Pork producers the losers in Quality Meat bankruptcy

Tuesday, June 3, 2014

When Quality Meat Packers sought bankruptcy protection in April, it left dozens of Ontario farmers and truckers holding unsecured debt, prompting calls for better safety net protection for the industry

by JIM ALGIE

When a Superior Court judge in Toronto in early May handed Quality Meat Packers and Toronto Abattoirs over to receiver A. Farber and Associates, it was simply the denouement. The die had been cast in a court ruling weeks before.

In mid-April, Ontario Superior Court Justice D.M. Brown rejected a bid from a farm group that would have forced Quality out of court protection and established priority security for farmers. The farm group's application sought security available for agricultural product suppliers under S. 81.2 (1) of the Bankruptcy and Insolvency Act. Judge Brown found that agricultural security rules did not apply at the time of Quality's early April notice.

The system fails farmers in circumstances such as the Quality case, veteran bankruptcy trustee Bill Courage said in an early May interview. A senior vice-president at accounting and advisory firm BDO Canada and an insolvency specialist based in Owen Sound, Courage said: "Fundamentally, you get debtor possession. So it's the lunatics continuing to run the asylum."

The system works like this. "While hog farmers and agriculturalists have special protection under the Bankruptcy and Insolvency Act, it's only in the case of a bankruptcy or a receivership. And it only extends for 15 days after the starting point," Courage said. "You've got a 15-day period to get your goods back. Well, in a pork plant, all those goods are converted (to meat) so standard protection clauses under the Bankruptcy and Insolvency Act aren't working."

David Schwartz pulled the plug on 25 per cent of Ontario's hog processing capacity on March 28, when he decided to stop funding losses at his family-owned company, Quality Meat Packers Ltd and associated Toronto Abattoirs.

President of the 83-year-old, Toronto-based pork processing firm begun by his grandfather in 1931, Schwartz is also a major secured creditor through a separate holding company not under receivership. Although Schwartz avoided speaking to reporters during the peak of Quality's financial crisis, his affidavits and those of an appointed trustee filed with Ontario Superior Court provide an account of what happened.

Shrinking hog supplies and sharply higher prices accounted for ruinous losses at Quality during 2012 and 2013, Schwartz's affidavit says. A surge in hog prices during the first three months of 2014 brought Quality to its knees as it sought to balance high-priced hogs against customer expectations of stable, predictable pork prices.

Quality sought bankruptcy protection finally on April 3. The move froze company assets and provided a 30-day window to reorganize financing under terms of the federal Bankruptcy and Insolvency Act. It also left dozens of Ontario hog farmers and truckers holding unsecured debt for thousands of pigs delivered in late March and early April during the final week of normal-course operations.

A 17-page list of 276 creditors posted on its website by Farber, Quality's receiver, tells the story. As of early May, outstanding debt totalled more than $40 million for the company and an associated business, Toronto Abattoirs Ltd. The abattoir provided hog slaughter services to the meat packing firm at 3 Tecumseth St. in downtown Toronto.

As court protection expired May 5, Schwartz filed an application seeking to broaden Farber's appointment to take control of all assets: effectively a voluntary declaration of bankruptcy. Of the possibility of continued hog processing, Schwartz said in an affidavit sworn May 2 that the company was "unable to secure sufficient supply to recommence operations at an economically viable level."

Quality's failure raises questions about how hog farmers can protect themselves against similar future risks in the absence of a financial protection such as those in place for years among grain and beef farmers in Ontario. Agricultural economist Ken McEwan, director of Guelph University's Ridgetown College, studies the Ontario hog industry closely. In an interview, McEwan described the Quality Meats failure as an "important" development for the provincial hog marketplace. Even so, continued strong demand from Quebec packers – particularly Olymel – helped pick up some of the slack, McEwan said.

But losses of "huge sums of money" by Ontario farmers caught up in Quality's bankruptcy should generate careful thinking about designs for a financial protection program, McEwan said.

Such a program was under active discussion between provincial government officials and the Ontario Pork Producers Marketing Board as recently as 2012, board communications manager Mary Jane Quinn said in an emailed response to questions from Better Pork. However, the board decided not to proceed because of tight government budgets at the time in circumstances where "the cost versus benefit of a plan was not hugely apparent," Quinn said.

Quality Meats changes things, McEwan said. "I think going forward, what becomes the real issue here is how to  . . .  develop some sort of a safety net program in place for producers," he said. "I think there needs to be something put in to properly address this in a fair and balanced way," McEwan said. He also said he has "more questions than answers" about the details of such a program.

McEwan referred specifically to the challenge in any plan of accommodating recent trends in hog marketing that rely on direct supply contracts with packers. As well, he referred to questions about how to handle U.S. sales and to accommodate the actively expanding co-operative, Conestoga Packers, which processes hogs for members.

Other commodities have protection plans. The Ontario Beef Cattle Protection Program operates with a current balance of about $7 million judging by statements published in the 2014 annual report of Beef Farmers of Ontario. Claims on the fund have varied widely over the 32 years reported. In 2012-13, the payout amounted to $657,000. The fund showed significant claims in 2000-2001 of more than $2 million.

The beef financial protection program began after a cattle dealer went under, taking stockyard operators and producers with him, and is funded partly with a deduction on animal sales. The program statement for 2012-13 shows $106,068 in deductions and investment income of $244,642. Other animal production groups have operated financial protection programs for years, often started after a processors' financial debacle cost producers large amounts of money.

Four days after Quality's April 3 notice of financial trouble, the company and pork board officials negotiated a prepayment agreement for future shipments of hogs. No hogs were delivered, however, under terms of the agreement.

Without continuing production, the company's senior secured creditor, Toronto Dominion Bank, refused to extend credit beyond April 18. By then, it had become clear that hog suppliers were unwilling to risk further losses. As a result, on May 2, Schwartz sought to appoint a receiver and liquidate company assets, a voluntary declaration of bankruptcy for the family firm.

Until April, Quality processed between 23,000 and 24,000 hogs weekly. McEwan calculates that's roughly 20 to 25 per cent of the provincial total. In the week before it sought court protection, the company received 23,400 hogs from 68 suppliers, all of whom are unsecured creditors, during a liquidation process that one experienced bankruptcy accountant figures could take six months or longer to complete.

During the court protection period, Quality continued to sell inventory and collect accounts receivable. Those moves put the company in a positive cash position, the trustee's report said.

As a result, TD "repaid itself in full using cash balances in Quality accounts at TD," the trustee's report says. In early April, Bankruptcy Act filings estimated company debt to TD at $8.082 million.

TD is one of two major secured creditors in the failure. The second secured creditor is a separate holding company which also involves Quality Meats president David Schwartz. The holding company claims a security agreement on debts of more than $19.3 million.

An April 9, the trustees report estimated outstanding debt to hog producers at about $8.671 million.

The Schwartz family also owns Great Lakes Speciality Meats in Mitchell, in Perth County. Patrick O'Neil, head of Ontario Pork's marketing division, says hog shipments to the Mitchell plant resumed later in April, based upon an arrangement whereby the plant pays the marketing division in advance of delivery. There are also arrangements in place with other packing plants, O'Neil says, mentioning "letters of credit, performance bonds and cash advance and performance bonds."

Those instruments were in place before the Quality Meat failure, O'Neil says. But not for Quality. The producers who shipped through Ontario Pork in those last days before the issuing of the Notice of Intent remain unpaid for more than $1 million worth of hogs. BP

With files from Don Stoneman.