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'The nature of what's to come': Farmers seeking to eliminate middleman eliminated by middleman

(Tuesday, April 1, 2003 -- CropChoice news) -- via the Agribusiness Examiner:

JOY POWELL, MINNEAPOLIS STAR-TRIBUNE : The farmers who sold their corn-processing company cashed their checks months ago and Archer Daniels Midland (ADM) has taken over the operation. But the dust hasn’t settled in corn country.

The $756-million sale of Minnesota Corn Processors (MCP) to agribusiness giant ADM last September is stirring concerns that reverberate far beyond southwestern Minnesota to the state capital and to Washington D.C.

Some Minnesota lawmakers are frustrated that the state provided $33 million in ethanol-producer subsidies to a farmer-owned operation ­ only to see it become the biggest acquisition ever for Illinois-based ADM. A federal judge has yet to review an antitrust challenge before he signs a consent decree approving the sale. ADM said it is confident the deal will be approved.

Meanwhile, in Marshall there is bitterness over the way the deal came down. Some directors of MPC, including those who votes "for" the sale, say negotiations & supporting documentation were "pushed through quickly, without adequate information." Dissenters say they were threatened with possible lawsuits and arrest while company executives were poised to real millions of dollars in golden parachutes and accelerated pension plans. The 5400 farmers in who sold to ADM may never know whether they got a fair price, say legal experts who reviewed the proxy documents.

But there was more than money at stake. Two decades ago these farmers launched a venture to complete with the world’s biggest agribusinesses. They raised a quarter-million dollars, built plants in southwest Minnesota and Nebraska and marketed nationwide. They stepped from the fields into the world of big business to gain more control over their economic destiny.

For a while it worked. They reaped higher corn prices and pushed annual sale to $620 million. But by last September after being told of dismal prospects, the shareholders voted (by a landslide) to sell. They had set out to eliminate the middleman by becoming processors themselves. In the end, the middleman eliminated them.

"We’re just dirt farmers now" MCP director Dean Buesing’s brother told him.

The Dream began 23 years ago on the fertile plains of west-central Minnesota in a high-spirited meetings around Granite Falls.

In March 1980 Kim Larson, a 27-yr old farmer just starting out with cattle and grain met with 20 other farmers in Willmar to hear a Minnesota state "expert" on economic development.

Larson watched the man tape butcher paper on the café walls and scrawl numbers and flow charts showing how the farmers themselves could process corn and move beyond merely providing grain animals and (in some cases) humans and access low-profit margins. They could cash in on the growing markets for ethanol (aka fuel alcohol) and corn-derived sweeteners.

The dream set a fire in them and they began selling the vision. Originally, shareholders contracted to put up $10,300 for "shares" valued at $2.06. They "had to supply" a 5000 bushel contract of corn to the plant. The stipulations were such that that the plant would have a nominal supply at a price, even if the unforeseen would happen. Farmers could "up the ante" putting in more money for more bushels.

They formed a co-op and Larson became a director. So did Steve Lipetzky of Springfield Minnesota. Lipetzky "believed so strongly in the farmer-owned venture that when he encountered financial difficulty years later he sold land and farm equipment in order to keep his original stock and to buy more."

From the beginning, Lipetsky pushed to have business experts serve on the board to provide expertise. That never happened. Farmers instead relied on themselves, making some mistakes along the way. Perhaps mistakes would be inevitable, anyway, they would save the cost of "fees."

In 1983 they opened a $55 million plan north of Marshall. They city helped with a $1.86 million tax-increment financing package. The plant would grow over the years into a sprawling complex of silos and buildings, rail cars and grain bins. Above it all rose while plumes of steam, a sign of farmers’ progress for miles.

It was the state’s first wet-corn-mill. It collected corn, cleaned it, steeped it in tanks of water-and-sulfur dioxide. Puffed kernels were put into rollers that separated the outside fiber from the white starch inside. The rollers popped out the small germ containing the corn oil.

The dried germ was sold and the fiber became livestock feed for the surrounding feeder operations.

From the remaining starch, gluten mean was extracted for pet and poultry food. The starch-slurry was refined into cornstarch, corn syrup, fructose or ethanol.

At first the plant made cornstarch and corn syrup for confectioneries, ketchup and other food goods. The corn syrup was supposed to be as clear as honey, but came out dark as chocolate milk… the farmers hadn’t learned how to "steep corn" yet.

"We just about went out of business at first because we didn’t know anything" Larson recalled. "We were just a bunch of farmers. We had to learn. By 1987 we’d worked out the kinks and were making money.

