USDA helps Michigan sugarbeet growers purchase processing plant - Value-Added Corner

Rural Cooperatives, Jan-Feb, 2004 by Richard E. Leach

We had just finished supper at imperial's hunting lodge, about 10 miles outside the small southwest Texas town of Hebbronville. Imperial Sugar Co. had invited the executive board of the Great Lakes Sugar Beet Growers on a quail hunting trip in January 2000. Imperial, owner of Michigan Sugar Co., had a reason for the hunting trip: to ask if the growers would consider forming a cooperative to explore the feasibility of purchasing Michigan Sugar Co. From that weekend forward, the Great Lakes Sugar Beet Growers Association would never be the same.

The first step in the exploration process was to find the best attorney with experience in creating sugar cooperatives. Attorney Randon Wilson, Salt Lake City, Utah, was hired to organize the feasibility of a purchase and move the project forward.

The growers appointed a steering committee. Attorney Wilson went to work almost immediately with a trip to Imperial's home office in Sugar Land, Texas, to establish himself as the buyout attorney for the growers and to gather information. Imperial told him that they would not set a price on Michigan Sugar--the growers would need to make an offer.

A financial modeler was hired who, along with Wilson, began collecting financial information to evaluate the value of Michigan Sugar. Financial information was difficult to obtain and even more difficult to understand. Part of the problem was that in 1984, Michigan Sugar had been sold by the Flegenheimer family to Savannah Foods & Industries. Imperial purchased Savannah Foods in 1997, including Michigan Sugar. After the purchase, Imperial moved all the accounting to its home office in Sugar Land, Texas.

Imperial became more difficult to work with. The president and CEO of Imperial was telling the growers that the buyout was never going to work because they couldn't raise the money.

Money to fund the project became a real problem. Because one of Michigan Sugar's factories is located in Michigan's Huron County, the Huron County Economic Development Corporation provided a $50,000 matching-fund grant to help with attorney expenses. In early 2001, the growers received a $210,000 Rural Business Enterprise Grant (RBEG) from USDA Rural Development. This matching-funds grant was for the feasibility study.

In the fall of 2000, Michigan Sugar Beet Growers Inc. was formed as a cooperative. Shortly afterwards, a draft offer (in the form of a letter of intent) was sent to Imperial. We received no meaningful response and, in mid-January of 2001, Imperial and their subsidiaries, including Michigan Sugar, filed for protection under Chapter 11 bankruptcy.

The growers (under contract) had delivered the 2000 sugarbeet crop and received approximately 70 percent of the estimated value of that crop. Growers were considered "critical vendors" under the bankruptcy and could be paid at Imperial's discretion. At this time, a bankruptcy attorney was hired to represent the growers.

The growers were reluctant to sign a 2001 contract to grow sugarbeets for Imperial, because of the bankruptcy and the uncertainty of receiving the balance of payment for the 2000 crop. A sugar company without sugarbeets loses value fast. With the real possibility of not having beers to process, the new cooperative was able to negotiate the letter of intent with four separate agreements and a lease agreement in the event the purchase could not be completed by harvest time. The negotiated purchase price was $83.5 million and the agreements were approved by the bankruptcy court.

The cooperative successfully contracted growers to produce the 2001 crop. After the contracting was completed (114,000 acres), Imperial informed the cooperative that it could not continue to run Michigan Sugar, rebuild the factories and pay the growers the remaining balance owed them for the 2000 crop. Agreements were finalized and the growers were paid all but $2.44 per ton (approximately 7 percent of the total value) owed them for the 2000 crop.

In June of 2001, a co-op stock offer was made to area growers for $200 per share. Each share required, and allowed, one acre of sugarbeets to be delivered to the cooperative.

That same month, the cooperative received approval of a $5 million loan from the state of Michigan, at no interest, for five years, to be used for the purchase of the company. In August, a $500,000 matching funds grant was approved by USDA Rural Development for use of startup operating expenses.

The sale of shares was progressing slowly and the cooperative was having trouble raising capital for the purchase. Imperial Sugar changed chief executive officers and the new CEO wanted to sell Michigan Sugar. In a meeting in October, the new CEO offered to lower the purchase price by $20 million (making the new price $63.5 million) and to finance the transaction. This was exactly what the cooperative needed and the share offering became over subscribed. The purchase was completed on Feb. 12, 2002.

The first year under cooperative ownership, Michigan Sugar Co. produced a record amount of sugar--over 630 million pounds. The 2003 crop that has just been harvested is also an excellent crop.