Mexico Takes Over Struggling Sugar Mills

Under mounting public pressure, the Mexican government Monday seized 27 troubled sugar mills in an attempt to stabilize an industry hard hit by mismanagement, alleged corruption and U.S. competition.

The mills, which handle roughly half of the 20 million tons of cane processed in Mexico annually, have struggled against cheaper U.S. corn sweeteners flooding the market since the free-trade provisions of NAFTA took effect.

The industry also has been hurt by gross overproduction, bloated payrolls and lack of investment in technology, according to government officials. A steep drop in prices has caused the mills to fall behind on millions of dollars owed to cane farmers--putting pressure on the government to take action.

The takeover reflects the deep problems in Mexican agriculture, which is in a process of adapting to free-market conditions after decades of government protection, make-work programs and subsidies.

Many of the mills were privatized in the 1990s with loans by the Mexican government and buyers putting up little if any of their own cash. The mills are now in arrears on mounting debts and unpaid taxes.

The seizure was accomplished with a decree signed by President Vicente Fox--giving the government quicker access to the mills than if it had tried to foreclose on loans, analysts said. Though decrees are rarely used as a major policy instrument, a similar one was employed when the government took over the banking industry in 1982.

A new government agency will be created to restructure the industry in hopes of privatizing it again within 18 months, Agriculture Secretary Javier Usabiaga said at a Mexico City news conference. The government expects to invest up to $300 million in maintaining and upgrading the industry, but hopes to recoup 90% to 95% of that when the mills are sold.

Usabiaga said the seizures were a preemptive measure to save mill and farm jobs before the annual sugar harvest, which begins in November. Mills have fallen to such a state of disrepair that their ability to operate is in doubt, he said. No immediate layoffs are planned.

“The sugar industry confronts a rising crisis, whose causes have been neglected for years and which demand immediate actions by the federal government,” Usabiaga said. He added that some mill owners were being investigated for various irregularities and abuse of public resources.

Government subsidies have consisted of extending terms of mill owners’ debt, as well as efforts to manage the domestic sugar market to provide for higher prices, said Ken Shwedel, director of agribusiness research at Rabobank in Mexico City.

“The step was a rational move on the part of the government in that this allows it to take control right away and not get involved in a long, involved court fight, which would have been the case had they tried to foreclose on debts. So now the government can move forward with its plans,” Shwedel said.

Also at the news conference Monday, Finance Minister Francisco Gil Diaz said the sugar industry had become a “financial black hole,” adding that the seized mills have “not just a problem of liquidity, but of solvency.”

The debts far exceed the mills’ assets, but Gil Diaz declined to estimate the shortfall. Creditors include Mexico’s social security system and water utilities.

Grupo Caze, owner of one of the expropriated mills, expressed confidence in the judicial process in a statement issued Monday, saying it would exercise its rights.

Gil Diaz said the government was investigating fraud charges against some owners for allegedly simulating exports to qualify for subsidies. He also accused some owners of “milking company resources for personal benefit” rather than investing in the mill machinery.

Officials said the takeover did not represent a shift toward a new government policy of nationalizing troubled industries. They described Monday’s step as an emergency measure to prepare the mills for a return to the private sector.

“To give these mills to people in the private sector who did not contribute capital, who in the majority simply used loans to buy them, is to speak of an industry that really was never privatized, but put in the hands of operators who had every incentive to milk it,” Gil Diaz said.

Both national and international sugar firms have expressed interest in making bids for some of the plants once they are available, he said.

The seizures occur as Mexico is caught up in a nasty trade fight with the United States, over what it says is its right to export up to a half million tons more of surplus sugar to the United States under terms of the North American Free Trade Agreement. The United States has fought that interpretation in a bid to protect its farm industry, and the outcome is unsettled.

Economy Minister Luis Ernesto Derbez, who also attended, said the fact that Mexico’s sugar industry was in “complete disorder on a national level” has made it more difficult to negotiate the sugar dispute.

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Times researcher Rafael Aguirre in the Mexico City bureau contributed to this report.