Minnesota lawmakers approached them about producing ethanol. The co-op agreed to add the ethanol plant. State approved the subsidies and Minnesota soon was leading the nation in blending ethanol in gasoline.

In1991 MCP built a state-of-the-art wet-milling plant in Columbus Nebraska. They added on in 1993 and 1995.

Jerry Jacoby, Springfield farmer was chairman of the 240-member board. A former military officer, tall, lean, at times intimidating. He also served as the first president of the Minnesota Ethanol Coalition. He’d spent a lot of time delivering testimony before congressional sessions.

For Jacoby the venture was about farmers taking their future into their own hands. They were becoming a player in the commodity manufacturing business --- a business dominated by huge companies such as Cargill of Minnetonka and ADM of Decatur. "We realized we had to grow or die. We became hard-nosed businessmen, assessing the future of our industry and our role in it…forget the warm-fuzzy buzzwords of ‘farmer-owned; value added’ … we were in a fight for our economic lives."

The fight escalated in 1996. Corn prices soared on the pretext of a new farm bill --- the Freedom to Farm Act. They more than doubled to $5/bushel Alas, the company was in trouble because it hadn't locked in prices it was to pay to farmers. Big losses were inevitable. But it would get worse when Mexico curbed fructose imports in order to help its own sugar (cane) farmers. MPC and the entire fructose industry had expanded production capabilities in hopes of further expanding the market for this wonderful product from these wonderful new plants. Only recently had Coca Cola announced its "preference" for corn sweeteners, forsaking a long standing affinity for beet-sugar. Excess fructose sugar glutted the U.S. market, driving prices down.

But the hardest blow came after another wet-corn mill was built. In 1995 a consortium of mostly beet farmers in North Dakota and northwest Minnesota, seeing the sweetener market’s golden opportunity, the stash of federal and state subsidies and feeling the pinch of a depressed beet sugar market, launched a $261 million ProGold Corn Sweetener Plant in Wahpeton, North Dakota.

ProGold starting on a high note, rode the corn sweetener market to the bottom. From $16 to $8 "just like that" Facing bankruptcy, ProGold bailed out and formed an alliance with Cargill as a Lease-Management arrangement for ten years (1997-2007). ProGold farmers "retained" ownership, Cargill would provide management and expertise, at the end of ten years everyone would stand back and assess the situation.

Whatever the reason, a price war ensued in the fructose sugar market. Prices were on the bottom for two years…Long enough to destroy any and every well-laid business plan and boil the blood of toiling family farmers who had invested "dearly" in the projects of MPC and ProGold.

"So there we were in 1996 with an upside down balance sheet. We owed $410 million. Banks didn’t like not getting paid" said farmer/director Doug Finstrom of Kerkhoven, who’d invested "heavily." Local lenders lost faith. MCP had to find a "partner" or close its doors.

Corporate jets carrying executives from Cargill, ADM and A.E. Staley roared into Marshall. MCP directors and Chairman Jacoby were involved in negotiations, as was President / CEO J. Dan Thompson.

Cargill wanted too much control. Staley didn’t come up with the money. ADM appeared to be the saviors. Larson recalls ADM Chairman/CEO G. Allen Andreas as a well-spoken down-to-earth man with a calm manner. ADM didn’t seek voting shares or control, only to be "consulted" on major expenditures.

In August 1997 ADM bought 30% for $120 Million. Many saw ADM’s investment as 1) rescue by a corporate angel. Others saw is as 2) the first step in a dance with the devil.

By 1999 MCP was turning around. Revenues and net profit increased. By 2000 they switched from a co-op to a Colorado LLC, mostly for tax reasons they were told. Everyone’s shares were re-valued at $1.02 The gains of 2000 and 2001 were dimmed in 2002. But by then MCP had reduced debt from $410 million to $245 million mostly through infusion of capital by ADM and refinancing at lower interest rates.

Finstrom and others felt MCP had turned the corner. They "spun off" a dozen other companies and pushed the production in the Marshall and Columbus, Nebraska plants to 130 million bushels per year.

A regularly scheduled board meeting on April 22, 2002 turned out to be anything but. Larson and Finstrom and other directors gathered at the horseshoe table in the round director’s room overlooking a cornfield. The agenda was showing a) low ethanol prices and b) low fructose prices as its itinerary.

MCP executives told the directors to shut their briefcases and not take any notes. CEO Thompson had an announcement. The company was for sale. The directors were stunned. Thompson the CEO was a well-liked man and smart. The directors felt comfortable relying on him.

