December 17, 2002   #209
Monitoring Corporate Agribusiness
From a Public Interest Perspective

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DEAN E. MURPHY, NEW YORK TIMES: The United States Bureau of Reclamation has agreed to pay more than $100 million to landowners in the Central Valley to stop farming about 34,000 acres because of severe water drainage problems.

Federal officials said it would be the largest buyout of farmland in the bureau's 100-year history and, some Central Valley water officials hope, could lead to a much bigger land retirement in the coming years totaling as much as 200,000 acres of farmland.

The proposed payment is part of a settlement of a 15-year-old legal battle over agricultural drainage issues that will be submitted for approval Thursday to a federal judge in Fresno, California The judge, United States  District Court Judge Oliver W. Wanger, is expected to take comments from  the public before deciding whether to approve the deal.

Though all the details of the proposed settlement have not been made public, some environmental groups and members of Congress have already expressed concern about it.

Hal Candee, a senior lawyer with the Natural Resources Defense Council said his organization worried that the settlement money would be taken from funds intended for environmental projects in California. John Lawrence, a water policy expert on the staff of Representative George Miller, said there were also concerns that farmers might be getting too much money for land that would have little value without its federal water subsidies.

"We have to ask whether those hard questions were asked or whether this is a sweetheart deal," Mr. Lawrence said. "I am not charging that, but the questions need to be asked."

About 100 farmers had sued the federal government, which provides water to the Central Valley, and the local water agency, the Westlands Water District, because poor drainage had loaded their land with salt and, in some cases, it was believed, the toxic mineral selenium. They had demanded $400 million in damages.

In previous court rulings, it had been determined that the Bureau of  Reclamation was responsible for providing adequate drainage for the farmland, a problem that dates to the 1950's. Bennett W. Raley, assistant secretary for water and science for the United States Department of the Interior, said it was too risky to let the case go to trial.

By settling the lawsuit, he said, and having the land removed from production, the federal government would be freed of its obligation to provide drainage.

"This was not done for the land retirement," Mr. Raley said of the  settlement. "It was a damages case. We could have been found liable for damages and have paid the very same money out and not have made one inch of progress toward resolution of the drainage issues."

Mr. Raley said it might strike some people as odd that the Bureau of  Reclamation, which was created to provide water for Western agriculture, was proposing to remove land from cultivation. He said that the move was unusual and should not be seen as a broader shift in policy by the Bush administration.

"There is a degree of irony here," Mr. Raley said. "It shouldn't however be mistaken for a decision by the administration to walk away from irrigated agriculture. To the contrary, we would like to get back to focusing on delivering water in a reasonable and efficient way to agriculture and environmental uses."

Under the proposal, the federal government would pay $107 million in damages to the 100 farmers and the Westlands Water District would pay $32 million to buy the 34,000 acres and keep them out of production. In exchange, the land owners would agree to "waive tort, contract and inverse condemnation claims" against the federal government and the water district, according to a description of the settlement released by the Interior Department.

Officials with the water district had long opposed taking farmland out of production. But that thinking has gradually changed because of the expensive drainage issues and recurring water shortages. Under the deal, the Westlands district would keep the water intended to irrigate the land, allowing district officials to divert it to other farmers.

"It is extremely painful and difficult for farmers to retire land," said Tupper Hull, a district spokesman. "But it is a process that is going forward."

Some water officials hope the deal will be the first step in a much larger agreement with the federal government that would remove as much as 200,000 acres from production because of the drainage issues.

The Westlands district, the largest agricultural irrigation district in the country, covers more than 600,000 acres of farmland in the western Central Valley, an area equal to the size of Rhode Island. Mr. Hull said the district has been in negotiations with federal and local officials about the district's proposal to retire up to a third of its farmland.

"We believe this settlement will facilitate the negotiations with the United States over ongoing drainage and water supply issues," he said. "We don't think that will happen overnight, but the negotiations have been very serious in recent months."

The Westlands district has a contract with the federal government to receive 1.1 million acre-feet of water a year, but has generally only received 70% of that because of water restrictions. By reducing the amount of cultivated land, the district intends to limit its need for water. Though the proposal would not change its water contract, the district has suggested it would agree to reduce its contract to 805,000 acre-feet if the federal government would fallow the 200,000 acres.

