Mexico is continuing to dump sugar, is starving cane refiners of raw sugar, and is creating an oversupply of refined sugar,” he said. “The specific requirements set for Mexican sugar in the recent TRQ (tariff rate quota) increase are an attempt by the USDA to get Mexico to sell adequate raw sugar to U.S. refineries. The suspension agreements are not working as intended and this problem must be resolved.”

The talks between the U.S. and Mexico to renegotiate the amount and type of sugar Mexico can export under the suspension agreement are well underway, government and industry sources say.

One government official said Mexico is expected to agree to U.S. demands out of fear that the suspension agreement could “blow up.” If that happened, Mexico knows it could face duties of up to 70 percent in retaliation based on the Commerce ruling that the country was dumping subsidized product into the U.S.  “What is at risk here is the suspension agreement itself,” an industry source said. “If either government sees it as not working then it can be terminated.”

It may be unprecedented to try to rewrite a trade deal so soon after it was implemented, but U.S. refiners are hurting, industry sources say.

USDA’s most recent available data back that up. The average May price for raw sugar in the U.S. was 27.26 cents a pound, about an 11 percent increase from 24.61 cents a pound in May 2015. The average price for refined sugar was 30 cents in May, a drop from 34.3 cents a year ago.

There is, however, another factor that’s pushing up raw cane prices and driving demand for Mexican product, sources say – the controversy over genetically modified food. Nearly all of the beet sugar produced in the U.S. comes from biotech seeds and U.S. companies including Hershey’s, Dannon and Ben and Jerry’s have pledged to avoid GMO sugarbeets. Mexico, on the other hand, only produces cane sugar and none of it is genetically modified. 

“There seems to be a switch in demand from GMO beet to nonGMO cane and so demand for cane is up,” a source said. 

The demand situation came to a head in May when the USDA increased its tariff rate quota to allow in an extra 200,000 short tons of cane sugar imports. USDA said it was forced to do so because food companies are shunning GMO beet sugar.

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Of the extra 200,000 tons of sugar allowed in, about 140,000 tons came from World Trade Organization countries that hold quotas. The other 60,000 tons came from Mexico.

Back in May, Agriculture Secretary Tom Vilsack laid some of the blame on the need for more cane sugar imports on the Senate because it could not agree on federal legislation to preempt state laws seeking to require labels on food that contain biotech ingredients. 

There has been progress since then, however. Senate Agriculture Chairman Pat Roberts and ranking Democrat Debbie Stabenow reached agreement on a bill last week and the farming sector is hoping the Senate will vote on the deal this week.

ASA’s Hayes rejected the notion that concerns over GMO beet sugar have had an impact on demand for cane sugar from Mexico. 

“Claims that there have been big shifts in the sugar market due to changes in consumer preferences are not supported by any data that we know about,” he said.