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Buyout May Benefit Florida's Other Sugar Power

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The New York Times

Published: September 15, 2008

In June, Gov. Charlie Crist announced that Florida would buy one of the state's two big sugar enterprises, the United States Sugar Corp. He billed the purchase as a "jump-start" in the environmental restoration of the Everglades, which cane growers are accused of polluting with fertilizer runoff.

In the end, however, the $1.7 billion buyout, scheduled to be completed in early 2009, may also prove to be a financial boon to the state's remaining sugar superpower, Florida Crystals.

One of the country's wealthiest families, the Fanjuls of Palm Beach, controls Florida Crystals and today touches virtually every aspect of the sugar trade in the United States.

If you buy Domino Sugar, you're buying from the Fanjuls. Ditto C&H Sugar. (That name stands for California & Hawaii, but the Florida Fanjuls acquired it in 2005.) National retailers prefer dealing with coast-to-coast vendors, so if you buy a bag of sugar at Wal-Mart, Kroger or Safeway, you're also patronizing the Fanjuls.

Take a pill, eat a granola bar - you're probably consuming special, high-end sugars that Florida Crystals produces for the pharmaceutical and packaged-food industries.

Sugar imported from Mexico and the Dominican Republic also stands a good chance of coming from Fanjul companies.

Now, some people in Florida are saying that if the state completes its takeover of U.S. Sugar, the opportunities that the deal presents may be a capstone to the life's work of the family patriarch, Alfonso Fanjul Jr.

"This is going to be a really good deal for the Fanjuls," says Dexter Lehtinen, a former federal prosecutor whose 1988 lawsuit against the state led to a settlement instituting tough clean water standards. "The state embarked on a nonachievable goal, and now in desperation to wrap up some package, they're going to have to give access to Florida Crystals on favorable terms."

Others, like makers of candy and cereal, say the Fanjuls already control too much of the sugar trade. They want to buy sugar cheap and say the Fanjuls have long charmed Congress into legislating price supports that keep it expensive.

Free-trade advocates also complain, saying that a private business has used the shelter of the federal sugar program, created in the Depression to nurture struggling farmers, to increase its corporate hammerlock.

"These people have been absolutely extorting consumers for decades, and the only reason they're existing in the first place is, they were able to get sweet deals from governments that were propping them up," says Sallie James, a trade policy analyst with the libertarian Cato Institute, referring to Florida Crystals and U.S. Sugar.

Florida Crystals executives, however, scoff at the notion that their company has weaved together a profitable and all-powerful sugar monopoly.

"Anyone who thinks this isn't one of the most competitive, fiercely won industries just doesn't know," says Brian F. O'Malley, chief executive of Domino Foods, a marketing concern in which Florida Crystals has a major stake.

Others in the Fanjul empire concur. "We might have a bit of a freight advantage, but not pricing power," says Luis J. Fernandez, executive vice president of Florida Crystals and Fanjul's son-in-law.

Whether or not the Fanjuls have crafted a monopoly, they certainly have re-created a very lucrative business dynasty.

Fidel Castro chased the Fanjuls from Cuba in 1959, ending five generations of the family's controversial rule in the sugar industry there.

Starting with cash moved out of Cuba and worn-out milling equipment bought secondhand in Louisiana, the Fanjuls spent recent decades buying refineries and related businesses - an enterprise that ultimately stretched from the cane fields of Florida to America's kitchen cupboards and beyond.

When Crist announced the sugar buyout in June, he called the deal "as monumental as the creation of the nation's first national park."

Environmentalists were overjoyed, and the proposal made national headlines. Plans to restore the Everglades - 4,000 square miles of marshes and sawgrass prairies in southern Florida - have been floated, fought over and delayed for years, often amid heavyweight lobbying by the sugar companies.

Millions had been spent, reservoirs dug, water moved this way and that, but the Everglades continued to grow sickly, largely because of what analysts say is rampant overdevelopment and the loss of regular flooding that wetlands need.

Then, in one grand gesture, Crist offered a buyout that the state said would knock out a major obstacle preventing reclamation of the Everglades.

"I can envision no better gift to the Everglades, the people of Florida and the people of America - as well as our planet - than to place in public ownership this missing link that represents the key to true restoration," Crist said when he announced the deal.

