by Alan Guebert

Farmland Industries Dives into Bankruptcy

Press reports of the May 31 Chapter 11 bankruptcy filing by Farmland Industries, the nation?s largest farm cooperative with more 600,000 farmer-members in 2,400 affiliated co-ops, have been awful.

Most parroted Farmland?s shallow explanation for its collapse: High anhydrous prices in 2001 and poor anhydrous sales in 2002 led to a cash flow drought that cooked Farmland?s ability to pay the initial installment (just $10 million) of a $500 million, Feb. 8 loan.

If anhydrous gassed Farmland, it was management purchases--not farmer sales-- that dropped the crippled co-op into bankruptcy.

According to Farmland?s Feb. 28 Securities and Exchange Commission 10-Q filing, Farmland, within minutes of receiving the $500 million loan Feb. 8, ?utilized approximately $190 million of (it) to purchase the nitrogen facility at Coffeyville, Kansas that we had previously leased. As a result of the transaction, we extinguished approximately $220 million of off-balance sheet lease commitments.?

Then, after sinking 40 percent of the desperately needed operating money to plug an off-balance sheet hole of its own making, Farmland closed the plant to do ?necessary maintenance? for six weeks at the height of the spring anhydrous season.

Subsequently, ?At April 12, 2002,? about the time the Coffeyville plant came back on-line, relates the SEC filing, ?only approximately $16.8 million was available for borrowing under the Credit Facility.?

So whose decisions put Farmland into Chapter 11; its farmer-owners or its former managers? The February SEC filing strongly suggests the hired men, attempting to erase a $220 million blunder, blew it. And now they blame the owners.

Story May End at Chapter 7, Not Chapter 11

Sources familiar with Farmland?s legal history believe the co-op filed a split Chapter 11 reorganization bankruptcy plan to keep the door open for a possible Chapter 7 liquidation bankruptcy. Their thinking is more straightforward than Farmland?s finances. It goes like this:

Farmland threw its worst assets into the bankruptcy--Farmland Industries, its 50,000-sow, vertically integrated hog business, a pipeline company and a transportation company. Kept out of the bankruptcy were four semi-profitable joint ventures--Farmland National Beef, Agriliance, Land O? Lakes Farmland Feed and ADM-Farmland.

Creditors now ask the $64,000 question: How can we get our money if Farmland keeps its healthy businesses out of our reach? The answer is, of course, it will be very tough. (By law, Farmland has 120 days after filing to submit its reorganization plan.)

?That leads me to believe Farmland doesn?t intend--really never intended--to reorganize,? says one attorney acquainted with the co-op. ?This deal has Chapter 7 written all over it.?

Adding juice to the allegation is that Robert Terry, Farmland?s boss since only May 13, is both an accountant and a lawyer. ?He knows how to work the system.?

If the co-op dives into a Chapter 7 liquidation, a tidal wave of co-op trouble could follow, offers one Kansas rancher, whose local co-op lists 50 percent of its current equity as Farmland stock. ?We now don?t know if the stock is good or not. A Chapter 7 would answer that question--and it would be a bad answer,? he says.

There?s another, even bigger question concerning Farmland stock. Since the value remains in limbo until Farmland files its reorganization plan, what does CoBank, the quasi-governmental lender to cooperatives, do with its millions in loans to Farmland that are collateralized with the co-op?s stock?

?It tries not to think about it,? offers one source.

But CoBank?s bind is doubly tight because not only does it hold Farmland notes pegged to Farmland stock, it has permitted Farmland locals to collateralize their Farmland stock dollar-for-dollar for loans, too.

Farmland creditors must play the Chapter 11 game very adroitly to prevent it from becoming a liquidation and starting an avalanche of potential co-op collapses.

Will the phrase ?government bailout? have new meaning soon?

Georgia Poultry Firm Tries End Run on Organic Rules

USDA still doesn?t get it when it comes to organic standards.

First, when the Clinton Administration proposed loose rules for organic food in 1998, USDA was buried under 275,000 cranky comments favoring tougher, not softer, rules. Stung by what big agribiz derisively dismisses as the aging hippie-greenie weenie coalition, USDA stiffened and kept GMOs, sludge and chemicals from creeping into organic food.

Now the Veneman-led USDA is under pressure to back-peddle again and grant a Baldwin, GA poultry firm, Fieldale Farms, an ?emergency exemption? to feed conventional rations--including GMO corn and soybeans--to some of its flock and market the broilers as ?organically grown.?

That request challenges current law on two fronts. First, all feed given to livestock or poultry to be marketed as organic must be grown through organic practices for at least three years. Second, USDA?s has but one organic label, ?USDA Organic;? there is no label that permits, as Fieldale requests, ?organically grown.?

Fieldale began its organic end-run by complaining it could not buy sufficient amounts of organic grain for its proposed organic birds, a patently false pretense, says Dave Carter, the chairman of USDA?s National Organic Standards Board (NOSB).

?There are large quantities of organic grain,? Carter relates. ?I even told them where they could buy it in the Midwest and Southeast. Fieldale simply doesn?t want to pay for the higher-priced grain.?

Fieldale then attempted to get around that jam by starting its own organic crop certifier, Organic Standards Inc. It was a sham company that Fieldale hoped to use to certify whatever grain it bought as organic, explains Carter. The attempt failed when USDA did not accredit the company as a certifier.

Next Fieldale did what any livestock contractor worth its lagoons would do--it called its congressman. Nathan Deal, R-GA, leaped into action and wrote Veneman a letter asking she approve the ?organically grown? seal and its implied use of non-organic feed as a ?temporary, common-sense approach that would allow producers necessary time to meet the new standards ??

Deal also convinced every Georgia Republican congressman to sign the letter. The list of organically-challenged representatives--who evidently have trouble following the Federal Code, too--includes Saxby Chambliss, Jack Kingston, Bob Barr, Mac Collins, Johnny Isakson, John Linder and Jack Kingston.

USDA legal counsel met Friday, June 7 to determine if Veneman can cross the road to grant Fieldale its exemption or stay on the green side and keep her feathers. NOSB Chairman Carter calls the pending decision ?vital? for the budding, building American organic movement.

?It?s been 12 years since Congress empowered USDA to establish organic standards. Now, just months (Oct. 21) before it rolls out its national ?USDA Organic? seal, the Secretary has to think about rendering it meaningless? That?s terrible,? he explains. ?It proves that this USDA often wishes organic would just go away.?

It won?t. The hippie-weenie coalition and innovative farmers love the about-to-be-launched seal because the wholesome food movement, the only U.S. food sector showing growth, could mean vast, profitable markets for farmers.

© 2002 ag comm