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Published September 12, 2011, 05:45 AM

Upside down dairy still looks ahead

Excess grain and feed: This is one of the major reasons North Dakota and South Dakota have sought dairy production opportunities in the past decade. One of the largest players in the game has been Rick Millner, a Roseau, Minn., native, who strung together a collection of dairies, centered in Veblen, S.D. Well-heeled local investors from the region continue to back him and work with him, despite a string of environmental, financial and ethical controversies.

By: Mikkel Pates, Associated Press

Excess grain and feed: This is one of the major reasons North Dakota and South Dakota have sought dairy production opportunities in the past decade. One of the largest players in the game has been Rick Millner, a Roseau, Minn., native, who strung together a collection of dairies, centered in Veblen, S.D. Well-heeled local investors from the region continue to back him and work with him, despite a string of environmental, financial and ethical controversies.

This week, we begin a story with Millner’s own thoughts about where he’s been and where he’s going. We also hear from a family who says unpaid bills for 2008 and 2009 crops have set them back financially by 10 years or more. Sandy Banish wants to warn others against similar circumstances and to make the investors understand their responsibility for entities they bankroll.

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VEBLEN, S.D. — Rick Millner’s world is not what it once was.

Sitting in his Bull Pen bar that he and partners built as a community and employee gathering point and watering hole for sprawling dairy enterprise, he — in some ways — still holds sway. This is true even after a dramatic change in ownership and management in one of the biggest and most controversial dairy operations the region has ever known.

His wife, Jill, is there, managing the Bull Pen, as the fajitas are served. She’s also involved in Prairie Ridge Management. The company also manages a set of some 15 houses in the town of 280 souls. “They’re probably worth 20 cents on a dollar for what I paid for them,” he says.

“Once we had about 13,000 cows and managed $150 million in assets,” Millner says.

His Prairie Ridge Management, the company in Veblen, S.D., had some 255 employees at the apex in January 2009.

In 2007, he even traveled to a dairy operation in Ukraine, where he says a large agricultural company had been looking to put together a 100,000-cow dairy. He told people at the time that the company had offered him many millions of dollars to come and manage it for them. (“I wouldn’t say I had a formal offer,” he says today. “We were negotiating.”)

That was then.

That was before his company had to close down Excel Dairy near Thief River Falls, Minn. Millner says that was the first in a daisy chain of other major dairy enterprise problems that Chapter 11 bankruptcies —- Dairy Dozen-Thief River Falls L.L.P. (Excel Dairy); Dairy Dozen-Milnor L.L.P. (FiveStar Dairy) and Veblen West Dairy L.L.P. — all on April 7, 2010; Dairy Dozen-Veblen L.L.P., July 2, 2010; and Veblen East Dairy.

Some people involved in the deals say a book should be written about it — certainly not a comedy.

“My reputation has been destroyed in this fight,” Millner says in a statement that many would agree with. “We need to regain the confidence of people. How do we do that? Operate profitably. Pay your bills. Communicate with the regulatory people.”

Millner says he ran a company that was at the top of the industry for production and efficiencies, a claim that not everyone accepts.

“I had one of the best teams in the country,” he says, and he’s not talking about his beloved baseball passion.

Today, Millner’s enterprises have been the focus of inquiries. Critics question his business past and his ethics. Millner has been involved in several attempts to retain control over dairies he’d once run, but the largest of them were sold and under the control of Riverview L.L.P. of Morris, Minn.

Timing matters

“A lot of it was timing,” Millner says of his troubles. “We expanded our company from about $30 million to $150 million in assets from 2007 to 2008, mostly, and we had some growing pains during that period of time.”

Even in the ramp-up, there were controversies about Millner’s dairies. It started out as a community economic development project. Millner came in as a manager and took control of the project, moving and elbowing people who disagreed with him, and made it into a collection of partnerships that sprawled across three states and involved cross-currents that owners couldn’t keep track of.

In Millner’s telling of it, the company’s troubles were largely the fallout from the financial markets collapse in 2008 and the dairy industry collapse of 2009.

