HOPE, MINNESOTA — A federal judge in Pipeline Foods LLC bankruptcy has allowed Minnesota farmer creditors to be free to sell grain that had been pledged to the company in credit sale contracts to other buyers.
The ruling on July 30, 2021, allows farmer-creditors of the Fridley, Minnesota-based grain ingredients company a measure of cash flow and financial relief for some farmers — but only the Minnesotans.
Also, state grain regulators in Minnesota, Iowa and Michigan on July 28, 2021, asked that the company not be allowed to sell grain inventories to pay off secured creditors, as the company had requested.
The size of the bankruptcy is not fully known. Pipeline, in its request for “cash collateral,” proposed to sell $28.7 million in grain inventories between July 1, 2021 and Oct. 2, 2021. In addition, they would collect $12.7 million from accounts receivable, for a total of $41.5 million in revenue. Deducting expenses, they propose to pay $26.9 million to secured creditors through weekly "sweeps" of the cash receipts.
At a July 14, 2021, bankruptcy hearing, Pipeline officials said that as early as May 2021, they explored bankruptcy with the U.S. Bankruptcy and U.S. Trustee’s offices in Delaware. Yet they kept soliciting grain and handing out IOUs to farmers, whose grain will go primarily to pay secured lenders.
According to the regulators’ “objection,” to the use of cash collateral, Pipeline Foods “primarily did business using (voluntary extension of credit contracts) with payment terms of 14 days or longer” and made new contracts after they “largely stopped making payments for grain in May.”
“The inequity of allowing the secured lenders to sweep the cash generated from sales of the very grain delivered by the (farmer) claimants is particularly acute,” they said.
Chris Koller, 41, and his wife, Andrea, operate Koller Farms at Le Sueur, Minn. They say Pipeline owes their 183-acre farm $82,000 for sales of much of their grain.
The Kollers think Pipeline Foods knew it was in trouble, but acted unethically by taking in grain that they now want to use to pay off secured creditors.
Chris said Oliver Larson, an assistant attorney general, representing the Minnesota Department of Agriculture, advocating to allow his sale for even a small part of the year’s production will give him something to live on — “some relief.”
The Kollers are relatively new to the organic game.
In 2004, the young couple purchased Chris’ grandparents’ farm near Le Sueur.
Chris worked full-time for the city of Le Sueur and farmed in the off hours. They transitioned the whole farm to organic in 2018, embracing the specialty market, including its weed, yield and management challenges.
The Kollers sold almost all of their grain crops to SunOpta, LLC, an Ontario, Canada, based firm that had an elevator complex at nearby Hope, Minnesota. In 2017, Pipeline Foods was established and in 2019 the company purchased SunOpta’s corn and soybean business, including Minnesota locations at Hope, Blooming Prairie, Ellendale, and Moorhead, as well as Cresco, Iowa.
Initially, Pipeline typically paid within two weeks of delivery.
In the past year had been delaying payments for up to three weeks. They “needed to be bugged a little bit — an email sent,” Andrea said.
In mid-summer 2020 the crop was looking good, so Chris signed a contract to sell the crop and deliver in a 20-day window in June and July in 2021. In April 2021, they sold a couple of extra loads and got paid in about two or three weeks. By July 2021, the Kollers had delivered three-quarters of their 2020 corn crop contract.
On July 7, 2021, they wanted to move soybeans in a grain bin that needed to be moved out. They made another contract with Pipeline.
The next day, on July 8, 2021, Andrea told Chris the family needed to pay some bills and to check on the Pipeline payment. Chris called the company and talked to his merchandisers. “Our broker, the guy I was dealing with, said, ‘We just filed for Chapter 11,'" he said.
“It couldn’t have come at a worse time.”
‘Across the street’
On a different scale, Brian Herbst, 65, and his family at Kasson, Minnesota, are owed nearly $350,000 — a huge setback to their working capital. Brian wonders why the company made deals with farmers until just before filing bankruptcy on July 8, 2021 and said the state should have better protection for credit sale contract farmers, like producers in Iowa and North Dakota.
The Herbst family is self-made. Brian’s father started the farm in 1958, farming 200 acres.
Today, Brian Herbst, 65, and his wife, Cynthia, operates under the Herbst Farms name, in partnership with sons Adam, 27, and Eli, 22 They raise corn and soybeans on about 2,200 acres in Dodge County near Kasson, Minnesota.
“Their indebtedness to me is $348,546.92,” Brian said, with specificity, and then added, “I believe.”
The Pipeline Foods debacle has eroded the Herbst farm’s “working capital,” which he said is its foundation for strength and growth.
“We don’t go to the edge and wonder what’s on the other side,” he said. “We make sure we’re going to be able to farm next year.”
The family is not afraid of work. Besides cropping, they custom-feed up to 6,000 hogs in two locations under a separate entity.
Brian has been planting non-GMO corn for many years.
“It costs less,” he said. “I believe, with proper management, it can frankly out-produce ‘traited corn’ in the absence of your pest, whether it’s a disease or insect. And some of those things you can’t control, and that’s why (GMO-) traited corn is a good thing, also.”
Initially , Brian marketed non-GMO corn a decade ago, selling through Mississippi River markets through Winona, Minnesota. Initially, non-GMO fetched a 40 cent per bushel premium, over and above the basis. The last time he checked, that premium was 20 cents. Today, about 60% of the family’s crops are non-GMO.
Brian’s recent contracts have been with SunOpta, and then with Pipeline. Last December and January, Brian signed two, 50,000-bushel contracts to deliver corn in June 2021.
In March 2021, Pipeline representatives called.
“They were short some corn and would like my corn to be delivered early, and said they would honor my June premium,” Brian said. He jumped right on it because it would shift his workload from the busy cropping season.
The Herbsts delivered the first 50,000 bushels. Payments were “a little slower” than typical.
In May 2021, the Herbsts started delivering on the second 50,000-bushel contract. But a funny thing: He was to deliver the first 30,000 bushels to Pipeline’s elevator at Hope, Minn. But then they asked him to deliver the next 20,000 bushels across the street, at a separate company called Crystal Valley Cooperative, an export site for a Mankato, Minnesota-based cooperative.
Brian expected it was a pass-through, “I assumed Crystal Valley would pay Pipeline — it’s my corn, my money — and (Pipeline) would turn around and pay me,” he said.
Crystal Valley typically pays within days. Brian wonders what Pipeline did, or will do, with the money.
‘Up to the end’
The Kollers didn’t dare to sell grain under contract to Pipeline, worried about the courts or Pipeline coming back at them several months later.
They have high praise for Larson, the assistant attorney general representing the Minnesota Department of Agriculture, which regulates grain companies. Larson petitioned the court on behalf of Minnesota farmers to allow them to sell grain that had been under contract but undelivered.. The court agreed and on July 30, 2021, set up an online system to apply to sell the undelivered grain, without jeopardizing other debts.
The department also administers the company’s bond of about $500,000. But it’s unlikely to be used — at all.
Why? Because, say court documents, Pipeline set up the “vast majority” of its contracts as “voluntary extension of credit” — Minnesota's term of art for "credit sales."
A section in the contract said the company could pay the seller after 14 days of delivery — essentially handing over title of the grain, with just the intent to pay back later. The contracts expressly say the contracts are not covered by the bond, which covers cash sales in the case of an insolvency.
The Herbsts and the Kollers now realize how important that distinction was and how many farms will go bankrupt after having so much of their crop delivered to Pipeline Foods.
Brian thinks Minnesota is overdue to create a system — perhaps with indemnity funds like those available in North Dakota and Iowa — to protect farmers from these kinds of losses.