MEXICO,S TWO SUGAR CANE PRODUCERS ASSOCIATIONS

UNCLAS SECTION 01 OF 03 MEXICO 001330

SIPDIS

SIPDIS

DEPT FOR DRL/AWR AND ISCSR, WHA/MEX, WHA/EPSC AND WHA/PPC,
EB/IFT/OMA, EB/ESC FOR MCMANUS AND IZZO, DOL FOR ILAB,
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/ARUDMAN, USDOC FOR
ITS/TD/ENERGY DIVISION, TREASURY FOR IA (ALICE
FAIBISHENKO),DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND
SLADISLAW, USDA/FAS/OGA

E.O. 12958: N/A
TAGS: ELAB ENRG ECON EPET PINR MX
SUBJECT: MEXICO,S TWO SUGAR CANE PRODUCERS ASSOCIATIONS
HAVE VERY DIFFERENT VIEWS ON ETHANOL

REF: MEXICO 0130


1. SUMMARY: Embassy personnel recently met with
representatives of Mexico,s National Union of Sugar Cane
Producers (UNPCA) and the National Union of Cane Growers
(UNC) to discuss these two organizations, views on
increasing Mexican ethanol production. The cane producers
are the intermediaries between the unionized sugar workers
(who cut cane and work in the mills) and the mill
owners/operators who make up the sugar industry. Of these
three segments of sugar production in Mexico, the cane
producers appear to be the ones who have thought most about
what the country needs to do to increase ethanol production.
That said, they have very different views on the near term
future of ethanol production in Mexico. According to the
UNPCA, many of the elements needed to increase sugar cane
based ethanol production are beginning to fall into place.
The UNC, however, is much less optimistic about the prospects
for increased production of sugar cane-based ethanol without
significant investments and changes in the way sugar is
produced in Mexico. END SUMMARY


A TALE OF TWO SUGAR CANE PRODUCERS
--------------


2. Embassy personnel responsible for energy, agriculture and
labor recently met with representatives of Mexico,s National
Union of Sugar Cane Producers (UNPCA) to discuss that
organization's views on increasing Mexican cane based ethanol
production. A short time later post,s Labor Counselor met
separately with the National Union of Cane Growers (UNC) to
confer on this same issue. Although the UNPCA and UNC both
call themselves &unions8 it would be more accurate to
describe them as commercial or trade associations. The cane
producers are the intermediaries between the unionized sugar
workers (who cut cane and work in the mills) and the mill
owners/operators who make up the sugar industry.


3. The main differences between the two organizations are
their ages, degree of political affiliation and level of
international contacts. The UNPCA is the older of the two
cane producing organizations and is formally a part of the
National Confederation of Farmers ) CNC. The CNC is an
integral part of Mexico,s former ruling party, the
Institutional Revolutionary Party (PRI).
Strictly speaking the National Union of Cane Growers )UNC-
is also closely associated with the PRI but is not part of
its formal structure. The UNC was formed in 1973 and
maintains a high level of international contacts and is a
formal member of International Sugar Organization and the
International Federation of Agricultural Producers. Both the
UNPCA and the UNC agreed that it was feasible to
significantly increase sugar cane based ethanol production
and even agreed on many of the steps required to make
increased cane based ethanol in Mexico. They differed
significantly however on how close Mexico was to achieving
the steps needed to make increased ethanol production a
reality.

THE GLASS IS MORE THAN HALF FULL
--------------


4. In meeting with the National Union of Sugar Cane
Producers (UNPCA),Embassy personnel were presented with a
scenario which clearly showed that the organization had given
great thought to the actions that would be needed to increase
Mexico,s production of sugar cane based ethanol. They were
aware that the legal framework needed to support increased
ethanol production was still pending the approval of a
national Bio-fuels Law and of implementing legislation for a
Sugar Law passed in 2006. The UNPCA acknowledged that the
current pricing structure for sugar in Mexico would prohibit
the production of sugar cane based ethanol at an economical
price (in comparison to sugar for human consumption or the
world price of petroleum). The UNPCA representatives also
seemed aware of the steps needed to achieve greater ethanol

MEXICO 00001330 002 OF 003


production such as increasing the amount of land under sugar
cane cultivation, the need to build plants devoted to
ethanol, develop a plan to get the ethanol to Mexico,s
energy producers (petroleum and electricity) and the need to
deal in some form or other with Mexico,s sugar workers (cane
cutters and mill workers) union.


