Testimony of James Horvath to the

Senate Committee on Agriculture, Nutrition and Forestry

Hearing on U.S. Sugar Policy

July 26, 2000

Introduction

Mr. Chairman, Ranking Member Harkin, and Members of the Committee, thank you for the opportunity to appear before you today.

My name is Jim Horvath, and I am President and CEO of American Crystal Sugar Company based in Moorhead, Minnesota. American Crystal is the largest sugarbeet company in the United States, with five factories in the Red River Valley of Minnesota and North Dakota. As a cooperative, we are owned by 3,000 farmer-shareholders and we have 1,500 employees. American Crystal produces about fifteen percent of the nation's sugar, and through our marketing arm, United Sugars Corporation, we and our partners, MinnDak Farmers Cooperative, Southern Minnesota Beet Sugar Cooperative, and U.S. Sugar Corporation, sell one-fourth of the refined sugar in the United States.

Doing What's Right

I appreciate the opportunity to testify today because it gives the sugar industry an opportunity to explain our perspective on U.S. sugar policy. Too often the public only hears the sound bites of criticism from our opponents. As is typical, those sound bites only scratch the surface of what the true facts are about sugar policy. And those sound bites often times place blame on sugar farmers, claiming they have done so many things wrong in recent years. So I'd like to start by giving a very brief history of the sugarbeet industry in the Red River Valley and what growers have actually done right because it builds to an understanding of sugar policy today that I believe will be helpful to you and the committee.

A little over 25 years ago, sugarbeet growers in the Red River Valley were faced with a challenge. American Crystal Sugar Company, then a Denver-based corporation, was seriously neglecting the factories they owned in the Red River Valley and was threatening to shut them down. The growers could either stop growing sugarbeets and let the industry die or take tremendous risk, purchase the company, and invest in its efficiency and in their own future. The growers decided to take the challenge. They pooled their resources, bought the company, and kept alive the ability to raise sugarbeets and the thousands of jobs necessary to grow and harvest sugarbeets, and to run the factories. The growers had a vision about the future they wanted, they made logical business decisions, and they took tremendous risks. They did all this because they cared about this industry, their livelihood, and their communities.

Where did that logic and vision lead them? It led them to becoming the most efficient sugarbeet growing and processing region in the world. Through study after study, the sugarbeet industry in the Red River Valley is shown to be the lowest cost producer of beet sugar in the world. We've achieved this because we've done the best with what nature gave us: good land, a favorable growing season, and cold winters. It's value-added agriculture at its best. From the field to the factory to the food aisle, we constantly seek the precision and efficiencies necessary to compete in the marketplace.

American Crystal growers don't just grow the sugarbeets. As owners of the company, they analyze, understand, and contribute advice on all aspects of the company, from growing to processing, to transportation, to financing, and to sales and marketing.

Sugarbeet growers also take care of the environment. As a company we constantly seek new methods to lessen agricultural inputs, not just to lower growers' costs but to produce higher quality sugarbeets and to care for our soil and water resources. In fact, the U.S. Environmental Protection Agency, in its 1998 study titled "Food Production and Environmental Stewardship" singled out with praise the work we at American Crystal Sugar have done to combine company efficiencies with environmental protection. We're proud of that record. In addition, we invest millions of dollars annually in environmental upgrades to ensure that the communities in which we operate are clean, safe, and pleasant.

Finally, American Crystal growers support the regional economy. They provide thousands of jobs and contribute $2.3 billion in annual economic activity to Minnesota and North Dakota. Communities large and small across the region rely heavily on the sugarbeet industry to support businesses, schools, and essential services. (Source: NDSU study, May, 1998)

Mr. Chairman, these are just some of the things sugarbeet growers have done right. I would ask that you remember these as I discuss sugar policy concerns.