The "missing link" was an expanse of sugar land south of Lake Okeechobee and north of the Everglades National Park. For eons, Lake Okeechobee served as the Everglades' giant wellspring, until the federal government diked the lake and drained lands around it after devastating hurricanes in 1928 and 1947.

The array of earthen bulwarks and pumping stations crisscrossing that territory cut off the Everglades from Lake Okeechobee, denying the marshlands their source of freshwater floods.

To make environmental matters worse, the cane planters who moved onto the newly dry land used fertilizer that leached phosphorous into what little water still made it from Lake Okeechobee to the Everglades, further degrading the marshlands.

The Crist plan initially promised to send fresh water streaming into the Everglades again, through a wide, shallow expanse called a flow way. To that end, the state offered $1.75 billion for the land and assets of U.S. Sugar, giving the company six years to wind down its operations.

But the state needs only about 24,000 acres of U.S. Sugar's farmland to create a flow way, according to David P. Reiner, a spokesman for the environmentalist group Friends of the Everglades. He said the flow way approach was abandoned as unworkable in the 1990s, and people were surprised when Crist revived it.

For its part, the South Florida Water Management District, the state agency in charge of the Everglades restoration, recently said the flow way might require 100,000 acres.

To that end, Florida is buying all of U.S. Sugar's land - 187,000 acres - as well as a new cane-grinding mill, a large refinery and a 200-mile railroad that carries cane to the mill.

A spokesman for the governor, Eric Eikenberg, said the flow-way plan was achievable: "Once the acquisition is complete, there will be the ability - and the environmental community is very enthused about the ability - to have a good number of acres to store water, and to clean water, and to move water all the way to the Everglades. It can be done."

Still, taking title to U.S. Sugar's acres will not by itself enable the state to build the flow way. The state would still need an additional 40,000 acres now standing in the way - land owned by a Fanjul company, the Okeelanta Corp., and home to cane fields, a grinding mill, a sugar refinery and a cane-fueled power plant.

Much of the land that U.S. Sugar owns around Lake Okeechobee is more desirable than Fanjul-owned land nearby because it's richer in sediment favorable for growing cane. Many in the sugar trade expect and even hope that the Fanjuls will use the U.S. Sugar buyout as an opportunity to expand their holdings in southern Florida, trading some of their land for U.S. Sugar's in a swap orchestrated by the state.

"If they're trying to drive a bargain, more power to them," says Ardis Hammock, a local cane planter whose family has been selling cane to U.S. Sugar since the 1930s. "It would bring some stability."

Gaston Cantens, a spokesman for Florida Crystals, says the Fanjuls did nothing to help engineer Crist's buyout of U.S. Sugar. On the contrary, he says, the family knew nothing about the deal until just a few days before it was announced. Nonetheless, Cantens says, the Fanjuls have let negotiators know that if the state ends up with more land than it needs, Florida Crystals is ready to take the excess and the new mill off its hands - but only on terms that make sense financially.

Because a sugar mill cannot turn a profit without access to tens of thousands of acres of sugar cane, the Fanjuls would have to gain access to a huge tract to make a purchase of U.S. Sugar lands feasible.

For now, Cantens says, the Fanjuls are like everyone else in Florida: they are waiting to see exactly what sort of restoration the state has in mind.

"We're interested, obviously," he says. "But it all depends on how much land they need."

Anyhow, Florida Crystals says, a big sugar buyout can't really be the salvation of the Everglades.

Years ago, Cantens acknowledged, cane planters were a major source of phosphorus in Everglades water. But since the 1990s, he says, the Fanjuls and other sugar manufacturers have cleaned up their acts.

"If you go back 20, 25 years, we weren't doing the things we're doing now," he says. "We've implemented all kinds of best practices. Environmentalists have given us this black hat, and we've been wearing it for the last 20 years."

Indeed, a titanic struggle has long raged in Florida between Big Sugar and environmentalists, with environmentalists saying that cane farming was destroying the Everglades, and the sugar companies denying that phosphorus was harmful and lobbying to delay water-quality deadlines.

Advocates for Everglades restoration agree that the sugar industry has raised its clean-water standards, but say it hasn't raised them enough to make the water safe for replenishing the Everglades. They want either a flow way or a system of reservoirs and "filter marshes" to cleanse the water before it flows south. And most environmentalists say they would still like to see the sugar industry removed from the region entirely.