Mr. Raley said it "makes perfect sense" for the Westlands to reduce the amount of irrigated land, but he said it was too early to say whether the Department of Interior would be willing to pay for such a large retirement of acreage. "Something of that magnitude has huge implications," he said.


JAMES STERNGOLD, SAN FRANCISO CHRONICLE: A proposed $107 million settlement of a lawsuit brought by San Joaquin Valley farmers against the federal government has prompted anger among water officials, who say it will divert funds away from Bay Area and other California water and environmental projects.

Under the settlement, submitted in federal district court in Fresno on Thursday, 19 families will sell their farmland --- 34,000 acres --- that they claim has been fouled by salt buildup because the federal government didn't provide adequate drainage as required by law.

Federal officials said they finally agreed to settle the suit out of a fear that an outright loss in court might have cost them more than $400 million.

But water officials around the state warned Thursday that the settlement was likely to take money away from a large government project for rehabilitating the rivers and Delta wetlands and for creating more storage of the water that flows down from the Sierra.

A federal official confirmed to The Chronicle that the project, known as the Cal-Fed program, could suffer.

"Yes, people are right that dollars spent on one purpose are not available for another," said Bennett Raley, the assistant secretary for water and science in the Interior Department. Raley added that the ultimate appropriation and funding decisions would be made by the Republican-controlled Congress but that it did not appear likely additional funds would be appropriated to cover the settlement.

That prospect angered environmental groups that have battled for years on the Cal-Fed program, and it prompted the state's largest water utility ----Los Angeles' Metropolitan Water District (MWD), which gets much of its water from Northern California --- to hint at possible legal action.

A week ago, Timothy Quinn, a MWD vice president, wrote to the head of the Westlands Water District, where the farms covered by the settlement are located, warning that "Metropolitan would vigorously oppose a funding approach that finances land acquisition in Westlands at the expense of Cal-Fed-related environmental restoration in the Bay-Delta watershed."

On Thursday, MWD spokesman Adan Ortega said the utility's board had yet to come up with a specific plan of action, but added: "To say that we vigorously oppose this means business."

State officials said they would not comment until they had read the settlement, but in the past they have also said they would oppose any arrangements that took funds away from the Cal-Fed project or other important California water programs.

The 19 families, who filed suit in 1986, farm 34,100 acres west of Fresno that fall within Westlands. The families had charged that the federal Bureau of Reclamation, which provides water for irrigation, had damaged their land with dangerous salt deposits because the government had not provided the drainage systems required under their contracts.

Critical to the deal is the agreement by the federal government to pay the families $107 million in damages. Subsequently, Westlands --- one of the nation's largest agricultural districts with 560,000 acres under irrigation --- will then buy the land for $32 million and stop providing water.

Westlands general manager Thomas Birmingham said that at least for a while the land would be planted with crops, such as wheat, that do not require irrigation. Over the long term, he said, officials would consider using it for parks or other public uses.

He added that the district would seek to find uses that might benefit the nearby town of Mendota economically, but that construction of housing or other commercial development had been all but ruled out.

Though the settlement will provide the families with about $4,000 per acre, an extremely rich price, they said they were not happy at the prospect of losing their land.

"We're relieved that it's over, but there are no winners in this thing," said Dudley Silveira, whose family farms 4,000 acres, currently planted with cotton, wheat and alfalfa. "All we ever wanted was drainage. It's a sad settlement, because this kind of land could feed the world."

The federal government had started to construct an extensive drainage system several decades ago but was forced to stop in the 1980s after it was discovered that selenium deposits in evaporation ponds it had built were killing and deforming birds in the area.

Raley of the Interior Department said the settlement was the best solution for a long-running problem. "We're making the drainage problem go away, and we're making the litigation problem go away," he said. "There was not a lot of enthusiasm for any of the choices."

But Tom Graff, the regional director for Environmental Defense, an environmental group that has been instrumental in the Cal-Fed program, complained that even after the $107 million is spent none of the water the federal government provides to Westlands will be returned and no anti-pollution measures will be taken.

He also said that the sum the families will be receiving was so high per acre that it would discourage other efforts under way to retire poorly drained farmland so the water could be employed in environmental rehabilitation. "This is a great deal for those people who were in that room, but not a great deal for everyone outside it," Graff said.