Sugar Policy Today

The subject of today's hearing -- that sugar policy is unsustainable given the current circumstances -- is simply not an accurate conclusion. Is it perfect policy? No, it's not perfect. But while we would prefer a more stable, predictable environment in which to do business, we must first review the fundamental facts about the industry and its policies so when the time comes to draw conclusions, these can be made based on complete information.

The first fact is that sugar prices have been flat for 15 years. Flat. Here's a chart (attached) showing nominal and real refined sugar prices since 1985. As the trend lines show, nominal sugar prices have been stagnant while real prices have dropped precipitously.

The chart also shows that since the farm bill, prices are down dramatically, taking a nosedive of 30 percent just since last year. This is the lowest level in 22 years! Prices now stand below the forfeiture level in all regions of the country.

Some people argue that in the case of sugar a flat price means a high price. Let me assure you it doesn't. Otherwise, why would seven sugarbeet processing plants have closed since 1993, with two more slated for closure next year? Profitable factories don't close; those that can't offset inflation do.

Under flat prices there's only one way to fight inflation, and it happens to be the same answer as to why we in the Red River Valley are efficient: growth. Without a strategy of growth to continually seek efficiencies and fight inflation, it is very likely that our factories would have closed. Growth is not a strategy to raise havoc; it's a strategy to survive, plain and simple.

Some people blame the current price collapse on this strategy of growth. Well, that's not so plain and simple. The poor farm economy has forced shifts in acreage. I don't need to tell this committee that returns for major program crops like wheat, corn, cotton and rice have been disastrously low several years running. That forced farmers to switch to planting sugarbeets or sugarcane. In the Red River Valley -- historically a region perfectly suited to growing wheat -- rising costs and abnormal weather have resulted in break-even or negative returns on wheat for nearly a decade. Many farmers plant wheat only because it's a good rotational crop for sugarbeets. It's only logical they would seek an alternative. This shifting of acreage, while not planned, was certainly a consequence of the flexibility provisions of the 1996 Farm Bill.

Thankfully, Congress recognized the downturn in the farm economy. It has provided over $70 billion in assistance to producers of program crops over the past four years. It's an astonishing, yet much needed and appreciated, level of assistance. But that, too, contributed to the current situation in sugar because it kept many farmers in business that, through no fault of their own, would have been forced to quit. I'm certainly not critical of the assistance Congress provided, but it's another fact that must be recognized as having an effect on sugar.

A more obvious fact is the trade agreements we've entered into, and their treatment of sugar. Quite frankly, the sweetener provisions of the North American Free Trade Agreement (NAFTA) are short-sighted and disastrous. Sure, there was a side agreement negotiated at the eleventh hour that made the original terms of NAFTA palatable for a couple years. But the bottom line is that U.S. negotiators failed miserably. The sweetener provisions of the NAFTA are flawed in numerous ways. The Agreement fails to properly recognize Mexico's ability to become a net surplus producer of sugar. It allows guaranteed imports of raw and refined sugar into the U.S. without recognition of our import needs. It allows an unlimited quantity of Mexican sugar to enter the U.S. if the economics work to pay the second-tier tariff. And it assumes that any Mexican access would have occurred fairly, as if the billions of dollars in subsidies the Mexican government provides its sugar industry to take unfair advantage of the Agreement has not occurred. Unless it's changed, NAFTA will destroy an efficient, productive U.S. industry.

To their credit, the Clinton Administration and the Mexican government have met many times over the past several years to seek a different result, one that avoids litigation and achieves a positive, long-term solution for both sides. Unfortunately, no such agreement has been reached. We at American Crystal have been supportive of these efforts and would surely prefer to avoid litigation. But let me be clear, we are not about sit by and let our market be destroyed by unfairly subsidized, dump-market sugar from Mexico.

The Uruguay Round of GATT also contributes to the current crisis in sugar. It requires the United States to import 1.25 million tons of sugar annually, or about 12 percent of our domestic consumption, whether we need it or not. This commitment goes far beyond the minimum import requirements, making U.S. sugar not only compliant with WTO rules but well in excess of our requirements. Wouldn't it be remarkable if the European Union ever made excessive reforms to its policies?

