Case Study: Farmland Industries Inc.
Farmland Industries Inc., a federation of 1,700 rural farm cooperatives that is the largest farm cooperative in the United States, filed for bankruptcy protection on May 31, 2002, after reportedly rejecting an offer by Smithfield Foods Inc. for acquisition of Farmland’s meat business. The meat business is operated as a joint venture with U.S. Premium Beef Ltd., which has the right of first refusal.
In the 1990′s, Farmland Industries re-directed its capital and took on considerable debt to become a larger processor of farm commodities. The subsequent declines in crop prices resulted in a loss of $90 million for the fiscal year reportedly ended August 31, 2001, with additional losses of $46 million for the half year ended February 28, 2002. Investors in Farmland’s subordinated bonds reportedly aggravated the liquidity crisis by redeeming the cooperative’s bonds in droves. This story offers an example to vendors of the impact of massive changes in a customer’s business environment, as well as the inflexibility a customer faces when it has committed to joint ventures.
This bankruptcy could be bad news for Ernst & Young LLP (or its successor Cap Gemini Ernst & Young). In April 1997, E&Y and Farmland formed OneSystem Group LLC (OSG) as an IT joint venture to provide IT outsourcing and business process outsourcing services to Farmland Industries and the Farmland Cooperative System, the largest farmer-owned cooperative in North America. The joint-venture relationship reportedly introduced results-based metrics and gain-sharing through the establishment of unique payment methods for services funded by realized business savings.
In a bankruptcy, executory contracts may be terminated. In a joint venture where one of the parties is bankrupt, the bankrupt joint venturer may terminate future obligations to provide funding and services, but it still owns the joint venture interest.