Washington Insider -- Thursday

A New Kind of Sugar Fight

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Chemical Safety Board Calls for Better Regulation of Stored Ammonium Nitrate Fertilizer

Just over a year ago, a massive explosion at a Texas facility that stored ammonium nitrate fertilizer killed 14 people, many of whom were first responders. This week, the U.S. Chemical Safety Board said the April 17, 2013 explosion was "preventable" and pointed out that the 40-60 tons of ammonium nitrate that ignited were stored in a wooden building and bins, rather than concrete, and that the facility had no modern fire suppression equipment.

CSB, an independent government agency headquartered in Washington, urged the Environmental Protection Agency and the Occupational Safety and Health Administration to regulate fertilizer-grade ammonium nitrate as an explosive. There are more than 1,350 ammonium nitrate fertilizer storage facilities scattered around the country.

The facility that exploded last year was in the town of West, Texas, in McLennan County. CSB lead investigator Johnnie Banks told reporters that the county was prohibited by Texas law from having a fire code to regulate the facility. Earlier, some fertilizer industry officials reportedly said that bringing older storage buildings up to new standards would hurt their companies economically. It remains to be seen whether that argument convinces legislators and regulators to refrain from mandating upgrades at fertilizer storage facilities.

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EPA Cuts 2013 Cellulosic Mandate Retroactively

Bowing to reality, the Environmental Protection Agency has retroactively cut the amount of cellulosic fuels that were required to be blended into the nation's gasoline and diesel supply last year.

The Energy Independence and Security Act of 2007 (EISA) stipulates that the renewable fuel mandate for cellulosic ethanol was to be 1 billion gallons. Early on, EPA realized that this amount was unattainable, and reduced the mandate to 0.006 billion gallons. This week, the agency again cut the cellulosic mandate to just 0.00081 billion gallons, which is exactly the amount EPA says was produced in 2013.

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Under EISA, petroleum companies were to be fined if they failed to blend the required amount of cellulosic fuel into gasoline and diesel. EPA's official change to the actual amount of cellulosic fuel produced means that the petroleum industry will not be fined for failure to blend cellulosic fuels that did not exit last year.

Renewable fuels advocates continue to predict that the advent of commercial-scale cellulosic ethanol production is just around the corner and that EPA's annual mandate is key to getting the industry off the ground. EPA has not yet announced the renewable fuels standard for 2014, but it may choose not to put its cellulosic figure so far from reality this time.

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Washington Insider: New Kind of Sugar Fight

The United States has long protected its sugar producers and over time has seen industry supporters become one of the most powerful lobbies in Congress. The result has been the virtual disappearance of the U.S. sugar refining industry, which depended on imports for raw material. In addition, producers of sugar-using food products have argued for years that U.S. programs hold sugar and sweetener prices well above world prices and undercut their capacity to compete globally, but Congress has repeatedly declined to cut back those support levels.

Now, the sugar producers' industry, which just won a battle to keep its supports, says it wants more. It says it is under heavy pressure from Mexican exporters, who have access under the North American Free Trade Agreement (NAFTA) to U.S. markets, just as many U.S. products have access to Mexican markets.

So, notwithstanding its current supply controls and price supports, the industry is pushing a complaint against the Mexican imports, supported by U.S. sugar cooperatives and refiners that include ASR Group, which makes household brand names including Domino Sugar and Tate & Lyle, and American Crystal Sugar Co. Their argument is that they need more protection from competitors who are undermining their margins.

Last week, the Commerce Department agreed to launch a probe of the allegations. At the same time, Mexican sugar mills offered their first formal rebuttal to U.S. regulators, arguing that sugar imports do not threaten the profitable, "well-heeled" and protected U.S. sugar industry and should not be blamed for the earlier collapse in prices.

Observers are suggesting that the industry petition risks both the future direction of the domestic raw sugar market and trade with Mexico.

While the sugar industry petition is still in its early stages and won't be decided for months, the threat of duties is already roiling trade and strengthening U.S. markets. It could end the flow of millions of tons of sugar trucked across the border, according to Paul Farmer, president of CSC Sugar LLC, one of the biggest U.S. importers of Mexican sugar.

With demand outpacing output in the United States, imports "play an important role" for U.S. cane sugar refiners, Mike Gorrell, head of Sugar Land, Texas-based Imperial (now owned by Louis Dreyfus) told the press. More than half the raw cane sugar Imperial refines into white table sugar comes from Mexico, according to trade estimates.

Whatever the outcome of the petition, it is pitting powerful domestic sugar growers against major food manufacturers in a replay of the prolonged and tense negotiations over the recent farm bill. Food manufacturers say they are concerned that higher sugar prices will make operations of major users vulnerable to overseas competition.

Sugar users are telling the press that they are aware that it likely will be an uphill battle for them, since they lobbied heavily for reform of the increasingly controversial sugar program last year, but lost that fight. In the process, sugar producers kept all of their protections, even as other groups' support programs were changed dramatically.

Now, the main concern of U.S. sugar users is that the government may end up considering a quota on imported Mexican sugar, notwithstanding our NAFTA agreement, and that the complaint over sugar could escalate into a broader trade dispute. For example, Mexico might retaliate against other commodities like high-fructose corn syrup, soybeans or pork — major U.S. exports. Keeping markets open is "critical," a spokeswoman for Cargill, which has stakes in Mexican mills and a U.S. refinery, told the press.

The U.S. sugar industry argues, as it has for years, that it is competitive and that competitors' prices reflect government intervention and Congress apparently accepted that argument. Now, however, as the government moves to consider the industry petition, there are fair questions regarding how much protection the U.S. industry has and how much it deserves and what the economic consequences might be of interventions in broader US-Mexican trade.

Clearly, the sugar wars have become high stakes fights for markets for many U.S. products, not just an effort for more protections for sugar. Thus, it should be watched closely by producers as the case evolves, Washington Insider believes.


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