It may not be Bernie Madoff-level money, but to cattlemen across the nation who received rubber checks from Eastern Livestock, receiving nothing for a year’s calf crop or their high-dollar feeder cattle threatens to wreck them far beyond any market crash.
Cattlemen and livestock market operators began receiving unfunded Eastern Livestock checks last November. When the dust settled, Eastern owed cattlemen and cattle entities about $130 million, according to USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA). The bankrupt company, headquartered in New Albany, IN, owes money to more than 700 cattle sellers in some 30 states.
In an attempt to help relieve pressure on financially strapped cattlemen, the National Cattlemen’s Beef Association (NCBA) approved a resolution to enable its staff in Washington, D.C., and Denver to pursue some relief for cattlemen from the federal government. NCBA is seeking federal funds at low interest or no interest to assist producers and firms that were directly impacted.
“We know Eastern may owe more than $130 million to producers and without some short-term financial assistance, in the means of low-interest or government-backed loans, many operations may be forced to shut down or sell off assets to cover costs,” says Steve Fogelsong, 2010 NCBA president and producer from Astoria, IL. “NCBA simply isn’t willing to let that happen.”
Following the Eastern blowup late last year, Fogelsong sent a letter to USDA Secretary Tom Vilsack on behalf of NCBA. He indicated that “due to non-payment of cattle, many of our members have told us they will have to shut down or begin selling land and assets to cover their liabilities if they do not get some financial relief soon.”
James Herring, former CattleFax chairman and CEO of Friona Industries, Inc., an Amarillo, TX-based cattle feeding company, says the potential assistance from the government would be helpful. “I’m sure supportive of any kind of loan program for these people,” he says.
“The legal process is probably going to take awhile. There are some good operations that have been injured by this. It may be a while before there is a resolution.”
More than a handshake
Herring says that even though the cattle industry was founded largely on the value of a handshake between buyers and sellers, proper documents are needed – and more importantly – knowledge of the financial worthiness of the buyer or seller.
“This marketing mess with Eastern reminds us that we have to be careful with whom we do business,” Herring stresses. “The real key is for producers to understand that they have to be cognizant both of the credit worthiness of the buyer and the reputation of the buyer.
“It’s important for them to really focus on legitimate purchasers of cattle. It’s not the easiest thing in the world to research each potential buyer, but it’s one of the most important things.”
Colin Woodall, NCBA vice president of government affairs, says NCBA has directed his Washington team to work with the relevant congressional committees to ask for a congressional oversight hearing into GIPSA’s audits and bonding of all cattle auction markets and dealers.
John Queen, co-owner of Southeast Livestock Exchange in Waynesville, NC, and an NCBA past president, notes that Eastern was bonded for only $800,000. NCBA terms that level as “woefully inadequate.”
Queen was among those who addressed the Eastern situation during an NCBA Live Cattle Marketing Committee meeting during the Cattle Industry Convention this February in Denver. Queen charged that GIPSA failed to keep records or conduct consistent audits of Eastern, which led to serious financial devastation for many producers, truckers and livestock markets.
He says GIPSA finally reported to the House Agriculture Committee that it did not keep a two-year audit trail on anyone. The only proof was a one-year annual report, Queen says.
“Eastern has not been audited in the last five years,” Queen says. “They were the largest in the country, folks. Where was our regulatory agency?
“The thing is they won’t challenge the big guy but have no problems auditing the small guys. They should be conducting audits and, if there is a problem, they should post it on the website to protect producers.”
Queen says that in 2010, Eastern traded $3.9 billion worth of cattle, which is three times the amount traded in 2009.
“I’m no rocket scientist, but a fifth grader could tell that a three-fold increase in volume over one year is probably a pretty good reason to conduct an audit,” he says. “We need to step forward and ask for regulatory oversight. We need to ask for a review of formulas. We need to find out why no audits were conducted on the largest livestock market in the country.
“If they can’t do audits of larger markets, then we need to ask that they be required to hire an independent audit company and then they (GIPSA) don’t have to worry about being held responsible for disasters like this.”
To learn more about the Eastern Livestock bankruptcy and cattle contracts involved, go to http://www.easternlivestockbkinfo.com/index.html.
Sidebar: Grid transparency needed
While electronic grading systems are helping packers obtain more accurate yield and quality grade scores, the yield grade information isn’t being reported to the overall beef industry that’s geared more and more toward value-based marketing, says Don Close, marketing director at Texas Cattle Feeders Association (TCFA) in Amarillo.
During the recent National Cattlemen’s Beef Association Live Cattle Marketing Committee meeting, Close was among several who addressed the issue of the lack of packer grid-based information being reported to producers and feeders. He says the data from grid-based grading is an important part of marketing cattle coming out of the feedyard.
In a separate interview with BEEF, Close says, “Most of these yield grades are based off a plant average. If their (cattle’s) yield grade or quality grade is better than the plant average, they get a premium. If it’s low, they get docked.
“The producer or feeder will receive the information on their kill sheet. But industry-wide, it’s not available. We need those yield grades as a measuring stick.”
Paul Coleman, Live Cattle Marketing committee chairman and co-owner of Frontera Feedyard at Muleshoe, TX, says that since there are numerous value-based grid sales of cattle, perhaps organizations like TCFA, the Kansas Livestock Association or Nebraska Cattlemen could serve as clearinghouses for grid information. “It’s information that would benefit us all,” he says.
Mike Lynch, chief of Livestock & Grain Market News, says his operation is looking into the potential for expanding the grid reporting system. He also encourages producers and feeders to explore the new “dashboard” feature of the Agricultural Marketing Service website at http://mpr.datamart.ams.usda.gov/amsdashboard/. The site provides easy access to information about various livestock movement nationwide.
Timeline of a failure
• On Nov. 3, 2010, a livestock seller complained to USDA’s Grain Inspection, Packers and Stockyards Administration (GIPSA) that a payment check received for livestock sold to Eastern Livestock Company (ELC) LLC had bounced.
• The next day, GIPSA deployed investigators to ELC headquarters to investigate, deployed rapid-response teams to potentially affected markets nationwide, and began issuing letters to unpaid sellers encouraging affected producers to submit bond claims.
• On Nov. 9, USDA issued a news release on the situation and information on how to file bond claims.
• That same day, Fifth Third Bank filed a motion in Ohio requesting a temporary restraining order on ELC and the appointment of a receiver. The court complied.
• On Nov. 10, Capital Indemnity Corporation served notice on ELC cancelling its surety bond for $875,000 effective Dec. 30, 2010.
• GIPSA filed an administrative complaint on Nov. 19, charging ELC and Tommy P. Gibson of New Albany, IN, with failure to pay, and in a timely way, for livestock purchases; and failure to maintain an adequate bond.