Sugar producer Tate & Lyle has issued a profits warning after sugar prices fell to their lowest for more than 20 years.

The company said profits for the six months to 25 March would be "somewhat below" last year's �93m.

Tate & Lyle blames the deterioration in the American sugar market. It is rethinking its strategy there, and might even pull out of sugar in the US.

Unusually large crops of beet and cane sugar have led to an oversupply.

The problem has not yet affected Europe, where prices are controlled by the Common Agricultural Policy.

Shares plunge

Tate & Lyle's shares dropped 16% on the warning, hitting a 10-year low of 195p.

"It's not new news that the US sugar market is bad but confirmation from the company is not going to be good for the shares," said one food analyst.

Sugar prices have been in the doldrums for well over a year.

But the problem in the US is so serious that the government is talking about buying 250,000 tonnes of surplus sugar to boost the price.

A government scheme guarantees US growers a minimum price for their sugar. Recently that has been three times the world rate.

But US production has increased as farmers switch from less lucrative crops and imports have risen because of obligations under international trade agreements.

That has sent prices in the US down by 25%.

Now growers are threatening to forfeit sugar worth up to $500m that was pledged as collateral on marketing loans.

Policy criticised

America's sugar policy has been criticised in the past, especially by countries being asked to lower their trade barriers.

Domestic opponents blame the farmers and say prices should be allowed to fall.

But if the government does buy up thousands of tonnes of sugar, it will have to find something to do with it.

One suggestion has been to donate it overseas, but no other country has expressed an interest.

Sugar-driven cars

Another idea is to convert it into ethanol, an additive used to fuel motor vehicles. Much of Brazil's cane has been used for this in recent years.

Jack Roney of the American Sugar Alliance said buying up the sugar was a better option than the costly loan forfeitures.

"The cost of removing some marginal amount of sugar from the market now and disposing of it is probably just a fraction of the cost exposure they're facing," he said.

US Agriculture Secretary Dan Glickman is currently deciding the best route to take.

But Dan Colacicco, an analyst at the agriculture department, believes taxpayers will foot the bill whatever happens.

"There's far too much sugar out there," he said. "It's a mess."

Producers around the world are hoping that increased demand in Asia, particularly China, will eventually help the situation.

But in the meantime, they are looking at alternatives.

Anger over protection

Australian growers are talking to the government about using sugar to produce ethanol - however, it would have to be exempted from fuel taxes to be viable.

But their main proposal, expressed strongly at this week's annual conference of Australian growers, is for free market reform in the world sugar trade.

The farmers are angry about the subsidies and protection available in some countries.

"We are required to give our sugar away to consumers for less than the cost of production," chairman Warren Martin told the Australian Cane Farmers Association.

"Sugar tariffs were stripped away as our contribution to world free trade, but we have received nothing in return."