(Adds background, context, legal and market commentary)
By Ros Krasny and Chris Prentice
WASHINGTON/NEW YORK, March 28 (Reuters) - U.S. sugar industry groups on Friday accused Mexican exporters of dumping cheap, subsidized supplies on the U.S. market, firing the opening shot in a potential trade war after months of growing tension in the sweetener industry.
In a petition to the U.S. International Trade Commission, which experts have called the first of its kind, the sugar cane and sugar beet groups said that "dumped and subsidized" imports would cost U.S. producers nearly $1 billion in net income in 2013-14.
The U.S. domestic sugar industry is reeling from record low world prices and unfettered shipments from Mexico thanks to trade agreements.
The petitions filed with the ITC and the U.S. Department of Commerce allege that the Mexican industry has shipped sugar to the United States at dumping-level prices, and has also received subsidies from Mexican federal and state governments.
"It is hard for U.S. farmers to succeed when a subsidized industry that is largely government-controlled is dumping its product," said Phillip Hayes, a spokesman for the American Sugar Alliance, which represents U.S. producers.
The dispute arrives against the backdrop of a struggling world sugar industry. A price rally early in the year has stalled and prices currently languish near the cost of production for many of the world's millers amid four back-to-back years of surplus.
Officials with Mexico's Agricultural Ministry and the Mexican Sugar Chamber, which represents most of the country's cane mills, did not respond to requests for comment.
But the move by U.S. groups is expected to kick off an escalated dispute, especially after political pressure prompted Mexico's sugar industry to begin exporting to the world market.
"It is highly probable if this proceeds Mexico will retaliate," said Kevin Combs, partner with sugar brokerage and consulting firm McKeany-Flavell in Oakland, California. "Mexico is absolutely going to bring high-fructose into the conversation."
The move has already triggered staunch criticism from U.S. sugar users, who have said that existing sugar supports inflate domestic prices.
The ITC will begin its investigation immediately and make a preliminary determination within 45 days. The U.S. Commerce Department will launch its own investigation within 20 days.
The U.S. sugar market, where Americans consume more sugar than they grow, is highly regulated through an array of measures that include import quotas.
Mexico, however, has open access a signatory to the North American Free Trade Agreement. But until the past year or so, the slow implementation of NAFTA and the disruption of U.S. supplies in the wake of 2005's Hurricane Katrina prevented it from taking full advantage of that access.
Now tensions between the two countries' sugar industries are growing as production hits record levels, Mexican sugar imports into the United States soar and the region's supplies balloon, pressuring prices to historic lows.
U.S. sugar companies defaulted sweetener to the U.S. Department of Agriculture (USDA) for the first time in nearly a decade rather than repay their government-backed loans in cash during the 2012-13 crop year that ended Sept. 30.
The forfeitures and a string of USDA efforts to bolster prices and erode excess stocks cost the government an estimated $260 million.
The USDA estimates sugar imports from Mexico in 2013-14 at 1.745 million short tons, and in a preliminary forecast in February said shipments would jump in the 2014-15 marketing year to 2.26 million short tons.
MORE THAN 'SHOTS OVER THE BOW'
These anti-dumping complaints are often successful and have a chilling affect on trade even before they are decided because duties can be retroactive.
"Well over 60 percent of these cases are successful," said Joe Dorn, a partner with King & Spalding in Washington, who has handled NAFTA trade cases with other products.
"In my experience, U.S. producers file these because they are getting harmed by the imports ... these aren't generally shots over the bow for negotiating; they are seeking relief from U.S. law."
This may be the first trade case of its kind in sugar, but not for the coveted sweetener products market, which saw Mexico launch an anti-dumping investigation on high-fructose corn syrup from the United States in the late 1990s.
Since then, high-fructose corn syrup exports into Mexico from the United States have surged alongside sugar exports into the United States from Mexico.
Mexico, the United States and Canada have prosecuted over 100 anti-dumping and countervailing duty cases since NAFTA went into effect, according to the ASA.
The move from the sugar groups may complicate the U.S. government efforts to balance supplies as the USDA is expected to face another year attempting to whittle down excess supplies and prevent forfeitures.
USDA propped up the sugar market in 2013 by purchasing excess supplies and selling them at a loss to ethanol producers and others. It has already warned that similar action might be needed this year.
The industry groups urging ITC action included the American Sugar Cane League, American Sugarbeet Growers Association, American Sugar Refining Inc, Florida Sugar Cane League, Hawaiian Commercial and Sugar Company, Rio Grande Valley Sugar Growers, Inc, Sugar Cane Growers Cooperative of Florida and the United States Beet Sugar Association.
Front-month U.S. domestic raw sugar futures on ICE Futures U.S. traded at 22.35 cents a lb on Friday, above estimated forfeiture levels.
The bid to prevent excessive imports and bolster prices faces criticism from a coalition of sweetener users that fought for changes to the U.S. sugar program ahead of the 2014 farm law.
"The U.S. sugar-producing industry is amazing in its quest to further enhance the un-level playing field against competitors," said Larry Graham, chair of the Coalition for Sugar Reform and president of the National Confectioners Association, which represents candy makers and other sugar buyers.
"Now it appears they're looking to further limit what little competition they have in the form of legal imports from our neighbor Mexico, which the law allows," he added. (Editing by Susan Heavey, Jonathan Oatis, David Gregorio and G Crosse)