Heavy debt pulls Farmland into
Chapter 11 ; new CEO Terry leads
reorganization effort
Patrick Duffey
USDA Rural Development
asting effects of the agricultural
recession of
recent years, which has
left some farmers reeling
and driven others out of
business, finally caught up with North
America’s largest farmer-owned cooperative.
Despite $11.8 billion in sales last
year, the weight of $1.9 billion in liabilities
from rapid expansion in the 1990s
to better compete on world markets
forced Farmland Industries, Kansas
City, Mo., to file for Chapter 11 bankruptcy
protection on May 31. Under
Chapter 11, firms seek protection from
creditors while they reorganize their
business. The bankruptcy process can
take a year or more to complete.
In the wake of the filing, the cooperative
has begun a summer-long
reorganization study to explore its
future. The investment bank UBS
Warburg has been hired to help evaluate
what might be sold to reduce costs
and raise cash.
After less than 2 years at the helm,
Robert Honse, Farmland’s chief executive
officer, retired at age 58 in early
May. Farmland’s 22-member board
unanimously chose Robert B. Terry, 45,
to succeed him. Terry has been Farmland’s
executive vice president, general
counsel and corporate secretary. Terry
saluted Honse for his 30-year career
with the cooperative and help in reducing
debt by $500 million, cutting corporate
expenses in half and securing a
new bank agreement.
Terry made
immediate changes
on his executive
staff. Steve Rhodes,
48, is the new executive
vice president
and chief financial
officer, replacing
John Bernardi, who
has left the cooperative.
Rhodes had
been a vice president
and controller. Bob Schuller, 41,
succeeds Terry as vice president, general
counsel and corporate secretary. He
had been associate general counsel.
Dennis Alt, another associate general
counsel, was named vice president for
strategic projects and will lead the
reorganization effort. Tim Daughty,
48, is the new vice president for administration.
The 73-year-old cooperative was
pushed over the brink by an estimated
$30 million “run on the bank” in late
May due to an aggressive early redemption
demand from subordinated debt
holders who had heard news of potential
bankruptcy. The bonds are held by
about 20,000 individuals who provide
about $570 million in debt financing.
The bankruptcy court will inform those
unsecured creditors on how to confirm
and address their claims.
The cash-flow crisis was made
worse by a sagging nitrogen fertilizer
market in recent years. The situation
intensified as drought has squeezed
farmers in the West and heavy rains
soaked the Midwest, delaying cropplanting.
The bankruptcy filing covers
Farmland Industries, Farmland Foods,
Farmland Pipe Line Co., Farmland
Transportation (transportation brokerage)
and SFA Inc., a Midsouth retail
farm store operation. The filing does
not affect several Farmland subsidiaries,
including Agriliance (a fertilizer
marketing venture with CHS
Cooperatives and Land O’Lakes);
ADM-Farmland (a grain marketing
venture with Archer Daniels Midland);
and Farmland National Beef, a 5-yearold
beef processing venture with U.S.
Premium Beef (which has the right of
first refusal to buy any available Farmland
stock in the venture).
While maintaining most of its
operations, the cooperative plans to
cut its workforce. In the past 2 years,
Farmland had trimmed 4,000 jobs but
still employs about 13,000 people,
including 900 in the Kansas City area.
Just before filing for bankruptcy,
Farmland paid its employees early and
asked them to cash their checks within
24 hours. Since then, Farmland has
closed 16 convenience stores in northeast
Arkansas that it acquired when it
purchased SF Services in 1998.
An 11th-hour buyout bid for Farmland’s
meat business by Smithfield
Foods Inc., the world’s largest hog
producer and pork processor, was
declined by the cooperative’s board.
Farmland rejected the offer after
receiving $306 million of debtor-inpossession
financing from its lending
syndicate headed by Deutsche Bank
AG and including CoBank, Bankers
Trust Co. and Rabobank. Sen. Charles
Grassley of Iowa has since said he
opposed any deal between the firms
out of concern for too much concentration
in the meatpacking industry.
Farmland’s refrigerated foods unit,
which includes its beef and pork business,
generated sales of almost $4.75
billion in 2001. Its fresh meat operations
are the fifth largest in the
nation. Rather than focusing on owning
livestock, Farmland has been
developing branded meat products
including case-ready offerings for
supermarkets.
Farmland is also attempting to sell
its petroleum refinery at Coffeyville,
Kan. After a 5-week shutdown for
repairs and improvements, the refinery
came back on stream for the spring
season. The regional cooperative’s
bankruptcy petition is expected to have
little effect on operations of its local
cooperative owners. If Farmland’s
stock is devalued, the locals could
write them off for tax benefit in the
current fiscal year.
Harry Fehrenbacher, Illinois farmer
and Farmland chairman, earlier this
year told a Farmland Systems Conference
in Scottsdale, Ariz., that the
cooperative was changing from a
commodity-based farm supply business
with huge cycles and small margins
to a more stable, high-margin
foods business, although “the transition
is not complete as evidenced by
financial results of the past few years.”
He said,“We must position it (Farmland)
to generate a return on your
equity investment...including the
foods business.”
Terry indicated the cooperative’s
strong brand equity, leadership in the
meat business, $2 billion asset base and
support of its 1,700 local cooperatives
and their 600,000 farmer-owners
would help the cooperative emerge as a
stronger company.