He told them that a month before Martin Andreas, ADM’s founders son and assistant to the ADM CEO had inquired whether MCP would entertain an offer to sell the remaining 70% and they’d discussed "prices." Andreas had visited the plants since 1997 and was impressed with them, saying often "MCP’s long suit was well designed, good low-cost, efficient plants with low emissions."

A series of calls ensued between Thompson, Andreas and ADMs new chairman G Allen Andreas as well as a cadre of "investment bankers." In April a staff attorney for MCP, Joe Bennett and MCP's chief financial officer Dan Stacken joined the discussions.

Some directors said they were dismayed they never learned of those discussions until the April 22, 2002 meeting. They had seen Thompson often, as recently as the March regular meeting. To add to their surprise, high-powered attorney investment bankers, and advisors from New York flew in by "private jet" to address the April 22 meeting.

Board members were "warned" to "not discuss the potential sale among themselves, outside of this meeting, or with anyone else."

"Its like the whole thing was orchestrated --- the whole board was kept out of it" said board member Finstrom.

Another board member, Jacoby disagrees. "The minority of the board had every chance to voice their objections. They could have made a motion to slow down the process."

That same day, directors voted on "golden parachutes" totaling $6.5 million for eight executives including Thompson and Bennett. The directors said later that they didn’t realize at that time that a sale would accelerate an existing pension plan for the MCP executives. The old pension plan, voted on more than a year earlier would not have provided about $6.5 million more. With "other compensation" MCP’s top eight executives would get $20 million if the company changed hands.

Nearly a month earlier, Thompson had received a $55,000 raise to $330,000 per year, with the "entire annual salary to be paid upon the consummation of any merger’ (Thompson and Bennett had moved away from Marshall, Minnesota by years end and were unavailable for comment for this article).

On July 2, 2002 the board voted 19-5 to put the question to a shareholder vote by mail. on whether they wanted to sell their shares at $2.90 to ADM for a total of $396 million cash and ADM would "take over" outstanding debt of $240 million for a package deal of $636 million.

On July 22 the directors met for the last time. After the usual business, Bennett, the lawyer repeated his warning that directors could be sued and lose their farms if they caused the deal to fall through or made slanderous remarks. Bennett then individually questioned each director about whether he had consulted an attorney or was working against the merger in any way. He accepted only a "yes" or "no" answer. The questioning was intimidating, they said.

Finstrom, Buesing, Lipetzky and Larson answered "yes" to at least one question and were asked to leave the boardroom. Finstrom hadn’t retained an attorney but had spoken "informally to one" about the situation. Larson told the lawyer "I’m gathering information to make a decision, that’s all. I’m not working against the merger" Lipetzky had only missed one meeting in 21 years. "I’m not going to leave. I’m elected by the stockholders to represent the stockholders," he said. CEO Thompson then told him coldly, "If you don’t leave I’ll call the police and have you arrested for trespassing."

Board Chairman Jacoby said the dissenters formed opinions based on bits and pieces of information that were less than accurate. The concern, he said, was that they might derail the sale for members who hadn’t received a decent return for seven years. He pointed out, shares had tumbled from a high of $4.50 to $1, and now a buyer was offering nearly triple that value in a cash deal.

The offer from ADM sounded "decent" to most shareholders, but it was the only one on the table.

Respected investment bankers, hired by MCP to advise and provide opinion directors on the financial fairness of the deal were working, in large part, on "contingency" under such a deal the two firms were to get millions more over and above their $150,000 fee if the sale took place.

The whole situation left the board questioning whether the fairness options might have been compromised. Corporate lawyers, expert in the field, agree saying concerns are justified.

"In circumstances where the fairness option, the vested interest of the bankers appears "compromised" --- the MPC management team may have compromised their independence…. And shareholders may never know if the deal was "actually fair’" for them, said Robert Moilanen, a Minneapolis attorney who specializes in such overviews.

At "informational meetings" held prior to the "proxy vote" Larson looked out over a sea of gray heads. He knew many farmers were at retirement age and their best option was to cash out now. Many had been hurt by low commodity prices. Many had borrowed to invest in MCP. The sale would save some farms, no doubt.

Marketing projections weren’t favorable for the foreseeable future according to Jacoby. More and more ethanol plants were starting up.

Shareholders voted 3825 ­ 736 for the sale. Only seven abstained. Among those voting "for" were directors Finstrom and Larson. "In some ways I feel we let membership down --- we weren’t able to tell the whole story. We were warned about what not to say, we were afraid of being sued ourselves. We had to shut up" said Finstrom.

Now, he and others are questioning whether they might’ve gotten a better price. Some wonder if they should’ve hung on for better times.

This article appeared on January 26, 2003