JAMES STERNGOLD, SAN FRANCISCO CHRONICLE: A day after officials in the Imperial Valley defiantly rejected a critical deal to sell huge volumes of water to San Diego, a senior federal official said that Washington would make good on a long-standing threat to slash the amount of water California can take from the Colorado River, beginning January 1.

Federal and other officials also hinted that the Imperial Irrigation District, which rejected the long-negotiated deal [last] Monday evening because of what the district said were environmental concerns, might simply have some of its water allotments taken away if it refuses to come to terms.

That extreme measure could trigger years of litigation, but it made clear how much is at stake and the pressures that are building to achieve a contract.

If the Interior Department makes the cuts, California would lose enough water to supply roughly 1.6 million homes annually, an amount officials said they could fill temporarily but that could create long-term problems across the state, not just in the parched south.

"Unfortunately for California, unless (the district) changes its position, this decision will have very serious consequences for all of California," said Bennett Raley, assistant secretary for water and science at the Interior Department on Tuesday.

Numerous officials involved in the exceedingly complex, 75-year water deal said a compromise could still be reached before the federal deadline of year-end, or perhaps early next year.

But Raley's statements made clear what experts involved in the negotiations have said for years: This issue will affect water-rich Northern California, too, by putting pressure on wholesale water prices, pushing more agricultural districts to sell their water to urban areas and forcing the state to plan more water storage projects, such as dams and reservoirs, in the San Francisco Bay and the Delta.

"They have to get their water from somewhere," said Tom Berliner, an attorney who specializes in water issues and previously worked on San Francisco's water policies. "If they don't get it from the Imperial Valley, they'll get it from Northern California."

Raley hinted Tuesday that, while the federal government would remain flexible, and could quickly resume the current level of water shipments if the deal is concluded next year, a failure could have particularly dire consequences for the Imperial Valley. The area now enjoys the largest allotment of Colorado River of any farming district.

The Imperial district, which encompasses one of the poorest regions of the state, receives slightly more than three million acre-feet of water a year, roughly equivalent to what Nevada and Arizona receive combined. An acre-foot equals roughly 326,000 gallons.

There is a provision in the laws that control Colorado River water under which the user can have some portion of an allotment taken away, without compensation, if it can be shown that the water is not being used efficiently or for an appropriate purpose. That provision is now being explored intensively.

Susan Gillen, a spokeswoman for the irrigation district, insisted that the area's farmers are efficient users. But water officials here said state figures showed, for instance, that the Imperial Valley's farmers use about 6.5 acre-feet of water per acre a year, compared with 2.7 acre-feet per year in the Westlands Water District in the San Joaquin Valley, one of the most efficient water users.

Raley warned Tuesday of a coming "extraordinary scrutiny" of water use, and warned: "What was acceptable a decade ago will no longer be acceptable now." Gillen responded that the valley believes the greatest waste of water is in the urban areas, not by farmers.

The issue results from California's long practice of taking more than its legal allotment of Colorado River water. Because other states in the Southwest did not need their full shares, California has been taking roughly 5.1 million acre-feet per year, more than its legal share of 4.4 million acre-feet per year. But the other states are now demanding their full entitlement, and California has been ordered to cut back.

Under this order, if California can prove it is taking steps to use its water more efficiently, in part by transferring large volumes from agricultural areas to urban areas, it will be given 15 years to phase out its use of the surplus. If the state cannot meet that test by the December 31 deadline, however, access to the surplus will be cut off immediately.

Imperial Valley officials said they rejected the deal, by a 3-2 vote by the district's board, because of concerns that they might be held responsible if the transfers harm the nearby Salton Sea.

The state Legislature provided an indemnification from such concerns earlier this year, but valley officials also want a federal indemnification. Raley said that was highly unlikely. Bob Hertzberg, the former speaker of the state Assembly who mediated the water deal, said he saw the district's rejection of it as something that could be changed.

But he also suggested the decision amounted to a failure of political nerve. "These guys have more water than they know what to do with," he said. "They're scared that they could lose the water and get nothing, but this is a really intelligent deal. This is what people get elected to office to do, to show courage."


