Sweet dreams: The new tax on corn syrup spells relief for local sugarcane growers. (Spotlight).

Consistently low sugar prices have always favored the soft-drink industry, allowing bottlers to either maintain prices and see wider profit margins, or offer discounts and be more competitive.

For bottlers that use other sweeteners, low prices are an effective bargaining chip in negotiations with suppliers.

Indeed, Mexico's bottlers have for years enjoyed beneficial market conditions beyond the favorable trend in low world prices. Mexico's big sugar surplus--which in 2001 ran to 700,000 tonnes--has a hard time finding available export markets, and the country's beleaguered industry has lacked the warehouse financing needed to coordinate and tighten domestic supply. U.S. imports of high-fructose corn syrup (HFCS) also have made inroads in the Mexican market, pressuring sugar prices downward, benefiting bottlers, but hurting sugarcane farmers and mill owners.

But recent changes to Mexico's tax regime are helping swing the pendulum in favor of sugar mills and away from the bottlers--at least this year. Mexican bottlers that used corn sweeteners were forced to switch in December to all-sugar processing systems after lawmakers levied a special 10% to 20% tax on soft drinks made with HFCS.

The special soft-drink tax has already boosted sugar demand, and subsequently sugar prices in the midterm, forcing bottlers to either absorb or pass on the higher costs to consumers, financial analysts say.

The tax will also help burn off Mexico's sugar glut since bottlers will be using more sugar and no HFCS, erasing the oversupply, said Ismael Capristan, a beverages analyst at Valores Mexicanos Casa de Bolsa.

In another boost to the sugar industry, the government expropriated about two dozen indebted sugar mills last September and reimbursed growers with overdue payments that had been reneged on by private mill owners. The nationalization eased strain in the countryside--where roughly 3 million Mexicans live off growers' incomes--charging Mexico's long-suffering sugarcane farmers with optimism.

"Things have improved after nationalization," said Candido Rosario, head of a sugarcane growers group in Zacatepec, Morelos, home of the Emiliano Zapata sugar mill, one of 27 expropriated plants.

The new measures have helped offset some of the perennial problems faced by Rosario and other sugarcane growers--problems soft drink bottlers don't have to worry about: A lack of credit for fertilizers and irrigation, low world prices and premature rainy seasons that sometimes curtail harvests.

"It's getting better. The payments are on time," sugarcane grower Berulo Garcia Flores told BUSINESS MEXICO at the Zapata mill.

LINGERING DIFFICULTIES

Nevertheless, fundamental problems remain for sugar as the industry tries to gain greater leverage in the market, Valores Mexicanos' Capristan said.

The principal problem is that the soft-drink tax further minimizes the possibility U.S. officials will drop restrictions on Mexican sugar in their market--a situation that will distance potential bidders when the Mexican mills are sold to new private owners presumably in early 2003.

"Who's going to buy (the mills) if they don't know their value?" Capristan said.

U.S. Trade Representative Robert Zoellick has called the tax a "discriminatory and destructive protectionist action" by the Mexican Congress. The response seems to rule out any short-term liberalization of U.S. import policy, which allowed access to only 116,000 tons of Mexico's 700,000-ton sugar surplus in 2001. Questions also remain whether the soft-drink levy jibes with Nafta.

And even if Mexican bottlers are able to eat up Mexico's oversupply this year, it's unclear how long the new tax, which makes it profitable for them to buy sugar and not HFCS, will remain in effect. Already efforts are underway to dilute the levy by exempting drinks made with domestic corn syrup from the tax.

But Mexican sugarcane farmers aren't thinking about next year. They're concentrating on the current November-June sugarcane harvest, which has been invigorated by the new pro-sugar measures. Perhaps the new changes have helped swing the pendulum, which normally favors the bottlers, just a bit in their favor.

On a final note, and just hours before going to print, the executive branch, announced that it is looking into the possibility of using a presidential veto to cancel the new fructose tax.

Robert Donnelly is a Mexico City-based freelance writer.