Eastern Livestock filled in the places in the cattle market once held by small buyers and small feedlots. Then Eastern failed and left ranchers and rural communities in 30 states with tens of millions of dollars in unpaid bills.
In early November, some cattle raisers notified federal authorities that checks sent to them to pay for livestock had bounced.
The farmers and ranchers had sold their cattle to Eastern Livestock, a large cattle buyer located in New Albany, a southern Indiana city just across the Ohio River from Louisville. Eastern had sent checks, but the checks wouldn’t clear.
Eastern Livestock buys millions of dollars of cattle every day in 30 states and sells them to feedlots. The company had been in business since the early 1980s.
The initial group of bad checks wouldn’t be the last.
At last count, 740 ranchers in 30 states may be owed as much as $130 million for cattle sold to Eastern Livestock, but never paid for.
Eastern issued $81 million in bad checks just between November 3 and November 9.
Trucking firms say they are owed hundreds of thousands of dollars by Eastern. Superior Livestock, an online and satellite auction service, says Eastern owes it more than $19 million. And Fifth Third Bank says Eastern has defaulted on a $32 million loan and has overdrawn its account by $13 million, according to DTN’s Katie Micik, who has been covering this case.
The losses are still coming in, but already it appears that Eastern Livestock has done for rural America what Bernie Madoff did for Manhattan.
The lessons in the Eastern Livestock case are still being learned. Certainly, federal oversight was weak. The bond Eastern was required to maintain was woefully inadequate.
Meanwhile, although the federal agency set up to oversee packers and stockyards realized the company’s bond was too small, it wasn’t quick enough — or didn’t have the regulatory power — to prevent Eastern’s collapse.
The losses from Eastern’s collapse are enormous. Some ranchers have said it will take decades to recover from the loss. (Nobody seems to think they will recover much from Eastern’s bankruptcy.)
The widespread impact of Eastern Livestock’s bankruptcy is also a consequence of a livestock market that has grown increasingly concentrated over the years, says Mike Callicrate, a Kansas and Colorado rancher who owns Ranch Foods Direct. Packers got bigger, Callicrate says, to serve high volume buyers, such as McDonald’s and Wal Mart. Feeders grew larger as a result and small cattle buyers and feed yards were crowded out of the market.
Eastern took over the markets left by the smaller buyers, Callicrate says, and when the company collapsed the consequences were large. “Like so much else today, Eastern was way too big,” Callicrate writes.
As more comes out about Eastern’s business, the more it appears that the company was using any means to cover its losses. For instance, Fifth Third Bank alleges that Eastern has been engaged in a massive check kiting scheme, conducting billions of dollars in fictitious sales between the company’s subsidiaries as it attempted to hide its losses.
The financial impact in the Eastern Livestock collapse will be less than the $18 billion Madoff defrauded from his clients, but cattle raisers say it will take them decades to work out from the losses suffered in this scheme.
There’s little recourse for cattle raisers who delivered livestock to Eastern but never received payment. Federal regulations require a bond, yes, but Eastern’s bond will cover only a tiny fraction of the lost payments.
Current regulations require companies buying more than $500,000 annually to have a bond based on two days’ worth of sales. A cattle buying company must have a dollar for dollar bond up to the first $75,000 in sales, but only ten cents on each dollar in sales after that.
That amount in today’s consolidating livestock market is a pittance. Eastern Livestock was required to have an $875,000 bond, according to DTN’s Micik, indicating the company was buying $8 million worth of livestock every two days.
The federal Grain Inspection, Packers and Stockyard Administration (GIPSA) earlier this year asked Eastern to increase its bond to $1.15 million, indicating the company had upped its two-day sales total to $10.75 million in 2009. (The company appears to have been increasing its volume in the hopes of covering its losses.)
Eastern never responded to GIPSA’s request and never increased its bond. Eastern collapsed before GIPSA ever took action.
The stories from ranch country since Eastern’s failure tell of a change in a business culture that has long existed on trust.
“Livestock people have worked on a handshake,” Kentucky livestock raiser Lynn Hirsch told Associated Press writer Betsy Blaney. “We deliver cattle and trust that we’ll get payment in the next two to three days by mail.”
“Something’s got to change or this is going to be a problem for a long time,” said Lane Broadbent of KIS Futures, a commodity brokerage in Oklahoma City. “There’s too many rotten people for it still be dealt with on a handshake. We’ve trusted too much.”
The Eastern case comes at a time when the livestock industry is debating GIPSA’s powers. GIPSA has proposed rules that would give it great oversight of the livestock business — regulations that large ag organizations and packing companies say are too intrusive.
Yet with Eastern, GIPSA was clearly not intrusive enough.
“I don’t think anyone knows enough yet to say, ‘Where do we go from here?'” Ross Wilson, president and chief executive officer of Texas Cattle Feeders Association, told the Associated Press. “There are a lot of people asking similar questions, and I have not heard any good answers yet.”