Farmland Industries, the largest US farmer-owned cooperative, has filed for bankruptcy protection, unable to meet demands for immediate debt payments amid a slumping farm economy.
The bankruptcy filing came after Smithfield Foods, the largest US pork producer, failed to convince Farmland to accept an offer to buy the cooperative's beef and pork operations. The two companies had discussions on Friday, Farmland said.
Cash-strapped Farmland had been struggling to meet a $10 million (€10.7m) loan payment due on its $500 million credit facility and to bring its books into compliance with cash reserve requirements set by its lenders.
The Kansas City-based cooperative told reporters late on Friday that it had secured debtor-in-possession financing from a banking group led by Deutsche Bank, to restructure under Chapter 11 bankruptcy protection, but it did not give an amount. Farmland has sought financing of up to $430 million, according to its filing with the US Bankruptcy Court for the Western District of Missouri.
"We fought to pull ourselves through this time of tight liquidity. Regrettably, we were unable to overcome one significant challenge - aggressive early redemption demands from our subordinated debt holders," Farmland chief executive Robert Terry said.
The decision by Farmland to file for bankruptcy could send tremors through the farm economy because the sprawling cooperative has some 1,700 smaller cooperative members who in turn have thousands more farmer owners in the US, Canada and Mexico. Besides meat, Farmland's some $12 billion in annual sales come from products ranging from crop fertilisers to petroleum products.
Terry said between 15,000 and 20,000 individuals held interests in the company's subordinated debt program, and recent publicity of the company's problems had prompted holders of those securities to seek early redemptions totalling more than $30 million.
"I liken it a bit to a run on the bank," Terry said. "It pressed our cash position. Ultimately, we found ourselves where this was the best decision at this time to stabilise the company's finances."
Farmland has grown rapidly in the last decade, and ranks 170th among the Fortune 500 list of largest US companies.
Terry said that the bankruptcy filing did not preclude further negotiations with Smithfield, which is based in Smithfield, Virginia, and has been aggressively expanding its operations beyond pork into beef.
"We have indicated and they have indicated there is no reason not to continue discussions," he said. "We are open to that."
Smithfield said it had offered to help Farmland make its $10 million payment due to its lenders, and offered to pay "full market value" for the meat businesses, which make up the bulk of Farmland's refrigerated foods division. The unit has annual sales of roughly $4.75 billion.
But Terry said the actual details of an offer were different than those Smithfield publicised. He would not elaborate.
Smithfield issued a statement late on Friday saying it was disappointed Farmland had chosen bankruptcy protection.
"It is very disappointing ... that the co-op's management chose the uncertainty of bankruptcy rather than explore the far more secure and valuable alternative that we proposed," Smithfield said.
But analysts said Farmland was wise to hold onto its meat business.
"The refrigerated foods business is kind of the crown jewel," said Fitch Ratings director Omar Jama. "If they sell that there is very little left behind. It is a difficult situation."
Steve Hunt, CEO of US Premium Beef, which is a partner with Farmland in Farmland National Beef, said that he had confidence Terry could turn Farmland around.
"Bob Terry is a good CEO and I'm confident he will do everything in his power to take this opportunity to better position Farmland for long-term success," Hunt said.
Hunt said Farmland National Beef would not be hit by the bankruptcy because it operates as a profitable, stand-alone company with separate financing arrangements.
Farmland handed out paychecks to employees two days earlier than normal this week, telling them to cash checks quickly as the Friday deadline loomed.