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NEW YORK, Nov 18 (Reuters) - At first blush, the powerful U.S. sugar industry seemed to clinch a big win last month when U.S. trade authorities struck a deal to restrict rising imports from Mexican rivals.
With a closer look, however, it appears that big cane refiners - including the maker of household brand Domino Sugar - might be the biggest losers because the deal could choke off imports of raw sugar from Mexico, cutting critical feedstock.
The pact setting quotas and prices on Mexican sugar imports for the first time appeared to be the best possible outcome to a months-long dispute that had threatened to escalate into an all-out trade war.
Facing global refined prices languishing at multi-year lows and a market that has been in surplus for years, U.S. sugar producers accused Mexico in March of flooding the heavily protected U.S. market with cheap, subsidized refined sugar and called for penalties on imports.
Domino, the top U.S. refiner, is owned by ASR Group, which is the only cane processor that signed onto that case.
For Mexican mills and U.S. food manufacturers such as Hershey Co, the eleventh-hour deal might be a better alternative to the import penalties threatened by the trade case. The new reference prices are about half those including duties.
The U.S. Department of Commerce has slapped duties of over 50 percent on imports, but has said it will drop them if the pact is sealed.
Refiners not involved in the trade case, such as Louis Dreyfus Commodities BV, which owns Imperial Sugar, are also worried, according to filings to the Commerce Department on Tuesday ahead of the deadline for comment.
Six of the country's 10 cane refineries, which represent some 4 million to 4.4 million tonnes of capacity, are located at ports, rely on imports and would be starved of raw sugar, Imperial Sugar's President and Chief Executive Officer Michael Gorrell said in a letter.
"Mexican exporters could ship all of their sugar quota to the United States as direct consumption sugar," he said.
Alongside relatively low reference prices, the possibility for Mexico to skirt refiners with their exports should be "particularly concerning," said Frank Jenkins, president of Connecticut brokerage JSG Commodities and a veteran trader.
The alarm from within the U.S. sugar industry might surprise many market participants who viewed the influential lobby as having the most to gain from restrictions on refined sugar imports after pushing for years to end free trade with Mexico.
Tweaking the terms to assuage the U.S. industry might also delay the deal, increasing the uncertainty about supplies and boosting domestic prices.
U.S. refiners ASR Group, Imperial Sugar and U.S. Sugar Corp declined to comment on this story. Cargill Inc and AmCane Sugar did not respond to requests for comment.
One of the central worries is the definition of refined sugar in the agreement as having a minimum polarity, a measure of purity, of 99.9 percent. Refiners believe that will skew how much and what Mexico imports through the new quota system, expert trade sources said.
Mexican sugar above a 99.5 percent polarity, but under 99.9 percent would not technically be refined under the new deal, potentially dealing a double whammy to refiners.
While refined sugar will still be flowing in - perhaps even more heavily because of limits in the draft proposal - it will be categorized as raw under the government's standards.
The 99.5 percent polarity sugar can be sold directly to food manufacturers, sidestepping refiners, and is used in drinks or as sugar crystals in baked goods where the whiteness of the sugar does not matter, traders said.
Refiners' options for alternative supplies are limited by the so-called tariff rate quota that permits imports from elsewhere if the U.S. government deems the market to be short.
"Their access to (Mexican raw sugar) could disappear," said Tom Earley, a food policy consultant at Agralytica in Virginia who consults for the Sweetener Users Association, which opposes restrictions on imports. (Editing by Josephine Mason. Editing by Andre Grenon)