OMAHA -- Nebraska state warehouse officials continue to comb through the aftermath of the closure and bankruptcy last month of the Alvo Grain and Feed elevators in Alvo and Ashland.
The plight of Alvo Grain and Feed raises concerns for some state and federal officials who fear it could be the beginning of a much wider trend of elevators facing financial trouble because of much larger margin calls, higher grain prices and hedges on a more volatile futures market.
Whatever the cause of any elevator failure, one fact remains: Farmers with credit sale contracts and other agreements are the last in line to receive payments -- if at all. They take a backseat to banks and others that are considered to be "secured creditors" in bankruptcy proceedings.
Credit sale contracts are written agreements in which the elevator takes ownership of grain but can wait for more than 30 days to pay.
In this first story in a three-part series DTN will look at how recent developments in the grain markets affect how grain elevators do business.
ALVO FEED AND GRAIN
Elevators have traditionally locked in prices for grain they've bought or contracted from farmers by hedging in the futures markets. For every futures contract, the elevator must maintain a percentage or margin in an account with their broker; if futures prices go up, the elevator must deposit more money in that account.
It appears that Alvo Grain and Feed was unable to pay its margin calls and went to its banker for help, said John Fecht, director of grain warehouses at the Nebraska Public Service Commission. The bank responded by calling the Nebraska Public Service Commission, and the PSC immediately closed the elevator.
State officials found about 223,000 bushels of corn and 92,000 bushels of soybeans left in storage between the Alvo and Ashland locations, which have a combined total capacity of about 1 million bushels, Fecht said.
The company's books show Alvo Grain and Feed owes money and/or grain to 38 customers on the warehouse side and 50 on the dealer side. Exactly how many farmers had credit sale contracts or other arrangements with the elevator is not yet known.
According to Nebraska law, the bankruptcy action supersedes any other matter, Fecht said. This means it could be up to six months before the state sells the grain in storage, sorts out who is due payment and makes those payments.
Farmers who had contracts with Alvo for the future delivery of grain still may be able to execute those agreements under a proposal that's being considered by the bankruptcy court, Fecht said.
"A stipulation is being circulated that would allow for the farmers to deliver their remaining contracts and future delivery contracts directly to the grain companies, cattle feeders or ethanol plants and to be paid directly by these companies," he said. "These stipulations would require the approval of the farmer, Alvo and the third-party buyer."
Secured creditors, including banks and others who filed security liens against the elevator, will be first in line for payment, Fecht said. That will be followed by unsecured creditors including farmers and others. This is generally the pecking order for elevator closures in any state.
SUNBELT GRAIN
Alvo Feed and Grain isn't alone in its financial distress. A Kansas bank filed an involuntary Chapter 7 bankruptcy petition in February against Sunbelt Grain in Tribune, Kan. This came after the company reportedly faulted on bank payments to Security State Bank in Scott City totaling about $4.9 million. The state closed the elevator in December.
Chapter 7 involves liquidating all of the elevator's assets and distributing the proceeds to creditors.
According to court documents from the U.S. Bankruptcy Court for the District of Kansas, on April 10, grain left in storage at Sunbelt was sold for a total of about $6.5 million.
Kansas officials said Sunbelt owes 33 farmers some $2 million for wheat sold in 2007, and those farmers are considered to be unsecured creditors. When the bank foreclosed on the elevator there were 25 farmers with about 96,000 bushels of wheat and another 23 with some 400,000 bushels of corn, all in open storage.
Amy Bickel, a Hutchinson News reporter who has been following the Sunbelt case closely, said that all told, the elevator owes its bank about $8 million.
There is speculation among state officials that large margin calls are to blame for the company's financial difficulties, as well, but that has yet to be determined.
OTHER ELEVATORS AT RISK
Darin Newsom, senior analyst for DTN, said small- to medium-sized elevators are facing six- and seven-figure margin calls with corn futures well above $5 a bushel recently.
Regardless of whether elevators are using hedging strategies or not, he said farmers should "probably be leery about working with any merchandisers, regardless of risk management practices. They need to have a good idea of organizations' financial situation before establishing long-term cash commitments."
Higher commodity prices have put many more elevators in financial situations like never before experienced, he said.
"The position has to be marked to the market each day," Newsom said. "In a strong uptrend, that means a margin call almost every day -- unless the market goes down."
He said it is likely that more elevator bankruptcies will occur as a result of the margin-call phenomena.
"We are hearing about more bankruptcies so it would not be surprising to see this trend continue if markets continue to rally," Newsom said.
Nearly all elevators use some hedging strategy, so "the downside risk is just as great. What if an elevator doesn't hedge or sell the cash and the market collapses? Tough time to be a merchandiser," he said.
"There's no doubt that everybody is borrowing more money than they've borrowed in a long time," said Chris Klenklen, policy advisor for the Missouri Department of Agriculture in the grain warehousing division.
"With grain prices like they are, price of fertilizer, all the inputs have gone up. A lot of the elevators are getting hit with a double whammy. Not only have they had to borrow a lot of money to bring in inventory for inputs once your price is substantially higher than it has been in the past. But at the same time it depends on how they're marketing their grain and if they're hedging it on the board of trade. Then they're also getting slammed with some pretty wild margin calls based upon the volatility," said Klenklen, who is also the secretary of the Association of American Warehouse Control Officials.
Tim Tyson, program manager for the grain warehouse program in the Kansas Department of Agriculture, said margin calls are becoming a "bigger problem." Prior to the Sunbelt failure, however, Kansas had just a handful of elevator closures since 2000.
In Nebraska, both grain dealers and warehouses are required to have licenses. In Kansas the state regulates and monitors only the warehousing side.
"We get a snapshot of where an elevator is at a certain point," Tyson said. "Because we are so limited it is hard for us to see what's really going on."
Elevator closures are relatively rare these days, Klenklen said. But many elevators are second guessing their marketing strategies.
"I'm sure some of them are rethinking that marketing plan," he said. "Their bankers have become regular daily parts of their operation. I think that's why a lot of small companies, even some of these major companies call a timeout for a little bit to try and figure out just exactly 'what is our exposure here.' It makes them really nervous because obviously the time to borrow money is not when you really need it. That's not the best time to go and talk to your bank when you've already tapped out one line of credit."
Todd Neeley can be reached at [email protected].DTN