The Fanjuls were noted political machinators during previous environmental battles, angling to defeat a proposed federal sugar tax linked to cleanups in the Everglades. But political fireworks may have diverted public attention from some meaningful steps the Fanjuls and other producers have taken.

After Florida passed a law in 1994 requiring sugar planters to reduce their phosphorus runoff by 25 percent, they voluntarily cut it by more than twice that amount by cleaning their irrigation ditches more often, planting organic cane fields and handling water differently, according to the South Florida Water Management District.

Today, the state's own data show that the phosphorus entering Lake Okeechobee comes primarily from the north side of the lake - downstream from cattle farms, residential developments with well-fertilized lawns and leaking septic systems - and not from southern cane fields.

Linda McCarthy, a water management specialist for Lykes Brothers, one of the largest cattle concerns on the north side of the lake, said companies there were working to control their waste runoff. But she said the state had different standards in her area.

Florida Crystals says it now scrubs other people's phosphorus from the water, yet more keeps coming. It also says that environmentalists have failed to credit Florida Crystals' contribution to efforts to limit global warming - pointing out that its cane fields absorb all the carbon dioxide output that its other operations cough into the atmosphere.

"From the environmentalists' perspective, they've always felt it was easier to bash sugar, because there's fewer landowners," Cantens says. "But there's climate-change groups that would advocate for sugar cane because it's such an energy-efficient crop."

Environmentalists maintain that there are better uses for land in southern Florida than cane plantations, like water treatment areas or animal habitats.

Eikenberg, the governor's spokesman, said Crist believed that there might be a way for environmentalism and commerce to go hand-in-hand.

"We're very proud of the way we have elevated the discussion in Florida, on both alternative and renewable energies," he said. "And Florida Crystals has stepped up to pursue research on cellulosic ethanol."

Given the political dynamics, some industry analysts say the U.S. Sugar buyout is something other than an Everglades rescue.

"My instincts are to suggest that it's a bailout," says James, the trade policy analyst. "Sugar prices have been going down. You've been signing trade agreements bringing in more foreign sugar. Basically, the company's going down because of government policy, so they're saying, 'You should bail us out.'"

Robert E. Coker, senior vice president of U.S. Sugar, disputed that assertion.

"We've had some tough times," he says. "But our company is well capitalized, and we're in a good position long term."

Why, then, is his company going out of business? "When the governor of the state of Florida looks you in the eye and says, 'We'd like to buy your company out' - and Charlie Crist is a very determined individual - our company takes it very seriously," Coker says.

Government intervention in the complicated and notoriously difficult sugar trade is hardly novel. To insulate domestic producers from the booms and busts of global commodity prices, Washington established a system of price, planting and import controls in the 1930s.

Federal programs for most other crops - like corn and wheat - have evolved, so that today the government makes direct payments to the farmers, who then produce huge surpluses for export.

But the sugar program has continued to work the old way, with Washington propping up the domestic price by limiting the supply of raw sugar on the market, through an elaborate system of loan procedures and import quotas.

Today, domestic sugar costs about 18 cents a pound; elsewhere in the world, the price bounces around six to 12 cents a pound. American consumers may not know it, but they're paying for that difference.

In 1984, with the industry in disarray, the Fanjuls bought up the sugar operations amassed by Gulf & Western, an old-fashioned conglomerate that was trying to unload unwanted assets.

The Fanjuls bought the operations for a relative song: $200 million, Gulf & Western's book value for the assets. Competitors and analysts thought the family was crazy; no one else wanted G&W's sugar operations.

Crazy like foxes, says Fernandez, executive vice president of Florida Crystals. The G&W purchase allowed the Fanjuls to knit together growing, milling and refining - facets of the sugar business that were largely separate elsewhere.

"What we pioneered was to have all three components under one corporate structure," Fernandez says.

U.S. Sugar also pursued vertical integration, but it started later than Florida Crystals and kept its operations regional. It also took on hefty debts.

Earlier this year, its employees sued, alleging the company was short-changing them when they claimed their retirement money; that suit is pending. The company canceled its stock dividend this spring. It earned only $3 million last year and warned that it would probably lose money this year.

Then came Crist's $1.75 billion offer.

Florida Crystals executives declined to speculate on U.S. Sugar's finances, other than to dispute any suggestion that its demise would give them control over the market.

Today, according to Cantens, the Fanjuls control 32 percent of the domestic sugar market. That figure plays down their real clout, analysts say, because they control the most profitable parts of the business.

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