Supplier-farmers stung by dairy's economic woes

"Due to 5 Star Dairy's lack of payment to me, I will be selling my White 8516 central fill planter. Used 3 years, very nice shape. $72,500 (firm). 701-427-5570/Milnor, ND"...

"Due to 5 Star Dairy's lack of payment to me, I will be selling my White 8516 central fill planter. Used 3 years, very nice shape. $72,500 (firm). 701-427-5570/Milnor, ND"

-- Recent farm newspaper ad

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MILNOR, N.D. -- "I'm tired of being Five Star's banker," says Dan Mund, explaining his recent advertisement while sitting with three other farmers who are in a similar fix in the back room of the North Forty bar and grill in tiny DeLamere, N.D., in northeast Sargent County.

As of Oct. 6, Mund says he is owed $80,000 for his 2008 corn crop by Five Star Dairy of Milnor, N.D. Five Star is a 1,600-cow operation that is part of a stable of five larger dairies.


"I just want to be paid and then be left alone," he says.

Much of the attention to the cost-price crisis in the livestock business has been on the livestock enterprises themselves, not to the secondary impacts on suppliers and contractors with these businesses. The impact can be especially acute when it involves a large, specialized livestock enterprise of the type that often is wooed to the region by governments as a way to capitalize on the natural agricultural resources in rural areas.

Five Star Dairy is owned by a group of investors that calls itself the Dairy Dozen managed by Prairie Ridge Management Co., (former MCC Dairy L.L.C.) of Veblen, S.D., about 30 miles south.

Prairie Ridge Management is headed by Rick Millner, who did not immediately respond to inquiries from Agweek to discuss how his dairy is coping with the crisis.

Millner at one point owned about 18 percent of an entity that calls itself the Dairy Dozen, according to Environmental Working Group data from 2006. The EWG said the largest of 17 owners at the time were Dennis Pherson Sr. of Rutland, N.D., 13.6 percent; Roger Gibbon of Milnor, 9.1 percent; and Dennis Pherson Jr. and Lenny Pherson, both of Rutland, with 9.1 percent, according to the report.

In the Oct. 6 meeting with Agweek in Delamere, Mund and his fellow suppliers talked about their fix.

Ray Martinson, also of Milnor, is owed some $34,000.

Dan's cousin, Arlin Mund, was owed roughly $75,000 to $80,000 since has been paid half of that Oct. 10, after the Agweek meeting. Two other producers in the room decline to be named or reveal their sizable losses.


"I do feel a lot better because I got half of it," Arlin says.

But neither Dan Mund nor Martinson -- the two who have pursued their claims through the courts -- have gotten subsequent payments.

"I guess it doesn't pay to go the legal route," Dan Mund says. "I've been fighting this thing since the end of January."

Becoming a supplier

Mund is a typical-sized farmer for the region and not typically in the news. He raises soybeans, corn and wheat. His wife works for Wilkin County in Breckenridge, Minn. The couple has three children and moved two years ago from their farmstead, about 1½ miles from Five Star, into Milnor.

Mund remembers well the history of the large dairy, which is about 12 years old.

Initially, Mund was leery of its size when neighbor Tom Hogness built it in 1997. Hogness milked up to 800 or 900 cows, but Mund considered it a family-run operation. Mund had grown up with Hogness. They went to school and Sunday school together.

"My opinion was, I


didn't want (a large dairy) there, but with them being there, I would work with them," Mund recalls of the Hogness operation. "We got along pretty decent. I always supplied silage in some acreage form. It was a pretty good deal when it worked. I also paid for manure for the fields."

Hogness ran the dairy for about seven years until an earlier milk price collapse.

Then, the dairy stood empty for 19 months, and the lender, AgStar Financial Services A.C.A., sold it to the group that called itself the Dairy Dozen. The company increased the capacity to more than 1,600 cows.

"I thought I could work with these guys, too -- maybe get some financial benefit," Mund says of the new owners.

In 2006, Rick Millner, the executive and an owner for Prairie Ridge Management Co. visited Mund's farm and asked him to be a feed supplier for Five Star, under new management. Millner, originally from the Roseau, Minn., area, graduated from high school in Roseau, and attended North Dakota State University in the late 1980s before getting into various dairy ventures.

"I remember him saying, 'I'm the kind of guy you don't need a contract with,'" Mund says. "A handshake is good enough."

The deal did involve a standard, formal contract, however.

The Five Star contract price is based off the price offered at the Cargill corn fructose plant in Wahpeton, N.D. For example, if the price is $3.50 per bushel in Wahpeton, the agreed-on per-bushel price with the dairy might be 50 cents less, which compensates for the fact that there are no harvest costs.


The per-bushel price contract is converted to a tonnage price for silage, based on an average of nine bushels of grain corn per ton of silage.

The way the contracts work, the farmer has some price flexibility. He can select prices at any point before delivery and must inform the dairy immediately so it can take offsetting positions on the milk market. In 2008, the first payment was supposed to be two weeks after chopping. The other two-thirds were scheduled for December and January.

Mund, who farms about 2,400 acres, started out with a 200-acre contract in 2006, moved to 300 in 2007 and then 370 of his best acres in 2008. Typically, the dairy's harvest crew would arrive in early September and chop an agreed-to number of acres.

Growing concerns

In 2008, rumors were floating around about the impact of the dairy price and corn costs. In August, Mund called the dairy. Soon after, Millner called to assure Mund that a $10 million loan or line of credit had been secured.

