Bondholders nervously watch Farmland

KANSAS CITY, Mo. -- Shirley Davis sold her family farm in 1992 and invested the $60,000 profit in Farmland Industries bonds, betting that the interest payments would help support her in retirement.

But the interest payments stopped after Farmland filed for Chapter 11 bankruptcy protection on May 31. Davis is 73, widowed, in ill health, and unsure what to do next.

"There was never any doubt in anyone's mind that Farmland would go on, and on, and on forever. We had so much faith," Davis said from the Independence home she shares with a daughter. "Now we don't have the money, and we don't have the farm."

Davis is one of about 20,000 individual investors who hold Farmland subordinated debt certificates. Some individuals hold $1 million or more in the bonds. Collectively they are owed $570 million, almost a third of the liabilities Farmland listed in its bankruptcy filing, the biggest in Kansas City-area history.

Of those who bought Farmland bonds, some are savvy investors whose bonds are part of a diverse portfolio. Others, like Davis, have much of their retirement in the high-yield bonds and face the prospect that Farmland's reorganization could blow much if not all of those investments away like topsoil in a dust storm.

Three-legged approach

For more than 50 years, the Farmland bond program was one leg of a three-legged stool that financed the country's largest farmer-owned cooperative. The second leg was traditional bank loans, and the third was the profits Farmland was allowed to keep, with the permission of the local cooperatives that own it.

Farmland founder Howard Cowden began the bond program in 1948, believing it was better to borrow money from farmers for about the same rate as Farmland would have paid a bank, said Harry Cleberg, Farmland chief executive from 1991 until his retirement in 2000.

"He saw it as a benefit to the farmers, to earn some money, and a benefit to the cooperative to have your owners be your debt holders," Cleberg said.

The bond program operated until sales were suspended in October 2000 because of Farmland's deteriorating finances. Farmland marketed the bonds through its own securities company, and sold them through brokers in 26 states.

Most of the investors were Farmland members, or employees. Sometimes generations of farm families held the debt and rolled it over whenever it matured. The bonds also were advertised in newspapers to the general public. Until the bankruptcy, the company had never missed an interest payment.

But Farmland investors got spooked in recent weeks as word spread that Farmland was short of cash because of abysmal fertilizer sales. Many cashed in their bonds early, creating what Robert Terry, Farmland chief executive, called "a run on the bank."

Over six weeks leading up to the bankruptcy filing, Farmland shoveled out more than $30 million to pay off early redemptions, aggravating its cash-flow shortage. If fertilizer sales had improved, Farmland might have dodged bankruptcy. But with no signs that the redemptions would slow, only bankruptcy promised to stanch the drain.

Bondholder lawyer Dan Flanigan said it's not yet clear how much bondholders might recover from their investments.

Pete Hancock, who works for a Denver construction company, is one of seven members appointed to a bondholders creditor's committee. The 63-year-old consolidated much of his retirement money, $800,000, into Farmland bonds several years ago. He learned about them through newspaper advertisements.

Farmland bonds looked safe. It was a company with meat-processing plants and grain operations. It made things.

"This wasn't some dot-com. It had assets," Hancock said.

Since the bankruptcy filing, Hancock said, he has met Farmland co-op members with more invested in Farmland bonds than himself. These people all seem to have faith that Farmland will recover and pay them back, he said.

"I hope they are right."