“With the $6- or $7-per-bushel corn prices in 2008 and the high-priced corn silage in the fall of 2007, when we put in our feed for the whole year, we were sitting with the cost of production of $18 (per hundredweight) with $9-per- hundredweight milk prices.

“In this part of the world, we’re not in really high levels of dairy population,” he says. “I think there would have been a much better, higher level of understanding in Idaho or California. The smaller operations in the Midwest grow their own feed and were able to make up that high price of feed and low price of milk. So there’s not been a great level of understanding of what we’re going through — being upside down.

If anything, Millner says his company expanded “too far for our capital,” and when the markets turned against him, there was “nothing to go on.”

His company had been “heavily hedged” in the market from 2000 to 2008, he says. It had built dairy after dairy and had just populated the big one — “Veblen East” — to the east of town.

The capital had been stretched to the limit.

Stretched to the limit

“In 2008, we were on the wrong side of the market. Milk prices were 20 bucks, and we were hedged at $15,” he says.

The cooperative they were selling milk to covered Prairie Ridge’s margin calls but — similar to grain elevators who quit trying to hedge corn when it hit $7 per bushel — the dairy co-op pulled back.

“Our ability to hedge was done in May/June of 2008,” he says. “We met with all of our lenders on June 18, 2008, and partners, and I think there was a lack of appreciation of the risks, on both sides.”

Millner remembers being adamant the company needed to lock in milk price at $20.66 per hundredweight for 2009, the average on the day of the meeting.

“We needed about $2 million of working capital to pull the contracting off, and we didn’t get it done,” he says.

The bank didn’t provide the $2 million. The partners, affected by the financial market collapse at the end of 2008, who might have had some ability to help, were facing difficult times themselves.

“From what we could have locked in, from the day of that meeting to the day it turned out in 2009, it was almost $30 million and it sunk us.”

And whose fault was that?

“It was mine,” Millner admits. “I should have been more relentless with both the partners and the bank. I felt strong enough about it that I should have been able to get it done. Maybe I should have locked them in the room without food and water,” he says

From that point on, the price of milk started declining.

Collateral damage

The company filled its big dairy in December 2008, and in January 2009 the price of milk dropped from some $15 per hundredweight to about $9 per hundredweight. That would be the equivalent, he says, of corn prices going to $1.50 to $1.75 per bushel.

When the milk price dropped $5 per hundredweight in January 2009, Millner knew he was in big trouble.

“That was about the time we were supposed to be making payments” on 2008 feed, Millner says. “We contacted them; we talked to them.”

“We had so many people calling us,” he says. “We weren’t being evasive; we weren’t equipped to handle the barrage of calls coming in. We never doubted for one minute that we’d be able to pay these guys as we took their feed, as we always had.”

In February 2009, he called a meeting with their banker, AgStar Financial Services, ACA, of Mankato, Minn. The company is part of the Farm Credit System.

“They assured us they were going to work with us, that we’d be working on some kind of restructure,” Millner says. “It may have included Chapter 11 (bankruptcy reorganization), but they’d be part of the work-out process. They’d get it done quickly, because, frankly, at that point, I was probably willing to throw in the keys if that wasn’t an option. Because I could see that it was going to be really, really bad and there was no way we were going to pay people if the banker wouldn’t extend credit. We were assured at that meeting that they would.”

In April 2009, AgStar sent a commitment letter.

“We’d go through a ‘refi’ and we’d be financed by June 1,” Millner says. “We explained how it was imperative that we’d be refinanced by June 1, that we needed to be locked in.”

AgStar didn’t make the June 1 deadline.

“They had a June 18 closing date,” Millner says.

That, too, passed.

“We were hemorrhaging really bad,” Millner recalls. “We needed to secure the crop, pay vendors. Our co-op (milk buyers) were concerned whether we were going to be around or not. We needed to refinance before they were going to lock in milk.”

Weeks went by.

By Sept. 22, 2009, the partners had “wasted” nearly $7 million trying to keep the operation going. The Veblen East operation was so big, “such a big hole,” as Millner puts it, that the partners couldn’t get their arms around it financially.