FRIENDS OF THE EARTH: On Saturday, December 7th, Washington State's Fish and Wildlife Commission adopted sweeping new regulations permanently banning genetically engineered salmon from fish farms in all its marine waters. The move comes in the wake of repeated, large-scale escapes of farmed fish, and heavy media coverage of recent biotech industry blunders including food crop contamination incidents.

The tough new state regulations placed on fish farms operating in Puget Sound and other coastal areas were adopted against a backdrop of growing scientific evidence that federal agencies have consistently put the environment and public health at risk by failing to prevent the unintended and uncontrolled release of genetically engineered organisms. The new rules will require state agencies to implement significant new enforcement and oversight measures to address the serious negative impacts of poorly regulated fish farms.

"Simply engineering designer fish and dropping them into our public waterways puts already endangered salmon at greater risk of extinction," Shawn Cantrell, Friends of the Earth's Northwest Regional Director. "Washington State has taken a bold step to protect the environment by permanently banning genetically engineered fish."

Genetically engineered, or "transgenic," fish are made-to-order creatures, custom-designed to possess certain "desirable" traits otherwise impossible to acquire in nature by breeding of any kind. They are often the product of much trial and error, created by scientists who alter their DNA in laboratories by inserting genetic material culled from different animals,
insects, plants, bacteria and viruses (in virtually endless combinations).

One company, A/F Protein, has developed an Atlantic salmon genetically super-charged to grow four to six times the rate of "normal" salmon. The consequences of engineering such life, and the technology used accomplish it is still highly experimental, poorly understood and alarmingly unpredictable.

"The introduction of transgenic fish into fish farms could have led to a major ecological disaster," said Joel Hanson, a citizen activist who helped persuade the Fish and Wildlife Commission to adopt the ban. "I am very pleased Washington State will not allow such a risky technology into our marine waters."

Scientists from Purdue University determined that, if just 60 transgenic salmon escaped from fish farms and joined a population of wild salmon, the wild population could become extinct in 40 generations. A new study by the National Academy of Sciences (NAS) has also recognized the immediate and serious human health, environmental and ethical concerns associated with the use of genetically engineered animals, including fish, in the food supply.

In addition to the ban on transgenic fish, the new rules adopted by Washington State are intended to address other serious risks that fish farms pose to naturally occurring fish and wildlife and their habitat. In response to significant public outcry, the rules were strengthened to include:

* Improved procedures to prevent escapes,
* Limiting duration of permits to five years,
* Better disclosure of drug and pesticide treatments used on the fish,
* At least annual inspections of every facility, and
* Expanded public and agency review of permit applications.

"Several hundred thousand Atlantic salmon have escaped from fish farms in Washington State in recent years, crowding out native Pacific salmon and spreading disease," said Cantrell. "These new rules are an important step in protecting threatened and endangered Puget Sound salmon populations from some of the worst impacts of non-native, farmed fish."

Ongoing problems with escapes as well as massive outbreaks of disease among farmed fish point up the urgent need for tighter regulation of aquaculture operations. "It is essential that these new rules be immediately implemented and aggressively enforced," said Cantrell. "Our wild salmon populations are already struggling to survive --- the last thing they need is more competition from exotic species escaping from fish farms."


MICHAEL DAVIS, NORFOLK VIRGINIAN PILOT: For meat giant Smithfield Foods Inc., the next great consumer market will likely have an accent other than a Virginia drawl. Smithfield's international operations -- especially in Europe --- are expected to boom in sales and profitability over the next few years, expanding faster than the mature domestic meat industry, according to officials.

"Longer term, that's where all the growth and opportunities are," said spokesman Jerry Hostetter. The world's largest hog farmer and pork processor has been on a run of acquisitions since the early 1980s, accelerating in the last half-decade, as it has sought to broaden its business beyond low-profit, high-volume bulk pork.

Smithfield fattened its hog-farming operations, for instance, so it could control pork from before conception through birth, maturation, slaughter and processing. And in the past two years it has added beef and precooked, ready-to-eat meals to its product offerings.

As part of the growth spurt, Smithfield made its first international acquisitions in 1998, buying meat processors in Canada and France. The purchase of a processing company in Poland, an additional French processor and a joint hog-raising venture in Mexico followed the next year. And last December, Smithfield joined a Holland-based company to produce and sell meats in the People's Republic of China.

