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FARGO, N.D. -- The government might pay the region's sugar beet
growers to voluntarily destroy some acres and help bring supplies in
line with demand.
A "payment-in-kind" (PIK) program might idle 25,000 to
75,000 acres of the company's 500,000-acre production in the Red
River Valley, company officials estimate.
James Horvath, president and chief executive officer of American
Crystal Sugar Co. in Moorhead, Minn., testified in Washington July
26 that his cooperative favors PIK.
"It quickly reduces the current oversupply of sugar by
cutting the number of harvested acres this year," Horvath says.
"It saves the (U.S. Department of Agriculture) 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 sugar beet and sugar cane farms
across America. And again, it saves the government money."
If the program is implemented, USDA officials say they'll
implement a $20,000 per farmer payment limit, according to
Horvath. No dollar cost has been estimated.
Certificates
Under the PIK program, growers would competitively bid a percentage
of their proven, historical production for the past three years.
They'd receive PIK certificates for forfeited production. They'd
later redeem them to Crystal, which in turn would redeem them to the
government for sugar, which the company later can sell.
Horvath represented the nation's sugar processors in a Senate
oversight committee hearing on the sugar program. The program was
attacked by critics as a desperate attempt to bail out growers, who
are partly to blame for the surplus.
Horvath defends Crystal for expanding acreage as a way to counter
inflation and fight falling sugar prices.
"Growth is not a strategy to raise havoc; it's a strategy to
survive, plain and simple," he says.
American Crystal has 4.5 million hundredweight of sugar as
collateral under government loans. Typically, the loans are paid
back as the company markets sugar.
But sugar prices have dropped 30 percent from a year ago and are
beneath government loan levels in the region and elsewhere in the
country. If prices stay low, as expected, Crystal officials say
they'll forfeit all of that to the government. The sugar would be
stored in Crystal's own storage space, causing logistical problems
for next year's sugar.
Discussed in spring
David Berg, Crystal's vice president for administration, says the
general concept was discussed with the U.S. Department of
Agriculture starting in late May. Faced with likely sugar loan
forfeitures, government officials dusted off the PIK rules and
figured they might reduce sugar surpluses the same way they reduced
government grain stock surpluses in the mid-1980s.
"They're enthusiastic about getting it out of their
ownership and letting it flow back into market channels," Berg
says.
USDA is expected to announce the program within days, Horvath says.
Proposed rules could come out in another week, and a comment period
and final rules after that.
"We're hoping this gets going within several weeks,"
Horvath says.
PIK never has been commodity-specific, although its chief use has
been for grain, Berg says. Crystal growers heard about PIK payments
over the past three weeks at a series of 17 annual "shop"
meetings in the company's five factory districts, Berg says.
A typical acre
A typical acre of Red River Valley sugar produces 50 to 55
hundredweight of sugar. Crystal officials expect farmers to bid in
payments at a lesser rate -- perhaps between 20 to 40 hundredweight
per acre, Berg says.
The reason they'll settle for less is that they won't incur the
harvest, transportation to the piling site, shrink or factory losses
or manufacturing costs. Once their bids are accepted, the government
would have to verify that the acres exist.
The program is being developed to make sure the government gets a
maximum of sugar reduction for dollars invested.
This year different
Crystal asked farmers to offer bids for destroying 1999 acres but
didn't accept any because the production came in at a level they
could process. More than 80 percent of growers later were polled and
say they want to keep producing at a 500,000-acre level to match the
processing capacity of their factories.
"This year is different because it's to assist in
rebalancing supply and demand," Berg says.
Crystal officials have projected gross net beet payments at $28
to $32 per ton in the coming year, without major government
intervention.
"If there were enough acreage PIKed," Horvath says,
"it could affect the net selling price, which could cause the
beet price to be better than that projection."
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