\r\n\r\nSeptember 16, 2003, Tuesday, Late Edition - Final\r\n\r\nSECTION: Section C; Page 1; Column 2; Business/Financial Desk \r\nKANSAS CITY, Mo. -- Two years ago, Farmland Industries, the nation's largest farmer-owned co-op, dedicated a new headquarters here that seemed to symbolize the company's emergence as a corporate giant.\r\n\r\nThe glass-sheathed building, with its sleek entrance and plush executive suites, helped consolidate the work force of a company that had grown from a collection of small farm co-ops into an agricultural powerhouse with sales of more than $12 billion. \r\n\r\nBut today, Farmland is preparing to close its doors. Weighed down by huge debts and a severely depressed fertilizer business, Farmland was forced to file for bankruptcy protection last year. The company is now proceeding toward liquidation.\r\n\r\nThe collapse of Farmland has some farm groups worried that co-ops are losing their ability to compete with big food companies.\r\n\r\nSmall farmers also worry that the demise of a big farm co-op will give big food and agriculture companies even greater market power over farmers, particularly the 500,000 farmers who collectively own Farmland.\r\n\r\n""This doesn't bode well for farmers,"" said Tom Buis, a spokesman for the National Farmers Union. ""The marketplace for a lot of farm products has failed because we're seeing less and less competition in the industry. It's fair to say if you've got just one buyer you're not going to get a good price.""\r\n\r\nYet some big farm co-ops, like Land O'Lakes, Dairy Farmers of America and Sunkist, have remained competitive and use their size and heft in the marketplace.\r\n\r\nFarmland, some agriculture industry experts say, was simply a victim of its own mismanagement.\r\n\r\n""They took a lot of risk,"" said Roger Ginder, a professor of agricultural economics at Iowa State University. ""Farmland borrowed heavily to finance its operations,"" he added, ""and in the end this created a lot of problems.""\r\n\r\nThe problem at Farmland, even people inside the company now agree, was an overaggressive expansion effort, too many building projects, too much reliance on debt and too much dependence on a fertilizer business that fell apart.\r\n\r\nBut no one expected Farmland to come apart so quickly. The failure has shocked the farm community. Thousands of farmers here in Missouri and as far west as Idaho and south to Mississippi are expected to lose more than $700 million in equity or investments in the collapse of the co-op.\r\n\r\nAfter spending hundreds of millions of dollars in recent years to compete with the world's biggest food companies, Farmland (whose motto is ""Proud to be farmer owned"") is now being sold in parts to rival corporations.\r\n\r\nCargill and Koch Industries, for example, bought its fertilizer plants. And last month, Smithfield Foods, the nation's biggest pork producer and processor, made a bid to acquire Farmland's pork processing business for $363 million. Last week, Cargill, which operates another big processor, the Excel Corporation, announced its own bid of $385 million.\r\n\r\nThe Smithfield deal led some farmers and legislators to cry foul because of worries about the dominance of big agriculture.\r\n\r\nNine United States senators, including Tom Daschle, Democrat of South Dakota, and Charles E. Grassley, Republican of Iowa, signed a letter asking the Department of Justice to investigate how the Smithfield acquisition would affect farmers and consumers.\r\n\r\nJerry Hostetter, a spokesman for Smithfield, which is based in Smithfield, Va., denied accusations that the combination would weaken competition in the meat processing market and said the acquisition would not be harmful to small farmers.\r\n\r\n""This is the same Midwest paranoia,"" Mr. Hostetter said in a telephone interview a few weeks ago. ""The small farmer thing has been around a long time.""\r\n\r\nCargill, one of the nation's biggest food processors, will soon have to answer similar questions from farm groups that worry about consolidation.\r\n\r\nFor years small farmers have complained about their shrinking share of the nation's food dollar and how a series of mergers has put most of the nation's processing capacity in the hands of a few big corporations. They, in turn, use their market power to try to keep the prices paid to farmers low.\r\n\r\nOf course, some economists say the story is far more complex. They say federal farm aid, trade restrictions, the propensity of farmers to overproduce and the fact that farmers are selling a commodity and not a processed, higher-valued food product, help reduce the farmer's share of the food dollar.\r\n\r\nThe fact remains, however, that farmers seem less powerful in the marketplace. And many farmers said they believed that co-ops were one of the few market equalizers.\r\n\r\nThat was the mission of Farmland, which was founded in 1929 here in Kansas City. At first, it helped farmers to band together to get cheaper oil and other farm supplies. Later, Farmland -- which is owned by smaller co-ops around the country -- began operating petroleum refineries, gas stations, feed mills and even convenience stores.\r\n\r\nWhen it made a profit, much of the money went back to farmers in the form of cash payments and equity in the local co-ops. Farmland is required by law to pay about 20 percent of its profits to farmers; it actually paid close to 50 percent.