The Mexican and Chinese operations remain incremental to the company's performance, Hostetter said, and are not noted as separate items in financial reports. But the other businesses --- Schneider Corp. of Canada; Animex S.A. of Poland; Societe' Financiere de Gestion et de Participation S.A. in France; and Societe' Bretonne de Salaisons S.A. also of France --- are on a roll.

Smithfield has only begun disclosing international profits this fiscal year.

But in the first two quarters of fiscal 2003, profits for non-U.S. operations more than doubled, from $ 10.4 million to $ 23.4 million. That accounted for almost one-third of Smithfield's operating profits this year to date, as overall earnings have plunged on poor hog prices. And for the quarter ended October 27, Animex made its first profit under Smithfield control.

International sales actually slipped slightly last fiscal year, undercut by downsizing at Animex. Smithfield shut down plants, idled hundreds of employees and purged management to convert a Soviet-era, state-owned monopoly into a commercial venture. "They were just overbuilt and underutilized," Smithfield Chairman Joseph W. Luter III told analysts on a conference call two weeks ago. "You can't take a 50-year-old ex-communist and turn him into an entrepreneur."

But despite a 20% drop in Polish sales over the two previous years, international sales topped $ 1.2 billion in fiscal 2002. That was about one-sixth of Smithfield's total revenues and would have been an even larger proportion but for the company's domestic growth through aggressive acquisitions.

"I think we're on the right track in every country," Smithfield President C. Larry Pope told analysts, calling international operations the "bright spot" in an otherwise difficult fiscal 2003. Those who study the company agree.

The solid performance so far this year, and especially Animex's profitability, "could be a watershed event for the international division and could set the stage for even better results in the future," wrote Leonard Teitelbaum, who follows Smithfield for Merrill Lynch Global Securities in New York.

The forecast for foreign operations is strong as well, according to Smithfield management.

Earnings at Schneider --- the No. 2 meat processor in Canada, and Smithfield's biggest non-U.S. operation -- were up fivefold in the second quarter from a year earlier. Officials said they anticipate no immediate change to what they called "stellar" performance.

Smithfield is expanding its hog farming at Animex, hoping to vertically integrate Poland like in the United States. By owning its hog-raising operations, the company offsets the cyclicality of pork prices: Expensive pork means better hog production income, while low pork prices mean cheaper raw materials for meat processing. "We want to create the same model in Poland that's worked so well for us in the U.S.," Luter said.

Animex is also poised to expand distribution across Europe, a fragmented consumer base with better growth potential than the mature U.S. market.

Poland has applied for admission to the European Union, the organization of the region's wealthiest nations that promises to open up trade continentwide. Poland is expected to gain EU membership in 2004, and with it improved access to half a billion consumers.

As that market matures, Smithfield officials say, overseas sales and profits should continue to expand. Analysts say Poland's entry into the EU will be critical for Smithfield. "That will be a great platform to launch into the rest of Europe," said Ann Gurkin, who follows Smithfield for Davenport & Co. in Richmond. "It's one of the great growth opportunities."

And while Luter typically refuses to make specific financial projections, he said Smithfield expects to take a large cut of sales and earnings from the region. "In the next five or six or seven years, I could see as much profitability from Europe as we have in this country," Luter said.


DOW JONES NEWSWIRES: Smithfield Foods Inc. said that it is seeking temporary relief of the leverage covenant in its revolving credit facility and certain of its senior secured note loan agreements for the next four quarters.

According to its quarterly report for the period ended October 27, filed late        [December 11] with the Securities and Exchange Commission, the company has received approval from its lenders for an amendment to the revolving credit facility and it expects an amendment to its senior secured note loan agreements to be approved and finalized by the end of December.

The company said it sought the amendments because it thought it may breach the leverage covenant of its credit agreements in the future, given the impact that unfavorable market conditions have had on it in previous quarters. As of October 27, the company was in compliance with all covenants under its existing loan agreements, the filing said.

The company said that funds are available to adequately meet its current and future operating and capital needs through internally generated funds and access to credit markets, and that the amended covenants won't limit its access to global credit markets.


Proponents of increased beef and cattle imports have argued that consumers would pay lower prices and have more food buying choices.

