FARGO, N.D. -- American Crystal Sugar Co. has come out with an initial payment projection of $37 per ton for 2014 crop beets -- a dollar lower than last year's projection at this date and likely a money-loser for farmers and shareholders, if realized.
David Berg, American Crystal's president and CEO, announced the payment level in a posted letter to grower-shareholders and carried the message directly to growers and bankers in meetings last week up and down the Red River Valley, where the farmer-owned cooperative operates five processing plants.
Berg acknowledged to Agweek that the $37 payment with a 23.3-ton-per-acre average yield is "seriously underwater" for most growers. While the initial projection traditionally has been conservative -- lower than the ultimate beet price -- in recent years, that doesn't mean it will be every year.
Don't expect up-tick
A year ago, American Crystal projected $38 per ton, but the final payment turned out to be $45.23 per average ton of beets. Minn-Dak Farmers Cooperative of Wahpeton, N.D., has projected a payment range of $36 to $39 per ton for 2014 beets. That's down from the 2013 crop, when the initial projection was $43 per ton, but ended up at $45 per ton.
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At American Crystal, Berg explained to shareholders and growers that mid-season price upgrades for the 2013 crop were possible largely because of an unusually cold April and May, which kept stored beets colder longer through the end of the slice campaign June 7. The company suffered from inadequate rail transportation that would have failed to clear warehouses of newly processed sugar, but because of the cold spring, the company was able to slow factory production rates deliberately, allowing longer, greater sugar production without the cost of discarding spoiled beets.
Shareholders can't count on similar good news for the 2014 crop projection, Berg says.
Sugar prices rebounded earlier this year, but not before United Sugars Corp., the co-op that markets sugar for American Crystal, Minn-Dak and other co-ops, was forced to sell a large portion of its sugar at the lower prices.
Meanwhile, American Crystal strives to harvest 10.2 million tons of beets, but this year will have only 9.4 million tons because of less-than-optimal growing conditions. That means the company won't have a lot of extra sugar to sell to capitalize on any price recovery.
Effect on joint ventures
All of this will have its impact on stock values and joint venture deals.
Joint ventures, limited partnerships (LP), limited liability partnerships (LLP) and limited liability limited partnership (LLLP) are four predominant types of arrangements that involve a shareholder who doesn't raise beets.
In the case of an LP, a shareholder is the limited partner who works with an active general partner, who raises the beets. Their joint venture then legally becomes the new shareholder, with the partnership having the obligation to raise beets for the co-op.
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Historically, limited partners would receive a flat payment, based on plantable acres in a given year.
Jayson Menke of Grand Forks, N.D., an ag stock specialist for Farmers National Co., helps manage beet share arrangements for limited partners.
"For all of the shares that we manage, the limited partners will not receive a payment this fall," Menke says flatly.
Menke explains it with a hypothetical example of a shareholder with 100 shares. From 2011 to 2013 -- years of exceptionally strong beet payments -- the shareholder could command $400 per plantable acre. Returns for limited partners were far greater than they could have made in other kinds of investments.
Because beet yields have increased, and because factories can process only so many beets efficiently, the co-op board has been allowing only a percentage of the beet share to be planted. In the example, the co-op allowed 92 percent of the share acres to be planted in 2011, so on that year, the limited shareholder would receive $36,800 as an annual payment.
Bottom falls out
In late 2012, limited partners and general partners made annual agreements for the 2013 crop, not knowing the sugar price would drop when Mexico started sending more sugar into the U.S. market than the market could bear. The limited partners got paid, but the general partners lost money.
Some general partners negotiated zero payments to limited partners for 2014, because they had taken the hit for the 2013 crop.
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Payments to nonfarming limited partners are triggered at various levels. An initial gross payment projection of $38 and less might mean a zero payment for the limited partner. If the price should recover, many of the limited partners have a possibility of seeing some payment.
Based on the FNC sliding scale, if the same deals had been in place for the 2013 crop, limited partners would have received $135 per plantable acre instead of the $400 they'd been accustomed to, Menke says.
The outlook for the 2014 payment is sobering, Menke says.
In many years, beet farmers made good money on $40- to $50-per-ton payments. But the cost of growing beets is increasing and those levels don't pay the bills.
Stock price impact
Menke also serves as president of FNC Ag Stock LLC, a subsidiary of FNC that specializes in secondary markets for ag co-ops including American Crystal. Very few shares typically change hands every year -- maybe 2,000 to 3,000 out of about 500,000 shares are theoretically available. Shares trade from September to May, when the American Crystal board approves transfers.
Last year, the majority sold from $1,200 to $1,600 per share and FNC Ag Stock's volume of sales was about double the average.
"Last year, because of the uncertainty in the beet industry, we moved the most shares we've ever moved in our 20-year history," Menke says.
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The price of beet stock has been volatile in the past three years. The price of shares on Nov. 12, 2012, was about $4,150 per share; on Nov. 11, 2013, shares were $1,350; and on Nov. 12, 2014, about $2,550 per share.
From Oct. 16 to Nov. 6, 2014, FNC Ag Stock had handled sales of 276 shares. The first sale on Oct. 16 was 20 shares sold at $2,000 per share. The highest was Nov. 4, when 46 shares sold at $2,750 per share and last sale on Nov. 6 was 50 shares at $2,550 per share.
Beyond the deals that have been made, FNC Ag Stock on Nov. 12 listed standing offers to sell 55 shares at $2,500 each.
Uncertainty over the Mexican imports and prices of other crops have an effect. After the summer of more positive news about the trade complaint against Mexico, the market started stronger this fall than many anticipated.
A year ago, there were small sales of shares in September at $2,000 each, followed by a drop-off to $1,350 per share as projected beet payments became known. Prices continued to slide to a low of $1,200 per share and the season ended at $1,600 at the beginning of April.
"American Crystal is a very thinly traded market," Menke says. "It doesn't take many excited buyers to push the market up. It doesn't take many excited sellers to push the market down."
