RPT-Louis Dreyfus sugar unit, others sue customers as U.S. sugar prices plunge

Mon Sep 9, 2013 7:00am EDT

* Imperial Sugar, Michigan Sugar, Amalgamated Sugar sue customers for alleged reneging

* Contract defaults 'drastic' measure for buyers facing price plunge -broker

* More litigation possible as falling prices, oversupply roil market

By Chris Prentice

NEW YORK, Sept 6 (Reuters) - Imperial Sugar, one of the largest U.S. refiners, and two other firms are suing customers for defaulting on contracts, in the latest sign that sinking prices and a supply glut are roiling the U.S. industry.

The lawsuits are considered a last resort in a marketplace where such disputes are normally settled outside of the courtroom, and have emerged as the industry struggles to cope with its biggest sugar surplus in over a decade.

Imperial Sugar, owned by commodity trader Louis Dreyfus Corp , has taken legal action to recoup millions of dollars in compensation from a customer it says has ripped up long-term deals. The move follows similar actions from two other U.S. refiners, Michigan Sugar Co and Amalgamated Sugar Co, all arriving as prices have fallen below contract prices.

While the litigation is limited in scale so far, it illustrates how torrid market conditions threaten to wreak potentially longer-term damage on the sugar sector. There is a risk that relationships along the supply chain, from distributors to food manufacturers, could be damaged.

Prices have tumbled 30 percent in the past year, damaging refiners' margins. The U.S. government has intervened in an effort to shore up the market, spending almost $90 million to buy unwanted sweetener from processors.

But brokers say there is little sign of a recovery while the market is awash with U.S. and Mexican output.

"There are definitely higher than normal defaults taking place," said a U.S. broker. "It's not usually an issue and generally customers honor their contracts, but that can change with these price swings."

The global sugar market also faces a tremendous glut that has caused prices to fall. The U.S. market has largely been protected by government measures against steep price drops, but imports from Mexico, where output has hit a record this year, have surged since the 2008 introduction of the sugar provisions in the North American Free Trade Agreement.

TAKE IT TO THE COURT

The defaults are a "drastic" measure for buyers as prices fall sharply, said Chip Smith, president of the National Sweetener and Ingredient Marketing Association, which represents brokers, processors and buyers.

He is also president of broker A.N. Smith and distributor MJ Distribution in Baltimore.

Some distributors, which buy sugar to sell to other companies including food manufacturers and retailers, have been hit particularly hard by falling spot prices as they often buy feed on long-term contracts and then sell based on cash basis.

Refiners' margins, too, have narrowed as domestic prices have tumbled, traders said.

Imperial Sugar, a household brand, is seeking damages of at least $3 million in a lawsuit against Buffalo, New York-based U.S. Sugar Co. It alleges that the sugar packager and processing firm reneged on contracts in 2012 and 2013, according to documents filed in a U.S. District Court in New York on Aug. 5.

U.S. Sugar agreed to buy refined sugar in 2012 at a delivered price of $55.42 per hundredweight and $42.30 per hundredweight in 2013, or about 55 cents and 42 cents per lb, the documents show.

That compares with current prices of 26 cents a lb for refined cane sugar in the United States, industry sources said. The front-month white sugar contract on Liffe, which is not a delivered price, finished at $492.8 per tonne on Friday, or about 22 cents per lb.

U.S. Sugar plans a "forceful" legal defense against the lawsuit which came after "good-faith" discussions broke down, the company's president and chief executive officer, William McDaniel Jr., said in an emailed statement.

"We are disappointed that Imperial has filed this lawsuit, when other solutions are still available, short of costly and unproductive litigation," he said.

McDaniel said that operations will continue as normal at both of the company's packaging plants.

A spokeswoman for Imperial's parent company, Louis Dreyfus, declined to comment, saying it is the company's policy not to comment on pending litigation.

DEFAULT INSTANCES RAMPING UP

Imperial is not alone in seeking legal action against customers. Just days before the cane refiner filed its claim, a beet sugar processor launched its own lawsuit against one of its customers for damages of over $75,000.

Michigan Sugar Co is suing Tova Industries LLC, alleging the Kentucky manufacturer, packager and distributor bought only a portion of the sugar it promised to purchase between Dec. 1, 2012, and Sept. 30, 2013.

The reason, Michigan Sugar alleges, is "presumably because the current spot price for sugar on the sugar market has dropped, causing Tova to purchase sugar at a lower price from Michigan Sugar's competitors," according to an Aug. 2 document filed in a U.S. District Court in Michigan.

Neither company responded to requests for comment.

Idaho sugarbeet refiner Amalgamated Sugar and the marketing joint venture it shares with Sucden Americas Corp are also embroiled in competing lawsuits with a marshmallow-maker in Idaho and Illinois, court documents show.

Amalgamated and National Sugar Marketing have asked an Idaho judge to award it damages of over $5 million, alleging that Illinois-based Doumak Inc breached contracts to purchase sugar in 2012 and 2013, according to documents filed in May in an Idaho county court.

Doumak has filed a separate lawsuit in an Illinois court, saying that the broker involved was acting on behalf of the sugar suppliers, he was not authorized to accept any commitments on Doumak's behalf, and that the marshmallow-maker never agreed to the contracts.

Counsel for Doumak, Amalgamated, and National Sugar Marketing declined to comment.

Some fear that these lawsuits are just the start of litigation related to the price drop.

"There is a possibility that we will see more of this. It could increase. The market's just fallen so much," said Jerry Kramer of Kramer Sugar Company, a brokerage in Wellesley, Massachusetts.

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