According to R-CALF United Stockgrowers of America (R-CALF USA), however, consumers have realized neither. R-CALF USA points to data collected by the Economic Research Service of the United States Department of Agriculture (USDA-ERS) that shows retail beef prices have increased significantly at the same time beef and cattle imports have also increased.

"The missing component for consumer benefits is the ability for consumers to distinguish one product from another," said R-CALF USA COOL Committee Chair Danni Beer. Consumers and producers fought together successfully to remedy this marketplace deficiency by passing the mandatory Country of Origin Labeling Act in the 2002 Farm Bill (COOL ACT).  The COOL Act will require labeling of beef, fruits, vegetables, and other perishable products with their country of origin.

"The meatpacking and retailing industries have been enjoying the advantage of no labeling," Beer said, adding, "They've been buying cheaper imported products but passing these products off to consumers at prices reflective of America's more stringent health and safety production requirements."

Beer said the packing and retailing industry-generated hype over the cost of labeling was fully expected by the millions of consumers and producers who helped pass this landmark legislation. "It amazes me that several other countries, including our trading partners, can label their food products but the most technologically advanced; most inspected food system in the world is finding all these excuses as to why labeling is too costly and will not work," said Beer.

But Beer cautioned that the current efforts of the packers, retailers and their allies should not be underestimated. "Their strategy will be to throw their collective political and economic weight everywhere they can to undo what we've accomplished, and American consumers and producers must stand together to preserve their hard-fought truth-in-labeling."

Beer said evidence of the COOL opponent's political strength first surfaced in October when USDA announced its rules for implementing labeling, and again last week when USDA announced its estimated labeling compliance costs. In its October rules, USDA informed American cattle producers that they must keep copious records, from birth to retail, in order to be eligible for their country's label.

But the same rules afford producers in Mexico, Canada, Brazil, Argentina, Australia and elsewhere the right to their country's label without any such record keeping, requiring only that the product's origin be announced upon entry into the United States. "Obviously, the tactic here is to impose a tremendous, though unnecessary burden upon U.S. producers, causing them to throw up their hands and abandon their labeling goal."

According to Beer, last week's USDA announcement of a $2 billion compliance cost for COOL is simply a progression of the opponent's strategy. In its comments on the voluntary program, R-CALF USA made it very clear that domestic producers need not be burdened with extra work because of COOL. Beer said imported live cattle make up about 7-8 percent of all cattle processed in the U.S., which means about 92% - 93% of all the cattle in the U.S. are automatically eligible for the USA label and only seven to eight percent are ineligible (this does not include the nearly ten percent of imported beef).

"It makes little sense to us that U.S. producers must affirmatively prove eligibility on 92% - 93% of the cattle in order to identify the seven to eight percent that is not eligible. Common sense suggests it would be far more cost effective and efficient to affirmatively identify the seven to eight percent of ineligible cattle and allow the 92% - 93% of eligible domestic cattle access to the USA label without any further record keeping requirements," Beer said.

Beer said the original COOL coalition consisting of consumer groups and farm and ranch groups who successfully passed mandatory labeling has now been reorganized and has begun work to impart a sense of reality to USDA's overstated estimate.  Beer said the coalition will also work with USDA to craft new rules that do not discriminate against U.S. producers and that ensures consumers will be afforded truth in labeling, without imposing an undue burden upon any segment of the U.S. food industry. "U.S. consumers and producers deserve no less," she said.

The Ranchers Cattlemen Action Legal Fund, United Stockgrowers of America (R-CALF USA) is a national cattle producers association representing over 6,800 independent cow/calf producers, backgrounders and feeders in 42 states. Over 30 state and local associations are affiliated with R-CALF USA, representing thousands of additional producers.

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ERIC PALMER, KANSAS CITY STAR: A somber message was delivered to the 500 farmers and farm cooperative managers who showed up Wednesday at the annual meeting of Farmland Industries Inc.

They were told that when Farmland emerges from bankruptcy, sometime in the next nine months, it probably will no longer be a farm cooperative devoted to their needs. It will probably be a meat business built primarily around Farmland's successful pork processing operations.

On top of that, it is most likely they will lose all of the millions of dollars in equity that they have built up in what had been the largest farmer-owned cooperative in North America. "We will not own a fertilizer business. We will not own a petroleum refinery. We will not own a regional grain business," board chairman Harry Fehrenbacher told the group gathered in a ballroom at the Hyatt Regency Crown Center hotel.

