Analysis - U.S. sugar battle threatens power merchants' sweet spot

By Chris Prentice

NEW YORK (Reuters) - In 2006, Ryan Efurd spotted a sweet opportunity on the horizon.

The closely guarded U.S. sugar industry was recovering from years of contraction as prices began to surge after hurricanes and a refinery explosion roiled supplies. Food firms clamoured for imports, but powerful millers fought to maintain the import limits that kept the market isolated.

On the recommendation of a friend with experience in the food industry, Efurd - then a 22-year-old former member of the U.S. Air National Guard in Arkansas - set up a small brokerage pitching sugar to restaurants and other industrial users.

The gamble was big: they knew little about sugar trading and wanted to break into the close-knit food market dominated by entrenched players like cooperatives.

Two years later, the North American Free Trade Agreement transformed that bet, allowing cheaper, abundant Mexican sugar to stream into the U.S. market and letting him gain a bigger foothold in the coveted $6 billion (3 billion pounds) market.

He eventually expanded to distribution operations in Mexico.

Eight years on, however, the fate of his company, Blackhive Corp, hangs in the balance of an audacious trade complaint launched by U.S. sugar growers, who accuse Mexican mills of dumping cheap, subsidized sugar into the U.S. market.

"With duties, our margins would be gone," Blackhive's 31-year-old chief executive officer Ryan Efurd told Reuters.

"The importers are going to lose that money forever, and it could drive us out of business."

The complaint is the boldest effort yet by the surviving 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, to protect against the upstart competitors who are undermining their market, and their margins, via Mexico.

On Friday, the Commerce Department said it would launch a probe into the allegations as Mexican mills gave their first formal rebuttal of the charges to U.S. trade regulators.

Mexican mills told the U.S. International Trade Commission that sugar imports are no threat to the profitable, "well-heeled" and protected U.S. sugar industry and should not be blamed for a collapse in prices.

Dealing in 300,000 tonnes of sugar a year, Blackhive is still a fraction of the 10.5-million-tonne domestic market.

But he has good company with some of the biggest commodity merchants in the world, including Louis Dreyfus and Wilmar International , who have also carved out a niche by securing sweetener from Mexico. Imports from Mexico were worth $1.1 billion last year.

At risk is both the future direction of domestic raw sugar prices, which have already rallied from their lowest since the mid-2000s on concerns over future imports from Mexico, as well as a wave of investment since NAFTA came into effect in 2008, industry sources say.

CUTTING OFF THE TAP

While the action is still in its early stages and the authorities won't decide if sanctions are necessary for months, the threat of hefty duties has already roiled trade.

Domestic prices have soared almost a fifth since the surprise complaint was filed - hitting 18-month highs even as global prices languish at multi-year lows as the market struggles with a fourth straight year of oversupply.

"While it's up in the air, it's going to be tricky to take the risk on sending sugar north of the border," said a trader with a big global brokerage.

Efurd said he has stopped shipping from Mexico and has shuttered his packaging and distribution facility in Monterrey.

The millions of tonnes of sugar trucked across the border could grind to a halt, Paul Farmer, president of CSC Sugar LLC, one of the biggest U.S. importers of Mexican sugar, said in an email.

With demand outpacing output in the United States, imports "play an important role" for U.S. cane sugar refiners, said Mike Gorrell, head of Sugar Land, Texas-based Imperial, which is now owned by Louis Dreyfus.

More than half the raw cane Imperial refines into white table sugar comes from Mexico, according to trade estimates. Gorrell declined to confirm that figure.

Many traders fear the complaint over sugar could escalate into a broader trade dispute, with Mexico retaliating in other commodities like high-fructose corn syrup or soybeans, major exports to the United States.

Keeping markets open is "critical", a spokeswoman for Cargill, which has stakes in Mexican mills and a U.S. refinery, said.

A POWERFUL LOBBY

Whatever the outcome of the months long process, the petition will pit the powerful domestic U.S. sugar growers against major food manufacturers less than a year after prolonged and tense negotiations over the farm bill.

Food manufacturers have criticized the sugar move. Higher U.S. sugar prices will likely eat into profits for major sugar users like J.M. Smucker Co. , Mondelez International , and General Mills .

They lobbied heavily for reform of the controversial sugar program during last year's U.S. farm bill negotiations but lost the battle: sugar farmers kept all of their protections, even as other groups' prior support programs were gutted.

With this case, some veteran traders and legal experts say the U.S. authorities may end up considering a quota on Mexican sugar into the United States.

2008: A YEAR OF TRANSFORMATION

At the core of the U.S. sugar cane and beet industry's complaint are a series of extraordinary events in 2008 that transformed the market: a handful of hurricanes along the Gulf of Mexico devastated cane crops and an explosion at Imperial Sugar Co's Georgia refinery cut off critical domestic supply.

With the border to one of the world's largest sugar producers thrown open by NAFTA, traders saw a chance to haul sugar north from Mexico, selling to food manufacturers desperate for alternative supplies.

As the trade dispute rages on, traders earning a living looking for new markets may have already spotted the next big opportunity.

"We are looking at Colombian sugar, domestic sugar, Guatemalan, anything besides Mexican sugar until this thing blows over," Efurd told Reuters.

(Reporting by Chris Prentice; Editing by Josephine Mason, Bernard Orr)