“What got slid across the table was not a restructure, it was a forbearance,” Millner says. “We signed everything away for a 90-day grace period and to work on a restructure (agreement) we’d already worked on in February and March. It was too late.”

Receivership, and more

Prairie Ridge allowed Veblen East go into receivership, hoping a third party would be able to “build a bridge” between the company and the receiver. Instead, the bank brought “their guy” in as a receiver. Millner says one of his key goals was to cross-collateralize the various dairies under Prairie Ridge management, all of which had their own ownership structures — the same lead bank but different partners on the lending side with each entity and different partners on the lending side with each entity and different partners within each entity.

Millner questions the bank’s motives. He says when a loan becomes “classified,” the lender is required to have escrow money in reserve. A $7.5 million “classified” loan requires $75 million in escrow.

“If they can dump us, they can loan out $75 million to good-paying customers,” Millner says. “They had to get out, at all costs. It didn’t matter who or what they destroyed.”

The way Millner remembers it, AgStar was supportive until he and Prairie Ridge balked at putting all of their dairies into receivership.

“They did an about-face and opposed us in court,” he says.

Excel Dairy filed a Chapter 11 but converted that to a Chapter 7 liquidation.

“There was no point, without the permit, to try and reorganize,” he says.

Millner acknowledges it “wasn’t 100 percent just the economics” that led to a dramatic decline in his organization. Excel Dairy’s construction schedule had been late.

“We got overwhelmed in some areas,” he says. “I found myself delegating out (responsibilities) in areas like environment. I don’t know how to say this anymore about Excel than we got screwed. We did what the state wanted.”

While that’s a subject of vigorous disagreement, the result was not.

In 2010, Minnesota pulled Excel’s license and ordered it shut down.

“We thought what they were ordering us to do had potential to smell. We brought that up to them; they told us to go ahead. When we got into problems (by following those instructions), we were like the red-headed stepchild. One day we got a letter from the state, saying we had 10 days to respond. Nine days later, before we were able to respond, we were served a lawsuit from the attorney general’s office in Minnesota.”

On April 7, 2010, Millner filed bankruptcy on Veblen West and Five-Star.

On March 3, Veblen East went into receivership. On about July 2, when a trustee was appointed, they filed Chapter 11 bankruptcy on Veblen East

At the same time, the judge appointed an operating trustee in the

Veblen West case, which he says is what “broke the back, basically, of the town as we knew it, the investor group, as we knew it.”

An uphill battle?

Millner reasoned it would be an uphill battle to reorganize Veblen East, but he made a new effort to purchase Veblen East and reorganize Veblen West and Five-Star through Chapter 11.

Despite his problems as of mid-January 2011, he says he’d put together $20 million.

“We had enough money to buy Veblen East, but we couldn’t put enough money together to buy both of them,” he says. “We needed about $36 million to do both. We had a commitment letter for $36 million, but we didn’t have the cash.

“I think we’re mad at ourselves for not having a full appreciation of the risk,” he says. “And I think we’re very angry at how the bank has behaved. It didn’t seem like financial recovery. I think the best chance of recovery was us. They ran around with their hair on fire, pointing fingers, making accusations. Horrible behavior.”

Prairie Ridge manages those two dairies and “does the books and records” for New Horizon Dairy of Hoffman, Minn. It has 1,300 cows. There’s the Short Foot Calf Ranch, just north of town.

“I think we have intentions of rebuilding and re-establishing ourselves,” he says. “The only capital we have is intellectual capital.”

On April 28, 2011, a judge in Fargo, N.D., confirmed a reorganization plan for Five-Star, a 1,630-cow dairy. Some of Millner’s old associates have bought a dairy in Ramona, S.D., that he’s putting into production and likely to try to expand.

Riverview Dairy of Morris, Minn., purchased the cows Jan. 28, 2011. On March 31, it completed the purchase of both Veblen East and Veblen West and renamed them Marshall Dairy, a division of Riverview L.L.P. of Morris. Marshall Dairy continues to house calves at ShortFoot Calf Ranch, with males going to market and females back into replacement regimens.