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Most business readers would recoil at the U.S. government's latest move to further subsidize its powerful sugar industry. Unless, of course, you happen to be invested in the Canadian sugar industry's one publicly traded company – Rogers Sugar Inc. – as I am. Market distortions south of the border are good for business here.
After reporting on and off on the Canadian sugar industry for 13 years, I decided last November to buy some Rogers stock. Why would anyone buy shares in a business that operates in one of the world's most warped industries ? Because since 1995, Canada's two sugar producers, Rogers and Redpath Sugar, have had the Canadian market almost entirely to themselves, charging 10 per cent or more above world prices.
That year, the Canadian International Trade Tribunal enacted high trade barriers to keep out sugar from the United States and Europe. The sugar duopoly got five-year extensions in 2000 and 2005. In 2010, the CITT extended the U.S. duties but dropped those on EU sugar – until the Federal Court ruled that was a mistake. The CITT restored them last September through 2015.
The two Canadian refiners continue to keep U.S. and European sugar out with the same simple argument: Without trade protections, warehouses' worth of tonnes of cheap, subsidized foreign sugar would be dumped into the Canadian market, put them out of business and result in the loss of the industry's 1,000 jobs.
U.S. and European governments protect their cane and beet growers and refiners with import quotas, restrictions and price supports, leaving their closed markets paying above-world market prices and producing excess sugar they would gladly dump at lower prices if they could. Those markets have been closed to Canadian refiners, except for occasional allowances to sell modest quotas of sugar into the U.S.
The latest U.S. government move is just further proof that nothing has changed south of the border and should make the duopoly's case for five more years of tariff protection a cinch in 2015.
Could the Canadian sugar industry's relatively few jobs be replaced if the market was busted open, perhaps in food production, where manufacturers would benefit from cheaper sugar? Possibly. But that doesn't compute in trade logic. Meanwhile, the status quo has been good to Rogers. Despite the industry's overcapacity and stagnant growth, Rogers has averaged a solid $50-million in annual free cash flow over the past five years (revenue exceeded $600-million last year), enough to support a 9-cent-per share dividend as well as a special 36-cent dividend earlier this year.
Even without that one-time payment, the stock's dividend yield of 5.6 per cent remains compelling, the business is conservatively managed, lower natural gas prices are good for costs and, of course, competitive threats are minimal. Canadian investors didn't ask for a distorted sugar market, but the payoff is sweet.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .
Sean Silcoff