"And I want you to consider there may be nothing left of value for anyone in this room. I don't want you to leave with any false hopes."

Farmland is owned by 1,700 farm cooperatives in North America that have invested money in the company. Those local cooperatives, in turn, are owned by the 600,000 farmers and ranchers who buy shares in them. It is not possible to say exactly what kind of company, public or private, Farmland will be when it emerges from bankruptcy, chief executive Robert Terry said after the meeting.

Chances are that creditor debt will be converted into stock in whatever entity survives. That company then will be owned by those creditors, who under bankruptcy stand higher up the pecking order than the local farm cooperatives and their members who have owned Farmland for decades, he said. "It is a sad day. It really is," farmer Larry Harrenstein said after absorbing the message.

"It looks like they are moving away from us grain farmers," said Harrenstein, who, along with his son, farms about 1,700 acres of corn and soybeans in central Nebraska. "We can go to other companies for supplies, but those others aren't going to look out for you like Farmland always did. I guess they didn't have any options."

The annual meeting Wednesday was the first gathering of the Farmland membership since the company filed for bankruptcy protection May 31. Last month it reported a $346 million loss for the fiscal year ending August 31.

Much has changed since Farmland held its annual meeting a year ago. That meeting attracted 2,000 delegates and was held at Bartle Hall. At that time, Farmland reported a $90 million loss, but then-chief executive Robert Honse said things were looking up.

Then, in a matter of months, things went from bad to abysmal. Loaded with debt from its expansion in the 1990s, Farmland suddenly found itself in a cash flow crisis, Terry told the group Wednesday. Its fertilizer sales fell off because of bad weather throughout the country. It had to close its oil refinery for repairs, losing six weeks of cash. When word got out that its finances were wavering, bondholders asked to be paid off and vendors withdrew credit.

The cash shortage got so tight that when Farmland filed for bankruptcy, the company that had $9.1 billion in sales in fiscal 2001 had only $450,000 in cash it could access.

When Farmland filed for bankruptcy protection May 31, it listed assets of $2.7 billion and liabilities of $1.9 billion, making it the largest bankruptcy of a Kansas City company. Those figures, however, included partnerships that were not part of the bankruptcy, such as its beef production company. As of July 31, the businesses that were part of the bankruptcy listed assets of $1.47 billion and liabilities of $1.67 billion.

If the company hadn't filed for bankruptcy, lenders would have foreclosed Farmland's property and repossessed its equipment, and its vendors would have stopped shipments, Terry told the group.

"If those things had been allowed to happen, Farmland would have ceased doing business," Terry said. "There would have been total job loss. Farmland's assets would have been sold at fire sale prices, and any remaining value in our company would have vanished." Farmland employs about 9,000, including about 900 in the Kansas City area.

Since then, Farmland has sold off unnecessary businesses, such as farm supply stores, convenience stores and grain elevators, Terry said. It is in the process of selling its fertilizer business, which will help significantly toward paying off its debts. The pork processing business, the only part of Farmland that is not for sale, has performed better than it did last year, Terry said.

Its sales and profits are up, John Richter, president of that business, said before the shareholders meeting. While he could not give specific figures, Richter said that in the quarter ending November 30, the pork business earned $5 million more than in the same quarter last year, even though the cost of buying hogs was $7 million higher during the quarter compared with last year. Sales of Farmland bacon and ham have done particularly well, Richter said. The pork business is slaughtering more hogs and expanding its operations, even though sales of meat are down across the industry.

While many Farmland members have expressed impatience over how long the bankruptcy is taking, because the meat business has done so well, "Farmland's businesses are worth more collectively today than they were six months ago when we filed for bankruptcy," Terry told the group.

EDITORS NOTE: From Farm and Food File by Alan Guebert for the week beginning Sunday, May 6, 2001

The last time we checked in on H. D. "Harry" Cleberg, the chief of Farmland Industries, in late 1999 he was selling a grand plan to Midwestern and Great Plains farmers to merge their two $8 billion farmer cooperatives. . . . .

On April 27, Farmland continued to market what's left of itself to reduce debt by renting 24 of its Great Plains grain elevators to ADM for five years. The arrangement has far broader implications than patching up a bleeding Farmland. It eliminates a vital alternative market for wheat farmers while strengthening ADM's already strong grip on coop-originated corn, wheat and soybeans from Ohio to Colorado and North Dakota to Texas.

