See also: Farmland Passes on Smithfield’s Offer

Heavy debt and weak fertilizer sales forced Farmland Industries to file Chapter 11 bankruptcy on May 31 to reorganize the company. Farmland’s assets are listed at $2.7 billion, with $1.9 billion in liabilities.

Complicating the matter was a “run on the bank” as subordinated-debt holders began aggressively cashing in their positions. This pressured the Kansas City based cooperative to come up with an additional $30 million to $40 million.

“This activity drained our cash liquidity and was expected to continue indefinitely,” says Bob Terry, Farmland’s chief executive officer. A $10-million debt payment was due on May 31, and Terry said Farmland’s lenders were hesitant to continue lending the cooperative additional money.

Farmland’s subordinated-debt program has been a steady source of financing for the company since 1948. Approximately 20,000 individuals hold Farmland bonds, which currently provide $570 million in debt financing.

Chapter 11 has allowed the cooperative to secure debtor-in-possession financing of $430 million from a group of financial institutions led by Deutsche Bank. This will allow Farmland to continue business operations and ensures payroll, vendor and producer payments.

Farmland had reduced its debt by more than $500 million in the past 18 months, but a high debt-to-equity ratio incurred during the 1990s expansion has weighed heavily on the business. To cut costs, the cooperative sold its U.S. grain business and closed its international trading unit. It has hired UBS Warburg, a Switzerland-based financial conglomerate to restructure its balance sheet.

Beyond Farmland Industries, the bankruptcy filing effects four additional entities: Farmland Foods, Farmland Transportation, Farmland Pipe Line Co. and SFA (a chain of agricultural retail outlets.)

Some entities are exempt from the filing because their operations and financing are handled separately, notes Terry. Entities not included are: Farmland National Beef Packing, Agriliance, CHS Cooperatives and Land O’ Lakes, Land O Lakes Farmland Feed and ADM-Farmland.

Late last week pork producer and packer, Smithfield Foods, Smithfield, Va., put additional pressure on Farmland as it made an unsolicited bid to purchase all or part of the cooperative. (See related story for more details.)

The Chapter 11 filing “provides us with stability and the opportunity to reorganize,” says Terry. “The board of directors will review our businesses from top to bottom to determine what needs to be done.” He indicated that the priority will be on repositioning the cooperative’s core businesses, which he identified as the fertilizer and refrigerated meats sectors.

Terry points out that the company plans to continue to grow its foods business; pursue the sale of non-strategic assets, further reduce debt and seek ways to cut costs. A company statement released on May 31, said a workforce reduction is likely. Farmland employs 14,500 people worldwide.

With about $11.8 billion in sales for fiscal 2001, Farmland is the largest farmer-owned cooperative in North America, placing it 170th in the Fortune 500 company listing. Some 1,700 farm cooperatives throughout North America own Farmland through a shares investment structure involving some 600,000 farmers and ranchers.