Federal Government Refuses to Rescue Financially Troubled Sugar Processors

SourceMex Economic News & Analysis on Mexico, March 1, 2000 | Go to article overview

Federal Government Refuses to Rescue Financially Troubled Sugar Processors


President Ernesto Zedillo's administration is refusing to rescue Mexico's sugar processors, which face near-certain bankruptcy because of unsurmountable debts, high production costs, and unfavorable terms negotiated under the North American Free Trade Agreement (NAFTA).

Some estimates indicate the debts of sugar processors have escalated to about US$2.5 billion since the industry was privatized in the late 1980s and early 1990s. Some debt problems are linked to the industry's decision to raise capital by issuing inflation-indexed instruments (unidades de inversion, UDIs) in the early 1990s. The devaluation of the peso in 1994 pushed annual inflation above 50% in 1995, which caused the UDI-denominated debts to grow beyond their initial value.

Some industry observers had suggested that the administration allow the sugar processors to restructure the debt owed the government, much of which is held by the government's sugar-financing agency (Financiera Nacional Azucarera, FINASA). Consorcio Azucarero Escorpion (CAZE), which accounts for almost one-fourth of Mexico's sugar production, owes the equivalent of US$700 million to FINASA and another US$100 million to private commercial banks.

"The most feasible future for Escorpion is that the government take it over," said the daily business newspaper El Economista.

However, administration officials quickly dismissed this proposal, saying that sugar millers have other options to restructure their debts. "There are plans to restructure the debt of some groups, but the government is not participating," said Agriculture Secretary Romarico Arroyo Marroquin.

Industry problems blamed partly on mismanagement

Mario Garcia Estrada, technical secretary for the government-sponsored Comite de la Agroindustria Azucarera, said CAZE's financial problems are the result of mismanagement.

"They're bad managers, they are no longer credit worthy, and they don't have money to repair their refineries or pay the sugar growers," Estrada told The Financial Times.

CAZE is a subsidiary of Grupo Escorpion, whose operations also include huge soft-drink bottler GEMEX. The sugar processor has taken steps to avoid financial collapse by offering to sell its processing plants. Earlier this year, the company hired US accounting company Price Waterhouse Coopers (PWC) to identify potential buyers for the plants by October.

The proposed sale of the sugar mills has received mixed reactions from the sugar-workers union (Union Nacional de Caneros) and its parent Confederacion Nacional de Propietarios Rurales (CNPR).

Union spokesman Jose Luis Cruz said sugar-industry workers would prefer that the government live up to its responsibilities to the industry and devote more funds to rescue CAZE and other troubled millers like Grupo Azucarero Mexicano (GAM). Cruz expressed concern that only large multinational companies like Cargill, Archer Daniels Midland (ADM), and Arancia CPC would be in a position to acquire CAZE's sugar-milling operations, since any sale would require that the buyer assume the massive debts.

Enrique Ramos Rodriguez, also a member of the sugar- workers union, said employees do not intend for the government to run the sugar-processing plants in the long run. He said the government should acquire the plants from their current owners, who are incompetent, and then sell them to others who are more knowledgeable about the sugar sector.

Some estimates show almost half of Mexico's sugar- processing plants in danger of disappearing because of extreme financial difficulties.

Low prices, unfavorable NAFTA terms also hurt industry

In addition to debt problems, the sugar companies trace their problems to marketing difficulties caused by a weak global sugar market. Because of a global oversupply of sugar, international prices as of mid-February had declined by about 21% from levels a year ago. …

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