Update on Cargill and Sugar Industry Issues

UNCLAS SECTION 01 OF 02 ANKARA 001300

SIPDIS

DEPT PASS USTR FOR LERRION
TREASURY FOR OASIA - PLANTIER
USDOC/ITA/MAC/DAVID DEFALCO
DEPT PASS EXIM FOR MARGARET KOSTIC

SENSITIVE

E.O. 12958: N/A
TAGS: EAGR EINV BEXP TU
SUBJECT: Update on Cargill and Sugar Industry Issues


Summary
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1. (SBU) The GOT is considering legislation on Turkey's
sugar and high fructose corn syrup (HFCS) quota system which
would provide an amnesty to companies, including Ulker's
Cola Turka, rumored to have invested in unauthorized corn
syrup production that violates the quota laws. Coca Cola
and Pepsi have applied for permission to invest in HFCS
production for internal use, but the authorities have turned
down their application. Cargill told us it opposes an
amnesty, despite the fact that it has partnered with Ulker
in at least one starch facility. Changes in the quota
system could pit U.S. producing and consuming companies
against one another. The USG will need to consider these
competing U.S. interests in the event that one or the other
side requests our advocacy with respect to this legislation.
End Summary.


2. (SBU) The Ministry of Industry and Commerce is reportedly
considering legislation which would legalize investments in
corn syrup production capacity made in violation of Turkey's
sugar quota system. Mustafa Sayinatac, Cargill's Director
for Corporate Affairs and a member of the quota-
administering Sugar Board, also expressed concern that the
legislation would subordinate the Board to the Minister.
Turkish Daily Referans and Sayinatac reported that Cola
Turka, which belongs to the Ulker Group, is expected to
benefit from the amnesty provisions in the bill, while Coca
Cola and Pepsi Cola, which had applied for permission to
invest in similar production techniques, had been turned
down by the GOT. Sayinatac told us that Cargill might
request USG advocacy against the draft legislation if it
moves closer toward enactment in its current form. Pepsi
has also registered with the Embassy its concern about the
amnesty.


3. (U) Under the quota system in place since 2001, a Sugar
Board with representatives of both the sugar and corn syrup
industries establishes annual production quotas to deal with
overcapacity in the industry. Companies must seek the
Board's permission prior to making new investments in sugar
or corn syrup production capacity, even for internal use in
a vertically integrated production process. At the same
time, illegal investment is motivated by Turkish domestic
prices for sugar which are now about four times those in
global markets. According to the press, Cola Turka has
realized a fifteen percent cost advantage over its
competitors through illegal in-house sugar production. Cola
Turka issued a press statement denying allegations of
unlicensed fructose production. Cola Turka claimed that the
law requires licensing only for sales to the market and not
for internal use.


4. (SBU) Interestingly, Referans also reported that Ulker
and Cargill are partners in a company called Pendik Starch
Industry Inc., which is reportedly also being investigated
for unlicensed fructose production. Commenting on the
article, Sayinatac confirmed that Cargill and Ulker are
partners in this company, but he maintained that Pendik is
"technically" not violating the quota system. Pendik's
product is starch slurry, which can be used as an input in
HFCS production, but the quota system does not regulate this
material.


5. (SBU) Sayinatac also noted the GOT's decision in early
2005 to abolish the Sugar Authority, the body staffing the
Board. He said the reasons for the decision were not clear.
Referans speculated that the abolition of the Authority is
somehow linked to an investigation of Cola Turka/Ulker over
quota violations, and noted the Prime Minister's former
shareholding in a large Ulker distributor.

Comment/Recommendation
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6. (SBU) We note that Cargill, as an HFCS producer with a
share of Turkey's sugar quota, is faced with the tradeoff of
limits on how much it can produce alongside high prices for
its output as a direct result of those limits. However, its
partnership with Ulker presumably means it also has some
equities on the HFCS-consuming side. Coca Cola and Pepsi
might not object as strenuously to an amnesty if they could
also gain permission to produce their own corn syrup as part
of a vertically-integrated plant. These U.S. companies may
have mutually-conflicting commercial interests arising from
sugar quota system. We will have to take these factors,
along with our long-run interest in a transparent, rule-
based investment climate and a liberalized sugar sector in
Turkey, into account in deciding whether to advocate for any
of the American players involved in this issue.
Edelman