\r\n\r\nBut in recent years, as big food processors and marketers have grown into giant corporations, co-ops like Farmland have been pressured into getting bigger to keep costs down and supply giant retailers. For capital, the co-op went to its banks.\r\n\r\n""Farmers need critical mass to play in these industries,"" Mr. Ginder at Iowa State University said. ""You get the ability to command enough volume to deal with, for example, a Wal-Mart, which is not going to deal with too many suppliers.""\r\n\r\nIn the 1990's, the cash cow for Farmland's growth spurt was fertilizer. From 1990 to 1999, Farmland reported nearly $700 million in cumulative profits, largely from increasing fertilizer sales. A big part of that money went back to farmers in the form of payouts. The rest was used for expansion.\r\n\r\nOne big beneficiary of the strategy of expansion was Farmland Foods, which became the sixth-largest pork producer in the nation by processing more than seven million hogs a year; it had sales of $1.8 billion in 2002.\r\n\r\nThe good times, however, came to an end in late 1999 and 2000, when the price of natural gas, an important raw material in fertilizer, began soaring.\r\n\r\nWhen the price of natural gas shot up from about $2 for an amount of gas with one million B.T.U. of energy, to over $10 in December 2000, Farmland executives figured they would soon decline. They did not, and the results were devastating.\r\n\r\n""The fertilizer business didn't just slow down, it hit a brick wall,"" says Robert B. Terry, who took over as chief executive in May 2002. ""And this wasn't just Farmland, it was the industry. Everyone has been wrecked.""\r\n\r\nThe losses hit when Farmland was in the midst of an acquisition and building binge. The company had re-entered the beef business; it was building a huge and expensive fertilizer plant in Coffeyville, Kan.; older fertilizer plants in Dodge City and Liberal, Kan., were being upgraded; and Farmland had spent about $100 million on a new computer software system.\r\n\r\nAs the losses mounted, Farmland tried to merge all of its operations with Cenex Harvest States, another giant farmer-owned co-op that had petroleum, fertilizer and grain interests. That deal fell apart when shareholders in Cenex (since renamed CHS) voted against the combination, partly because of concerns about Farmland's increasing debt.\r\n\r\nBy early 2002, the fertilizer business was losing a lot of money. Farmland reported that revenue had dropped to $3.4 billion in the last half of 2001 from $4.7 billion in the period a year earlier. It had a net loss of nearly $50 million.\r\n\r\nWorried about the co-op's prospects, and its ability to pay the high interest rates on its debt, bondholders began demanding early repayment, exacerbating the cash problems.\r\n\r\n""Farmland issued bonds that were redeemable on demand, and that was critical,"" Mr. Ginder said. ""So it sort of became like a run on the banks.""\r\n\r\nMr. Terry's predecessor as chief executive, Robert Honse, stepped down three weeks before the co-op filed for bankruptcy protection.\r\n\r\nThe executives who are now working to liquidate the co-op say Farmland borrowed too heavily to compete in too many capital intensive businesses. And once in those businesses, Farmland found it hard to get out when it started losing money.\r\n\r\n""The businesses we're in are important to the members,"" said Steven Rhodes, Farmland's chief financial officer. ""They interact with them; they buy fertilizer from them. So they don't want to get out.""\r\n\r\nCo-ops also typically have difficulty raising money, because they cannot sell shares to the public. Most of their capital comes from retained earnings -- what is left after making payments to farmers.\r\n\r\n""There are fundamental differences between corporations and cooperatives,"" says Michael Cook, an agricultural economics professor at the University of Missouri. ""Corporations don't have to pay out earnings and redeem equity.""\r\n\r\nSo are big co-ops like Ocean Spray or CHS still viable? Can they compete with giant food corporations?\r\n\r\n""Yes,"" Professor Ginder said. ""The capital constraint is a constraint, but that doesn't mean all co-ops are going to fail. They just need to find more creative ways to get that capital, and they need to use it more carefully.""\r\n\r\nSome of the better co-ops, experts say, are narrowly focused, like the Dairy Farmers of America or Florida's Natural Growers.\r\n\r\nFor Farmland, however, it is too late to find a focus. Company executives are working to create a trust that will liquidate the co-op's assets.\r\n\r\nEventually, Farmland will leave its six-story headquarters here. That will mean dismantling the large mural that hangs on the first floor. Painted in 1956, it depicts the growth of American agriculture and the founding of the Union Oil Company, which eventually became Farmland Industries.\r\n\r\nThe mural shows the co-op pioneers, as well as farm families, animals, tractors and, in the far right corner, the ""two skeptics,"" as they were called, the men who doubted the co-op system would ever work.\r\n\r\nThe mural is painted in heroic tones, as a symbol of how wrong the skeptics were; and how right the pioneering farmers were.\r\n\r\nWhile few experts believe that co-ops are doomed, farmers are still lamenting the fall of the biggest farmer-owned co-op of them all.\r\n\r\n""We're disappointed,"" said Dale Locken, chief executive of the South Dakota Wheat Growers Association, which had a large equity stake in Farmland. ""We'd like to have that equity. But you have to learn to just move on.""\r\n \r\nThe New York Times/DAVID BARBOZA
