Imperial Sugar is the nation's largest refiner of sugar. It's also bankrupt, thanks to the utter insanity of sugar politics.

James Kempner flops down in a chair in his company's law library, a look of weary resignation on his face. It has been his unpleasant task to put Imperial Sugarthe largest U.S. sugar processor and a company that has been in the Kempner family since 1907into bankruptcy. With brands including Holly, Dixie Crystals and Spreckels, Imperial sold 6 billion pounds of the sweet stuff last year, accounting for 28% of U.S. consumption. But that wasn't enough to save the Sugar Land, Tex.-based companywith $540 million in debt and $1.2 billion in mostly illiquid assetsfrom being ground finer than powdered sugar between falling world prices and an antiquated U.S. system designed to keep the price of raw cane sugar high.

That program costs consumers an estimated $1.4 billion a year and has created some crazy side effects. How crazy? Heartland By-Products, a U.S. unit of the British trading company ED&F Man, makes money by buying refined Brazilian sugar in Canada for as little as 6 cents a pound where it mixes it into molasses and trucks it across the border to a separation plant in Taylor, Mich. where the goo is converted back into sugar. All this to bypass tight U.S. sugar quotas.

At the same time taxpayers are subsidizing a swelling stockpile of more than 1 million tons of sugar purchased from beet farmers in the upper Midwest, many of whom switched to beets after losing federal subsidies on other crops such as corn and wheat. Those farmers are still expanding production at 4% a year. It is a terrible waste of energy to grow sugar in Minnesota, but Congress pays you to do it.

Imperial is caught in the middle of the madness. For years the company bought raw cane sugar at the government-supported price of 22.5 cents a pound and transformed it, through a process of boiling and filtering, into refined sugar it sold for about 27 cents a pound. After covering operating costs of about 4 cents a pound, that left a mighty slim profit.

Beet farmers upset the balance by bringing refined sugar directly to market through huge "beet factories" that are often owned by nonprofit cooperatives. The government spent $468 million last year trying to keep prices at a target of 22.5 cents a pound, but the flood of beet sugar has driven prices as low as 21 cents. At that price Imperial, which gets 60% of its supply from raw cane sugar, can't make a profit. "Basically, there's no margin left in it," says Kempner, 61, a Stanford Business School graduate who reluctantly joined the family firm in 1988 after a career as an investment banker and oil company executive.

Sugar Shock

Who benefits from this lunatic system? Cane sugar growers, led by the powerful Fanjul family of Florida. They flourish under import restrictions that protect them from sugar that sells for as little as 6 cents a pound on the international market. The family made $160,000 in various contributions to the 2000 campaigns, according to the Federal Election Commission.

The price-support program is up for congressional review next year, but has strong proponents in Florida and the Midwest, both regions that were critical to George W. Bush's election victory.

Losers include consumers, as well as processors like Imperial and employees of companies that buy sugar at the inflated U.S. price. Brach's Confections this year announced plans to shut down its Chicago-area factories because it is cheaper to import sugar into the country in the form of finished candies than to buy it here.

"The U.S. sugar program is the most efficient tax we have," says Kempner with bitter sarcasm. "It comes directly from consumers and goes directly to the growers, who turn around and give some of the money to the politicians. It never goes through Washington at all."