Illinois hog co-op meltdown hits Ontario producer

Sunday, March 29, 2009

by SUSAN MANN and BETTER FARMING STAFF

The meltdown of an Illinois-based hog-farming co-op hit at least one Ontario hog operation and raises questions about whether this province’s industry can protect producers if such a failure were to happen here.

Meadowbrook Farms, a co-op with more than 100 farmer-members, filed for bankruptcy March 21 and plans to liquidate all assets. Documents filed court in connection with the bankruptcy list Ontario Pork as being owed $294,746. Finance director Lloyd Bauernhuber says the creditor is an Ontario farming corporation owned by a parent company in the United States, which is a Meadowbrook shareholder. He declined to name the Ontario farming corporation.

Bauernhuber explains the marketing board was listed because all shipments of Ontario market hogs must go through Ontario Pork.

Bauernhuber says Ontario Pork has a deferred payment agreement with the company. The agreement is a “sign off that relinquishes Ontario Pork of any responsibility with regard to credit,” that leaves the company on its own to recoup the debt.

General manager Rob McDougall confirms that Thamesford-based Paragon Farms, a Canadian-U.S. partnership made up of Ontario Management Group and Michigan entity Great Lakes Pork Inc., has shipped pigs to failed Meadowbrook Farms. He says other Ontario farms have as well. Asked if Paragon was the creditor for $294,000 he said: "No comment."

In the past, Ontario Pork sold Meadowbrook two loads of 180-200 head on the spot market. In those cases, Meadowbrook paid within 48 hours of slaughter, the provincial organization’s normal terms of payment.

Formed in 2002, the Meadowbrook owned a processing plant with the capacity to process 4,000 hogs a day.

According to court filings, the co-op owes more than US$44 million and has assets of US$28 million. Meadowbrook blamed the bankruptcy on a Chicago-based company for backing out of a contract to buy antibiotic-free pork.

But trouble was brewing at the co-op for months. In November, the U.S. Grain Inspection, Packers and Stockyards Administration fined the co-op US$12,500 and ordered it “to cease and desist from misrepresenting terms affecting producer-members,” in connection with a 2007 incident.  Packers and Stockyards monitors the marketing of agricultural products in the United States.

Pork processing co-ops in the United States have a poor survival record. In Meadowbrook’s case, the inability to guarantee payment to its producers triggered financial failure.

In January, Packers and Stockyards ordered the co-op to increase its bond to US$5.97 million from US$740,000 to cover its financial obligations. Unable to come up with the money, the co-op shut its plant later that month.

In Ontario, there is only one pork-processing co-op, Progressive Pork Producers Co-operative Inc, owned by 150 family farms in southern Ontario. The other major processors are privately owned Quality Meat Packers Limited and publicly listed Maple Leaf Foods Canada, which slaughters nearly 45 per cent of the province’s weekly hog sales. Progressive Pork’s processing arm is Conestoga Meat Packers, Ltd.

Conestoga processes 14,000 hogs a week. Conestoga spokesman Bob Hunsberger says it’s a tough business. “Margins in meat packing are tight, currently, not just for us but for everybody.” He says Conestoga is building an addition to enable the packer to recover more byproducts.

There are indications that hog numbers are declining but also signs that demand for the product is weakening. “Prices for meat are low,” he explains.

Progressive Pork is the only processor Ontario Pork allows to pay producers seven days after slaughter. All of the co-op’s producers have agreed to abide by that extended term, Bauernhuber says.

The co-op doesn’t have to provide Ontario Pork with a letter of credit.

Under the province’s current hog marketing structure, Ontario Pork requires that packers, with the exception of Conestoga, provide letters of credit secured by banks, according to Bauernhuber. Ontario Pork is named the letter’s beneficiary so if there’s a default, it can take the letter to the bank for payment. Letters of credit have been sufficient to cover any defaulted payments except for one in 2003, when the letter didn’t cover the $215,000 defaulted payment of Brantford Packers, Bauernhuber says.

What would happen if the co-op needed more time to pay? Bauernhuber says the question is speculative and the Ontario Pork board would have to make a decision on it.

Who would pick up a loss if an Ontario Farm Products Marketing Commission Order to end single desk marketing for the provincial hog industry succeeds and farmers have to deal directly with packers?

Bauernhuber says the board is working with the Ontario Farm Products Marketing Commission and the Hog Industry Advisory Council on a plan to establish some type of financial protection plan but nothing has been developed yet.

The issue was highlighted in a draft plan Ontario Pork submitted to the Commission in December and the provincial marketing organization has stated it “will not move ahead with any part of this plan until a fully government funded ... system is secured for the industry.”

In January, Commission chair, Geri Kamenz, called the organization’s ultimatum “reasonable.”  BF

Clarification

If one of Ontario’s larger hog processors failed, producers’ only recourse for reimbursement would be an appeal to Ontario Pork’s 14-member board.

And even though the provincial marketing board tries to maintain a large cash reserve for such emergencies, “there is no guarantee of payment,” says Curtiss Littlejohn, the board’s outgoing chair.

Last month’s bankruptcy of Meadowbrook Farms, an Illinois hog co-operative, raises the question of what financial safeguards are in place to protect Ontario producers.

In January, U.S. authorities ordered the 100 farmer-member co-op to increase its bond to US$5.97 million from US$740,000 to cover its financial obligations. Unable to come up with the money, the co-op shut its plant later the same month.

On this side of the border, Ontario Pork requires that packers provide letters of credit secured by banks to ensure producers receive payment. Ontario Pork is named the letter’s beneficiary so if there’s a default, it can cash the letter.

The policy, however, does not extend to the province’s three main pork processors: Conestoga Meat Packers, Ltd., the processing arm of Ontario-based Progressive Pork Producers Co-operative Inc; privately owned Quality Meat Packers Limited; and publicly listed Maple Leaf Foods Canada, which slaughters nearly 45 per cent of the province’s weekly hog sales.

Littlejohn says producers are protected because Ontario Pork monitors “the receivables from those processors.”

Lloyd Bauernhuber, the marketing board’s finance director, notes laws require Maple Leaf to disclose quarterly reports to investors. If problems were brewing, they would be foreseen.

Ontario Pork requires Quality Meats to provide financial information and annually reviews Conestoga’s financial statements. The board also requires Progressive Pork members sign documents showing they understand and accept Conestoga’s payment terms, which, at seven days after slaughter, are longer than the 48 hours Ontario Pork normally requires.

According to 2008 financial statements the board holds more than $5.8 million in temporary investments. But it’s up to the board “to spend the resources of the corporation,” Littlejohn says. BF