The Wichita Eagle | PHYLLIS JACOBS GRIEKSPOOR | June 23, 2002
Andale-area farmer John Martin knows he's about to lose a chunk of his nest egg. He's not alone. He's one among thousands of rural businesses, investors, farmer cooperatives and workers who are all waiting to see how badly they may be hurt as Farmland Industries, the nation's largest farmer-owned cooperative, seeks to reorganize its finances under Chapter 11 bankruptcy.
They all stand to lose something. They just don't know how much.
Martin is among 20,000 people, mostly farmers and retired farmers, who own Farmland Industries bonds. Collectively, those bonds account for $570 million, almost a third of the debt Farmland listed in its bankruptcy filing.
Some of the bond holders, like Shirley Davis of Independence, Mo., thought they were making a safe investment.
"There was never any doubt in anyone's mind that Farmland would go on and on and on forever," said Davis, 73, who put the $60,000 profit she made from the sale of the family farm into Farmland bonds.
"We had so much faith," Davis said.
But not everyone had faith. Investors cashing in after hearing about the co-op's problems aggravated the cash-flow shortage that put Farmland in bankruptcy, the co-op says.
Farmland paid out more than $30 million to investors in the six weeks before the bankruptcy was filed.
But now, bond holders such as Martin, who did not cash in, are in line behind banks and secured creditors to recover their money.
Local co-ops
Martin is also among the 600,000 farmers who own shares in local cooperatives, which in turn own Farmland.
Martin says he expects to lose money not only on his private investment in Farmland but on his shares in Andale Farmers Co-op, where he's been a member more than 40 years.
Almost all of Kansas' 350 local cooperatives have shares of Farmland.
"We all expect Farmland equity shares to be written down (devalued) when the fiscal year ends Aug. 31," said Kelly Davidson, who has been involved in local co-op management in Kansas since 1983 and who is now manager of the Andale Farmers Co-op. "We just don't know how much."
Davidson said it won't be the first time that local co-ops have seen the value of their Farmland shares decline.
"Back in the last big farm crisis in the mid-'80s, Farmland cut share value by more than 30 percent," he said. "For most co-ops and most farmers, it didn't cause a major problem. It isn't a cash loss. For most farmers, it can be taken as a tax write-off."
Each co-op will have to make a decision on what to do to account for the Farmland loss.
Among their choices:
They can pass the loss through to members by devaluing cooperative shares.
They can cover the loss out of current earnings.
They can take the money out of their cash reserve of retained earnings, accumulated from sales of products to nonmembers of the co-op.
Which of the options they choose depends on the financial condition of the co-op and the amount of the loss.
Andale's board has already voted not to pay for co-op shares in the event of a member's death until after Farmland makes a decision on how much to devalue its shares.
"Normally, we'd pay the heirs of a deceased member in the month of the death," Davidson said. "But right now we don't know how much a share is worth. Once we know what our Farmland loss is, then we can figure how much value our shares might lose."
Some co-ops, including Garden Plain, which owns nine elevators in Sedgwick County, might have enough money in current and retained earnings to absorb the loss, leaving members unaffected.
Hardest hit will be co-ops in the western part of the state, where drought has been more severe and farm losses greater over the past two or three years.
"The tough part for farmers is that most of them won't have enough income this year to need a tax write-off," said Ralph Stolz, manager of the Wallace County Co-op in Sharon Springs, Kan.
Martin says he's willing to take the loss if it means Farmland stays in business.
"I'm a hog producer, too, and I want to see the pork side stay in the co-op system," he said.
"I don't think equity losses will hurt that much. But Farmland going out of business...."
Unpaid bills
Co-ops and producers aren't the only businesses worried about Farmland's struggles.
For many rural businesses, like Badgerland Meat and Provisions in Madison, Wis., Farmland is a major customer.
Badgerland employs 275 people, who slice the pork that Farmland sells to Wal-Mart.
"If Farmland went under, it'd put some people around here out of work," said Pat Mackesey, owner of Badgerland. "I've got 40 or 50 grocery stores I also do packaging for, but Farmland is by far my biggest customer."
Other businesses, many of them small rural businesses, are owed money by Farmland.
Among them is Greensburg Oilfield Services, owned by Rick Schaffer.
Schaffer, who has 12 employees, said Farmland owes him "several thousand dollars" for work he did cleaning up storage tanks at a fertilizer plant.
"For an outfit my size, that's a substantial amount," he said.
On June 5, U.S. Bankruptcy Judge Jerry Venters in Kansas City, Mo., gave Farmland permission to pay $16 million in bills to suppliers and service companies that might go out of business without the cash, court documents show.
The emergency funds included money to pay outstanding bills of $2.5 million for hogs, $1.3 million for animal feed and $20,000 for livestock-insemination tools, court filings showed. The largest outstanding expense listed in court filings was $7.6 million for freight-hauling services.
Farmland workers worry
Farmland has repeatedly promised that no production jobs will be lost as the company strives to realign its finances and return to profitability. But its more than 6,000 employees in Kansas remain nervous about the future.
Already, 103 salaried workers have lost their jobs in the reorganization, and president and chief executive Bob Terry is not promising that the layoffs are over.
So far, it's business as usual at production facilities, including meat processing, oil refining and fertilizer manufacturing.
But Farmland might be forced to close fertilizer plants and sell pork-processing plants in order to pay back bank loans, said Omar Jama, an analyst at Fitch Inc., a credit rating company.
Farmland has three fertilizer plants in Kansas, located in Coffeyville, Dodge City and Lawrence, although the Lawrence plant has been closed for months because of a lack of demand.
The oil refinery, which has shown a profit during recent tough times, has been up for sale for more than year. It employs more than 200 people in Coffeyville and, combined with the fertilizer plant, makes Farmland the largest employer in Montgomery County.
There are no current plans to close the refinery, which has been profitable in recent months. But neither are there offers on the table. And the clock is ticking on the need for a major investment to upgrade the refinery to meet new clean-air standards.
The Refrigerated Foods Group, as the meat unit is known, is profitable. And the Farmland brand is among the strongest in the supermarket.
Meat operations include a south Wichita processing plant that makes deli meats and hot dogs. So far, eight salaried employees have been laid off there, but none of the more than 300 production workers have lost their jobs.
Farmland also owns 70 percent of Farmland National Beef, the fourth-largest U.S. beef processor. The other 30 percent is owned by U.S. Premium Beef, a producer's cooperative. U.S. Premium Beef has the right of first refusal should Farmland decide to sell its interest in National Beef.
Farmland National Beef has packing plants in Liberal and Dodge City that together employ more than 4,000 workers.
Smithfield Foods, the nation's largest pork producer and processor, made an offer for the meat unit prior to the bankruptcy filing and, in fact, the company told Farmland it was willing to buy "your entire company, if you prefer," according to a Smithfield news release.
Farmland firmly refused that offer.
And analysts say Farmland's private bond holders are likely to oppose any sale of assets because the only way for them to recover their investments is for the company to keep operating.
Reach P.J. Griekspoor at 268-6660 or pgriekspoor@wichitaeagle.com.The Wichita Eagle:
