But just when no one thought it could get any worse, it has. Domestic sugar prices have plummeted 40 per cent since January as cash-strapped refiners have flooded the market. The country's 150,000 cane growers, who have not been paid in months, are threatening to occupy the refineries.

As in past years, the government recently announced a $270m last-minute line of credit to pay farmers. The money, however, has been held up by government bureaucracy and perilously indebted refineries may not have enough inventories to put up as a loan guarantee.

To make matters worse, the World Trade Organisation ruled on Friday that Mexican anti-dumping duties on US imports of high fructose corn syrup - a cheap sugar substitute - violated international trade law. Mexico has said it will appeal the decision.

The looming conflict has become a political minefield for Vicente Fox, Mexico's president, whose seven-month-old administration has been slow to recognise the extent of the crisis plaguing the country's largest agricultural industry.

After years of living on borrowed money and borrowed time, it seems the industry has reached its limit. Thirty of the country's 60 refineries are in receivership with an accumulated debt of $2bn - just with the government.

Embittered sugar executives blame many of the problems on the government's unwillingness to rein in one company in particular; Consorcio Azucarero Escorpion, CAZE, responsible for a quarter of Mexico's 4.8m-tonne annual production. They say CAZE, owned by Enrique Molina, the Mexican tycoon and controlling shareholder of Pepsi-Gemex, the largest Pepsi-Cola anchor bottler outside the US, has been treated with kid gloves despite a ballooning $1bn government debt.

Not only has the company not serviced its debt in years, but it is under investigation for allegedly bribing finance ministry officials to fake its export quotas. Under the previous administration, Mr Molina was given until October to sell CAZE, but the ultimatum mysteriously dissolved. The company declined to comment.

In an interview with the Financial Times in December, Javier Usabiaga, the newly appointed agriculture minister, said he supported a scheme to hand over to the cane growers CAZE's refineries given to the government as loan guarantees. "If the cane growers buy it, what will we lose?" said Mr Usabiaga. "We have more hope with them."

Apparently, refinery owners and the finance ministry, unwilling to shoulder the lossmaking and socially explosive problem, did not agree. According to industry sources, the disagreement has touched off a bitter dispute between Mr Usabiaga and Francisco Gile, the finance minister.

Mr Usabiaga, angered over the treasury ministry's delay in providing a line of credit to the refineries, threatened to resign at the weekend.

Meanwhile, the Fideliq, a trust that liquidates government assets, has been charged with settling outstanding loans from the defunct state sugar bank, Finasa. The claim on assets includes 30 refineries owned by six different groups as well as shares in Pepsi-Gemex that Mr Molina put up as collateral.

However, since the government has been unable to exercise its right over the refineries because of pending litigation, Fideliq plans to auction off the "litigious rights" to the refineries by the end of the year. Bidders will win the right to try to retrieve the assets either through continued litigation or by reaching a settlement.

Eugenio Garza Chapa, who is heading the auction, says: "The best option is for a group of investors to take on the debt and reach a business agreement with the actual owners to recapitalise the refineries."

Potential investors are not as convinced. The scheme, they say, puts them at the mercy of owners who may prefer to stonewall for years to get a better settlement. It also opens up the possibility for owners to buy back their debt from third parties at a steep discount.

"We are not at all upbeat about this and it will not solve the long-term problems," says one potential foreign investor. "They [the government] are giving in to someone's interest. Obviously they don't have the political capital they thought they had."

Mexican production costs are among the highest in the developing world due to the lack of economies of scale, little investment and a rigid labour regime.

For years, industry has been calling on the government to close unproductive refineries and reform a labour contract that applies to all cane growers regardless of the refinery they work for.

Mr Fox, in a meeting this month with the industry, promised to end "impunity" in the sector and improve access, under the North American Free Trade Agreement, to the US sugar market.

The two countries dispute the terms of the agreement. Mexico argues it should be able to export 600,000 tonnes in excess sugar to the US while the US says Mexico will not be granted full access until 2008.