Dismantling of Farmland continues;
Smithfield buying pork business

By Patrick Duffey, writer-editor
USDA Rural Development

ike a cat unraveling a big ball of yarn inch by inch, once mighty Farmland Industries Inc., at Kansas City, Mo., is being unraveled and dismantled. Its operations are being sold to satisfy an overwhelming debt load that drove the agricultural supply and meat-processing cooperative into bankruptcy May 31, 2002. Although it filed for Chapter 11 bankruptcy, or corporate reorganization, the case has been handled from the early stages as a virtual Chapter 7, or asset liquidation bankruptcy.

Observers note that Farmland’s demise resulted from borrowing too heavily to compete in too many capital intensive businesses, expanding too aggressively, building too many projects and depending too heavily on the fertilizer business when the fertilizer industry was depressed. Thousands of farmers are expected to lose more than $700 million in equity or investments.

Robert Terry, Farmland’s chief executive officer, said that if the cooperative’s reorganization plan is approved by U.S. Bankruptcy Court Judge Jerry Venters, Farmland could begin paying claims by year’s end. Additional payments would occur as the cooperative sells more assets.

Bids have been offered in recent months for Farmland’s primary fertilizer, petroleum and meat-processing facilities.

Cargill, Smithfield bid
for Farmland pork division

Competition developed between Cargill and Smithfield Foods for the pork division of Farmland Foods. Bidding peaked in October and went to a bankruptcy court auction. Smithfield emerged as the winner.

Smithfield’s initial bid was $363.5 million, which triggered a hearing before the Senate Judiciary Committee due to concerns about concentration in the meat-packing industry. But the deal eventually was approved by the antitrust division of the U.S. Justice Department.

Cargill, which owns Excell Corporation, a major pork processor in Illinois and Iowa, entered the bidding with a pre-auction cash offer of $385 million. Smithfield countered at the auction, increased its cash bid to $367.4 million for most of the assets, agreed to honor Farmland’s pork-producer contracts and assumed Farmland’s $90 million pension plan obligation, effectively boosting its offer to $457.4 million.

Prior to the fall auction, Smithfield sold its Canadian pork business to Maple Leaf. It expected to net $200 million from the deal.

With the Farmland purchase, Smithfield could become a $10 billion food company that processes nearly 30 percent of the nation’s pork supply. Farmland Foods, which ranked as the 6th largest pork processor, has packaging and processing plants in Iowa, Kansas, Nebraska, Illinois and Massachusetts. The cooperative processed more than 7 million hogs per year and accumulated sales of $1.8 billion last year.

The sale could become effective in early November. The combination of Tyson, Smithfield, Cargill and Swift now dominate the meat processing business.

Farmland’s beef processing operation, Farmland National Beef, will remain under producer control, as it has been purchased by its former partner in the operation, U.S. premium Beef, a cooperative (see related story).

Fertilizer assets sold
Meanwhile, J.R. Simplot of Boise, Idaho, has agreed to buy Farmland’s interest in SF Phosphates, a Utah based joint venture of the two companies. Simplot will pay $64.5 million plus the value of Farmland’s share of cash and working capital. The assets include a fertilizer plant at Rock Springs, Wyo., a phosphate mine at Vernal, Utah, and a 96 mile pipeline connecting the two.

The deal is expected to close quickly once it gets court approval, which was anticipated in early November. The assets were not included in Farmland’s Chapter 11 restructuring.

Pegasus Partners II, a Greenwich, Conn., investment firm, has offered to buy Farmland’s petroleum refinery and adjacent fertilizer plant at Coffeyville, Kan. The deal would also cover an old oil terminal at Phillipsburg, Kan., and a three-state crude oil gathering system and related inventories required to operate the facilities. The deal was valued at $281 million. The Coffeyville refinery sale would be contingent on about $134 million being committed to bring the plant into federal environmental compliance.

Even after it disposes of these assets, Farmland still has other holdings, chief among them its grain joint venture with Archer Daniels Midland. In partnership with other cooperatives, it also has interest in a pair of joint ventures: Agrilliance LLC, an agronomy marketing and sales affiliate owned with CHS Inc. and Land O’Lakes. The other venture is Land O’Lakes/Farmland Feed.

In May, Farmland closed and sold its catfish processing operation at Eudora, Ark., for $200,000 to a group of 60 farmers associated with Seacat. No delivery rights were involved. Farmland acquired the operation in 1998 when it purchased SF Services, the Arkansas regional farm supply cooperative.

U.S. Premium Beef seals purchase of Farmland National Beef

Farmland National Beef has been purchased by U.S. Premium Beef (USPB), which had been Farmland Industries’ partner in the operation and is a producerowned cooperative of 1,850 cattle producers in 37 states. The purchase, valued at $232 million, was approved by the federal bankruptcy court in St. Louis on July 15, and the sale was completed Aug. 6.

USPB is now majority owner of Farmland National Beef, which will be renamed National Beef Packing Co. LLC (NBP). It is the nation’s fourth largest beef packer, with about 10 percent of the national beef market. It processes about 3.2 million head of cattle annually.

Minority investors are an NBP management group and NBP Co. Holdings LLC, a South Dakota company managed by Beef Products Inc. (BPI).

“This is an excellent opportunity for additional growth in the market for USPB stockholders and members,” says USPB Chief Executive Officer Steve Hunt. “Increasing the synergies that already exist between our companies will enable NBP to become even more efficient in processing and marketing high-quality beef products worldwide.”

The sale includes Farmland National Beef packing plants in Liberal and Dodge City Kan., as well as furtherprocessing facilities in Hummels Wharf, Pa., Moultrie, Ga., and the Kansas City Steak Co., Kansas City, Kan. National Beef also owns National Carriers, a 700-unit refrigerated trucking operation.

“Having NBP’s management group as minority owners solidifies their commitment to making NBP the industry leader in terms of product quality as well as plant operating efficiency,” Hunt said. “Likewise, IBP, as the world’s leading manufacturer of boneless lean beef, has a long history of dedication to quality, food safety and operational efficiency.”

USPB member cattle are marketed under the U.S. Premium beef brand and numerous NBP product lines, including Farmland Black Angus Beef, Farmland Certified Premium Beef, Black Canyon Agnus Beef and Certified Angus Beef. Member cattle are also marketed direct to consumers through Kansas City Steak Co, NBP’s quality steak mail-order business.

November/December Table of Contents