Farmland may save the interest on the $250 to $300 million per year it usually borrows to finance grain inventory. Farmers, though, stand to loose much more if competitive markets vanish. For this to occur because the coop was in a hole dug by its own management only adds deep insult to deep injury.

Expect Farmland's debt reduction sale to continue, say sources. All or part of its huge contract hog growing business, one of Harry's bigger air-suckers, and its member-owned beef and pork slaughtering business are on the block. But Harry isn't; he retired last August 31, his grandiose plans having bitten Farmland's 600,000 members badly and their once profitable coop joint-ventured, sold or rented off piecemeal.

Good Old Harry ended on the plus-side even as Farmland tanked. Last year he was paid $633,584 in salary and the board awarded him a $700,000 bonus upon retirement.


DAVE FREDERICKSON, PRESIDENT, NATIONAL FARMERS UNION: Consumers are paying more for dairy products and dairy farmers' net income is down 50%, yet certain dairy processors are earning record profits. This would lead one to wonder, "Just who is getting milked?"

Dean Foods, the largest fluid milk processor in the country, recently announced record earnings for 2002. The processor attributed the increased earnings to reduced raw milk costs, the synergy of mergers, and the success of its specialty lines.

Meanwhile, at least two ice cream makers are admittedly skimping on the amount of ice cream in a half-gallon container and scooping up profits from the sales of new 1.75-quart containers, for which they are charging the same price as the conventional two-quart containers. Processors and retailers cite rising ingredient costs for their actions. The opposite is true.

The costs for butterfat and nonfat solids, the main dairy ingredients in ice cream, have dropped by one-third since January 2002. Prices paid to farmers for their milk have dropped more than 50 cents a gallon in some parts of the country since that time. Nationally, U.S. dairy farmers will receive $4 billion less in milk receipts this year than last.

At the same time, the administration is proposing additional changes in dairy programs that would cost dairy farmers as much as $1 billion in lost income. Additionally, the United States is seeking to open borders even further to cheap dairy substitutes from Australia and New Zealand, further flooding the U.S. market.

Consequently, dairy farmers are receiving the lowest prices for their products since 1979 and are continuing to go out of business at a record pace. Unfortunately, economic projections predict that dairy prices paid to farmers have little, if any, chance of recovery in the coming months.

Manufacturers, on the other hand, are paying only 50 cents for the dairy ingredients used in a one-half gallon of ice cream. The retail price of that same ice cream is around $5. And, milk prices paid by consumers have held steady or increased. Recent surveys have shown that certain dairy processors and supermarket chains may be earning more than $1 a gallon in profits.

Dairy farmers are not against processors and retailers having a successful year. However, a competitive market situation would reward dairy producers and consumers as well.

America's dairy farmers and consumers currently appear not to be gaining any visible benefit in the market place. The lack of market competition that exists in the dairy industry allows the few largest companies to dominate the market not through efficiency, but through monopoly. A competitive market would benefit both consumers and dairy producers.

National Farmers Union is urging Congress to hold hearings to determine whether lack of market competition within the dairy industry is resulting in price gouging that is harming both consumers and producers. In years past, consumers benefited when cereal manufacturers responded to congressional questions by announcing they would lower cereal prices.

Similar action is now needed in the dairy industry to stop the unjust milking of American consumers and those who produce their food.

National Farmers Union represents nearly 300,000 farming families nationwide through legislative representation, educational opportunities and support for farmer-owned cooperatives.

                                       EDITOR'S NOTE

Preparing to post this 209th edition of THE AGRIBUSINESS EXAMINER it is
gratifying to know that over 1100 people throughout the world are currently receiving it

on a regular basis and judging from comments received feel it is a valuable source of
information. However, it is also quite troubling to realize that less than 4.5% of that
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To that small cadre of contributors this editor can only express his profound gratitude
and appreciation for I realize that in some cases even a small donation was a sacrifice for

From the outset it was never the purpose of THE AGRIBUSINESS EXAMINER to
charge a subscription fee for the original intention of this newsletter was to get it into as
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interest perspective, just as was the establishing of a web site
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