5. According to the UNPCA (and the UNC),the current
structure of Mexico,s sugar industry is completely incapable
of taking the steps needed for increased ethanol production.
The semi controlled price of Mexican sugar, which is one of
the highest in the world, makes it uneconomical to produce
cane for ethanol as opposed to cane for human consumption.
Their solution to this was to create a totally new and
parallel ethanol industry totally independent of Mexico,s
current sugar industry. The new ethanol industry would
expand the planting of sugar cane to new fields which the
UNPCA says it has already identified in order to avoid
competing for sugar currently destined for Mexico,s food
related industries. It would build new, modern production
facilities totally dedicated to producing ethanol production.
Finally, this new industry would work with the sugar workers
union to establish a new hiring and employment structure that
is more flexible than the ones that currently exists in
Mexican sugar mills.


6. In order to finance the establishment of this new ethanol
industry the UNPCA representatives stated they had been in
contact with Japanese, European and Brazilian interests who
were prepared to invest in Mexico. Despite its close
affiliation with the Mexico,s PRI political party the UNPCA
underscored that its membership was composed of cane
producers associated with parties across the Mexican
political spectrum and as such the had no concerns that their
plans for establishing a new ethanol industry would meet any
political resistance.


7. Interestingly, in response to a direct question about
working with the GOM in general and Mexico,s Labor
Secretariat in particular, the UNPCA representatives stated

SIPDIS
that involving they want no contact with the GOM as that
would be the surest way to prevent the new industry from ever
getting off the ground. That one negative note
notwithstanding, the UNPCA representatives responded
optimistically to all the question put to them by Embassy
personnel and assured us that the establishment of new and
independent sugar cane based ethanol industry was well on its
way to becoming a reality.


THE GLASS IS REALLY ALMOST EMPTY
--------------


8. Over the course of an extended meeting at the offices of
the National Union of Cane Growers (UNC),post,s Labor
Counselor received a very different take on the prospects for
the increased production of sugar cane based ethanol in
Mexico. The leadership of the UNC is in close agreement with
their colleagues in the UNPCA that Mexico will needed to
create a parallel ethanol industry if it wishes to
significantly increase the production of this alternative
fuel. However, this was probably the only point regarding
sugar cane based ethanol on which the UNC and UNPCA agreed.


9. In the UNC,s view, the most overarching problem
preventing an increase in the production of sugar cane based
ethanol was the overall availability, or more specifically
the lack thereof, of sugar cane. The UNPCA saw no real
problems in meeting the current demand for sugar in Mexico.
However, the UNC said, Mexico,s current demands for sugar
and its capacity to meet those demands are almost in prefect
synchronization with nothing left over to spare.


10. For example, the UNC estimated that in 2007 the total
production of Mexico,s sugar industry would be about 5.6
million tons (MT). The UNC then compared that estimate with
expected demand which it said would be roughly 5.5 MT with
nothing left for the production of ethanol. According to the

MEXICO 00001330 003 OF 003


UNC, the pattern production just barely meeting demand will
almost certainly be repeated in 2008 and 2009. This problem
could be solved by increase cultivation but that would not
address the problem of the comparative cost/benefits.


11. At present one ton of sugar cane will yield 120 kilos of
sugar with a market price to the producer in Mexico of some
USD 72.00. That same ton of sugar cane will yield 80 liters
of ethanol with a market price to the producer of USD 32.00
) 40.00. Under those circumstances, the UNC asked
rhetorically, what producer is going to sell their cane to
someone interested in producing ethanol. The UNC speculated
that under some sort of renewable energy program a system of
subsidies might make sugar cane based ethanol profitable to
the producer but that would not be very efficient and it
would require the approval/participation of the Mexican
government,s Energy Secretariat, Secretariat of Agriculture,
the office of the President and the Treasury Secretariat.
And even then, the UNC added, that assumes that all the other
factors mentioned by the UNPCA fell into place and that the
sugar workers union could be persuaded to negotiate flexible
employment conditions. In short, the UNC concluded, it is
possible to increase sugar cane based ethanol in Mexico but
doing any time soon would require a great deal of luck,
cooperation and a change of hard economic facts.

COMMENT
--------------


12. After talking with Mexico,s two main sugar cane
producers it is clear that they have both given a great deal
of thought to increasing the country,s capacity to produce
ethanol. Both producers seem to be in agreement on the steps
that need to be taken to increase cane based ethanol
production but they differ markedly on how easy or difficult
it will be to take those steps. At present it appear that the
UNC has taken a more realistic view of the difficulties
involved in the economic production of cane-based ethanol in
Mexico, but even that organization believes that ultimately
it can be done. It appears, however, that a great deal of
work still remains to be done before significant gains can be
achieved.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity
GARZA