About the time, Mund says that if he could have gotten out of the contract, he still would have contracted corn at the local elevator for a decent price, but he decided to stick with the dairy and his signed contract.

According to Mund, the first third of the payment was due Sept. 23.

Mund took detailed, hand-written notes. With no payment on Oct. 4, he called the dairy's manager.


"They said they'd look into it," he says, reading his notes.

He tried calling the dairy several more times Oct. 30.

"When I finally got them on the phone, they said they'd send the payment," he says.

He says he called the dairy representative again Nov. 5, and "they told me they forgot and would get right on it."

He called the dairy Nov. 10 and demanded his check. He talked to the company bookkeeper.

Nov. 12, he drove to Veblen.

"They gave me a check and told me to hold it until Nov. 19," he says.

"On Nov. 19, I cashed my first check, and it was good -- one-third of the volume, or $95,623."


The second payment was due Dec. 15 -- again for about $100,000 or so.

Mund says the dairy management staff was "good to work with, except a lot of times they wouldn't answer the phone. Sometimes it helps to see somebody in person."

Dec. 19, he drove to Veblen again, this time with a neighbor who also was owed money. They were told their checks were delayed because of a clerical error.

He made a return trip the next day to get the check. This time, he received a check that would cover the full second payment. It was dated Dec. 29, 2008, and he was told to hold it until Jan. 20.

"I told them that wasn't acceptable," Mund says. "I did cash it earlier, and that was good."

The third payment was due Jan. 20 -- another $100,000 or so, and that's what he's still working on.

Just before the due date for the third installment, Mund says he called the dairy's bookkeepers to verify that the check would be available.

"I had payments to make, and the bookkeeper said they'd be sending a portion. He didn't say what portion," Mund says.

On Jan. 22, Mund received a payment of $10,000, with no other information.

"That's what really set me off," Mund says. "That's when I got a lawyer involved."

In late March, Southeast District Judge Richard W. Grosz in Sargent County approved a judgment against the dairy for the full amount. Since that date, the dairy has sent some money once in awhile, but not enough, and there is no schedule for when payments are coming.

"They still owe me about $80,000, plus interest, I feel," Mund says. "Plus a helluva lot of stress is involved."

Rebuilding trust?

Martinson also remembers he'd been leery of market conditions in late 2008 and tried in vain to get area silage growers to band together and demand the dairy pay something significant up front -- before the crop was cut.

Martinson figure that "if they all

didn't stick together, they wouldn't get it."

He couldn't get others to agree, so things moved forward without up-front cash.

"It's the independent spirit these guys have. It's tough to get them organized," he says

In October 2008, the dairy chopped only half of the 150 acres they'd contracted with Martinson.

"They said they had all of the silage they needed at the time. They promised they were going to take the remainder of it as earlage," he says. "That timeframe came and went and we got into the season for combining corn."

Martinson made a deal with the local manager at Five Start to deliver the remainder of his corn as high-moisture corn grain to satisfy the contract.

"I was kind of in a bad spot. By this time, the price of corn had come down. And, of course, there was the weather," he says.

The dairy paid for all of the silage they'd chopped earlier -- 80 acres -- in December. Martinson received the part for the silage in December.

Getting paid for the grain corn was another matter.

For that, Martinson got a $10,000 check in January, and by that time, "I'd settled my other legal matters," Martinson says.

"Since then, it's been about $1,000 or so at a time, and not regular. I think they owe me $34,000 or $35,000."

Grosz approved a judgment on his behalf July 10 against Five Star Dairy, Prairie Ridge Management, then for roughly $37,000.

Looking ahead

Wayne Carlson, dairy program director for the North Dakota Department of Agriculture, says a few people have called the department, reporting problems with Five Star contracts being paid either slowly or insufficiently.

Carlson acknowledges that the state has encouraged the establishment of dairies.

"I'd hate to say that if one individual is not paying that that spoils the whole basket," Carlson says. "I think we need livestock development to help us in the state and to use the byproducts we have."

Carlson says he knows that some others are suffering because of the dairy decline.

At last count, the state was down to 196 dairy producers.

"Last month, we lost five farms. Recently, we've been losing an average of four or five a month this year."

Carlson says he doesn't think it's fair to say the state "shouldn't look for more dairy production because one individual had problems with paying some bills."

Tom Silbernagel, administrator for the North Dakota Department of Agriculture's Ag Mediation Service, says his counselors are in place to help work through disagreements among farmers, lenders and others.

"Sometimes it's good to have a third party in the room looking for a solution. It all depends on cash flow. Are they going to be able to provide a little bit? Will deferrals work, or re-amortizations or rescheduling a note," he says.

Silbernagel says farmers should contact lawyers about using supplier liens, which, in some cases, can put them in a superior position to other lenders. Often, the timing is important and the liens need to be filed sooner rather than later.

Mund isn't sure what to make of the situation. He doesn't blame office workers in the organization.

One company worker at one point wrote a handwritten note to him, stuck onto the back of a formal notice: "Sorry again about the promises," the worker wrote. "I know it puts a strain on you guys and we do apologize. We were expecting the money coming in to go to you guys as promised, but things kept coming up and you guys get the raw end."

Mund wonders if it isn't wise to make sure farmers are paid with "letters of credit" or some secure form. Maybe there should be bonding, he says.

"I'd like to see our laws changed to protect people doing business with L.L.C.s," he says. "They're too hard to nail down. I'm tired of being their banker.

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