Sugar industry adjusted quickly; Imperial anticipates changes in 2009

After the Feb. 7, 2008, fire and explosions that killed 14 people at Imperial Sugar Co.'s Port Wentworth refinery, consumers faced the possibility of empty grocery store shelves.

But the sugar industry quickly adjusted. Refineries increased their production, more sugar was imported from other countries, and consumers haven't seen a difference in the supply or the price of sugar.

Behind the scenes, however, the price of raw sugar is still reeling from the effects of the refinery being shut down.

That price drop might help Imperial Sugar Co. as it positions itself by taking advantage of changing consumer preferences, looser trade rules with Mexico and a partnership with sugar cane growers.

"2009 will be a year of rebuilding our core sugar business," said Imperial CEO John Sheptor. "I am confident that our Port Wentworth refinery construction, our participation in the Mexican joint venture and our potential participation with Louisiana Sugar Refiners will strengthen our core sugar business."

Nine percent of the nation's sugar, and 15 percent of its cane sugar, was refined in Port Wentworth before the explosion.

The facility bought raw cane sugar, which in the U.S. is grown in Louisiana, Texas, Florida and Hawaii. It refined it by melting it down and spinning out molasses to get pure sugar crystals, which were then sold to consumers, restaurants and food processors.

With the Port Wentworth facility offline, more harvested raw cane sugar was available than could be refined, leading to an oversupply on the market.

That drove the price down.

"It's been very unfortunate for us producers. The price has been quite depressed," said Jack Roney, director of economics and policy analysis with the American Sugar Alliance. "The lack of demand from one of the biggest refineries in the country hasn't helped any."

Raw cane sugar cost $0.21 a pound in 2007; now it costs $0.19 a pound. That amounts to millions of dollars lost among producers of cane sugar, but millions of dollars saved among those buying it.

It hasn't brought the price of refined sugar down because there's a smaller supply of refined sugar.

Also contributing to the smaller supply is a reduction in sugar beet acres planted.

There's no difference in the end product of refined sugar beet and refined cane sugar, but sugar beet is grown in the northern Midwest states and is refined in the fields.

The acreage planted dropped nearly 11 percent for the 2009 season as farmers planted more lucrative crops, such as corn, wheat and soybeans, according to the U.S. Department of Agriculture Sugar and Sweeteners Outlook.

"A recovery in raw sugar prices is critical for producers experiencing higher import costs," Roney said. "We've got a lot of producers on the brink of bankruptcy. They're rooting for the Savannah refinery to get up and moving again."

The market is in an unusual situation.

The U.S.D.A. has increased the amount of imports it allows to help keep the supply and price of refined sugar stable.

"It's actually a good opportunity for cane refiners," Roney said. With raw cane sugar prices low and refined sugar prices steady or even up slightly, "it's a good opportunity for them to cover their costs of acquiring and maybe make a profit."

Imperial Sugar has relied on its Gramercy, La., refinery to help meet its demands while the Port Wentworth refinery is down; sales are still about 50 percent lower than before the explosion.

Imperial continues to fill its contracts for industrial customers and supply food service and retail customers by buying refined sugar from other entities.

"A lot of the turbulence related to the refinery being shut down has basically subsided," said analyst Hamed Khorsand, of BWS Financial. "(Imperial) has some challenges ahead but not as severe as before."

The Port Wentworth refinery is expected to resume all of its operations in the fall. Imperial has ordered the equipment it needs, and much of it will be more efficient.

As American consumers have become more health conscious, the demand for traditional sugar has been reduced.

Still, "sugar is a staple of the American diet," Sheptor said.

In this economy though, consumers are shifting their preferences to private labels or store brands and buying at discount stores.

Imperial has seen a reduction in restaurant sugar consumption as people eat at home more frequently. And they're eating fewer processed desserts, which may be impacting the company's industrial clients.

"At this point, there's been no significant impact on Imperial," Sheptor said.

However, the company is expanding its offerings.

It introduced pre-measured brown sugar packs in November, designed to make it easier for consumers to use brown sugar in baking.

Imperial is also trying to reach consumers who buy natural products.

It invested in a company called Wholesome Sweeteners, which makes organic, fair trade sugars, syrups and nectars.

"Wholesome Sweeteners gives Imperial the opportunity to participate in this channel where we were not," Sheptor said.

Imperial owns 50 percent of Wholesome Sweeteners and has an option to buy the rest in 2010.

Wholesome Sweeteners had double-digit growth last quarter. Its products are mostly sold in natural-food stores such as Whole Foods and in Savannah at Brighter Day Natural Foods.

To avoid getting locked out of the sugar industry, Imperial is exploring a potential joint venture with Louisiana Sugar Refinery LLC on a new refinery.

Louisiana Sugar Refinery is a joint venture between food product provider Cargill Inc. and Sugar Growers and Refiners Inc., a cane sugar marketing cooperative.

The company would benefit from having a definitive source for its raw sugar and from teaming with Cargill, Khorsand said.

Cargill entering the sugar market would have meant new competition "with bigger pockets."

"Once there is something officially announced, it would be a positive," Khorsand said.

In the proposed deal, Imperial would contribute its Gramercy facility in exchange for a one-third interest in the venture.

The sugar cane grown nearby would be processed at the new refinery, and its refining capacity would be 1 million tons. None of it would go to Port Wentworth.

Imperial expects to move toward closing the deal in the coming months, Sheptor said.

"Negotiations are ongoing," he said. "We have received preliminary approval from the state."

In January 2008, a new market was opened to the U.S. sugar industry.

Tariffs on sugar transferred across the U.S./Mexican border were abolished, making it cheaper to import and export sugar.

It essentially "dropped all limits on how much sugar Mexico could sell in the U.S.," Roney said. "Mexico has no constraint on how much sugar they can produce and sell on the U.S. market.

"It's been a big factor in how low the sugar price has been."

To reach that market, and to reach the U.S. market from a different angle, Imperial entered into a joint venture with Mexican sugar company Ingenious Santos, S.A. de C.V. to form Comercializadora Santos Imperial.

It's been a successful first year, Sheptor said.

"The venture sold more than 400,000 tons of sugar into Mexican and U.S. industry," he said. "Our venture participated in 15 percent of exports from Mexico into U.S."

Imperial can bring raw cane sugar from Mexico and have it refined in Gramercy and eventually in Port Wentworth.

The venture also expanded Imperial's customer base by supplying refined sugar in Mexico for beverages and confectionary and retail products.