Another fact is the egregious case of stuffed molasses. The large London-based sugar trading corporation, ED&F Man, has continued to blatantly circumvent our harmonized tariff schedule in a manner that should cause all senators - supporters and opponents of sugar alike - to bristle. Through its subsidiary operations in Ontario and Michigan, ED&F Man blends low-priced, dumped world market sugar from Brazil and other countries with molasses and water. The mixture is carefully concocted to exploit a classification under the tariff code and evade U.S. import duties. It is then imported into the U.S. where the liquid sugar is separated, then the molasses is returned to Canada to start the process again. U.S. Trade Ambassador Charlene Barshefsky called it right in a May, 1999 letter to Senator Conrad in which she stated, "From a commercial perspective, these imports appear to be simply a vehicle to bring raw sugar into the U.S. market free from the tariff applicable to sugar imported outside of the tariff rate quota ("TRQ")." This sneaky scheme offends our Customs laws, our sugar policy, and our common sense. It's flat-out circumvention, and it must be stopped.

So Mr. Chairman, these facts explain the real reasons behind the sugar price collapse we are experiencing. They're obviously not sound bites. But they're facts.

Forward Action

To rectify the situation the sugar industry has been seeking the USDA's assistance in the form of government purchases of sugar. We are seeking this for several reasons: First, because like the rest of agriculture, the sugar industry is on the precipice of dramatic losses of farms and factories. Second, because none of the $70 billion in assistance provided to agriculture over the past four years has gone to equally stressed sugar growers. And third, because it will actually save the government money.

Thankfully on May 11, Secretary Glickman announced a modest purchase of 150,000 tons of sugar, although the final purchase amount was less: 132,000 tons. While we greatly appreciate the Secretary's action, it is simply not enough. Forfeitures of sugar under the loan program are not only possible this year, they are likely. Unless further purchases take place, the USDA is likely to be acquiring and managing significantly higher levels of stocks. The purchasing process, as Secretary Glickman stated in his announcement of the initial purchase, would cost less than forfeitures.

To his credit, though, the Secretary made a clear recommendation to the sugar industry in his May 11^th announcement. He said he expects the sugar industry to come forward with additional measures to address the sugar supply.

We took the Secretary's message seriously. As you and the Committee may have heard, Mr. Chairman, a payment-in-kind program for the current crop year is under consideration by the USDA. In summarized form, the program would offer sugarbeet and sugarcane growers the voluntary option of destroying a portion of their 2000 crop in return for sugar USDA has or will be obtaining through the purchase or forfeiture process.

We at American Crystal are supportive of this concept. We believe it achieves several worthwhile objectives for the industry and the government. It quickly reduces the current oversupply of sugar by cutting the number of harvested acres this year. It saves the USDA the responsibility of obtaining and managing large amounts of purchased or forfeited sugar. It returns balance to an oversupplied market that is causing severe financial stress on sugarbeet and sugarcane farms across America. And again, it saves the government money.

We believe the combination of the purchase and payment-in-kind programs are reasonable methods of restoring balance to the U.S. sugar market. But as I said, it is a market out of balance not because of any desire to raise havoc. It is temporarily out of balance because of poor trade policies, quota circumvention, and the pure economic need to survive.

Conclusion

Mr. Chairman, I was the leading finance officer at American Crystal Sugar company for 13 years, and have been CEO for two. I know what it takes to run a sugar company. The farmers who own this cooperative know, too. In fact I still think it's remarkable that they've taken a nearly defunct sugarbeet company and turned it into one of the world's most efficient. As I stated at the beginning, they've done what's right to build a successful company.

Having done what's right, we believe it's also right to implement measures in the short term to restore an economic environment in which their investments and their logical strategy can fairly operate. For issues beyond that, we look forward to the 2002 Farm Bill debate which as we all know, is not that far away.

Again, thank you for the opportunity to speak to you today.