MOORHEAD – American Crystal Sugar Co.’s board isn’t outlawing joint ventures, but it is taking a step toward guaranteeing all entities always deliver beets – the basic ingredient for making sugar.
Robert Green, a St. Thomas, N.D., farmer and the co-op’s chairman, says the board made changes that were discussed in shareholder-only meetings in Grand Forks and Fargo last month
Among the changes: In the 2016 crop, the co-op will require new joint venture partners to provide personal liability guarantees to cover the company’s fixed costs, should the partnership entity fail to perform on their contract. By 2018, the rules will apply to all joint venture partners. These guarantees would supersede normal protections in joint venture agreements.
Also, beginning this year, all new joint venture agreements will need to be individually pre-approved. In the past, the company has spot-checked them.
Green says the action came in response to a resolution passed by the Red River Valley Sugarbeet Growers Association in 2013, which asked the American Crystal board to study the stock ownership system – including phasing out joint ventures entirely.
“I think it’s a step in the right direction,” Green says. “We’re protecting all of us from a few of us, in the adverse times. This study never ends.”
In 1974, American Crystal formed as a cooperative and members bought shares that offered a right and obligation to deliver beets. Original shares sold for about $100 an acre – a large sum at the time.
Shareholders have the obligation to deliver because it takes a total of about 10.5 million tons of beets to optimally run all five factories.
“A cooperative is predicated on the idea that everybody delivers beets,” says Dan Mott, the co-op general counsel in Minneapolis, who was in charge of the study.
Share ownership became complicated as original shareholders stopped actively farming or died. In the 1980s, some older shareholders started forming joint ventures, becoming a limited partner and an active farmer-grower. The combined joint venture entity then had the obligation of delivering beets and was legally the producer, Mott says.
As returns have stayed strong, share prices have gone up to $2,000 or even $4,000 – a capital gain of some 40 times the original price. Many retiring farmers formed joint ventures to defer or avoid the need to sell the shares and pay capital gains taxes.
Mott says roughly 50 to 60 percent of American Crystal shares are held in joint ventures. He has seen a doubling of joint ventures that have passive participants, or people who don’t farm. This could mean a retired farmer or widow who has moved and doesn’t want to lose the income, or an heir.
Initially, joint ventures were largely general partnerships, where both parties were personally liable for the obligations. But legislatures approved new corporate forms – limited partnerships, limited liability partnerships, and limited liability limited partnerships.
The LPs, LLPs and LLLPs increasingly separate the individuals behind them from legal and financial responsibility if the entity fails to produce beets or meet its contractual obligation.
“The problem is, in some cases neither partner is liable beyond what they initially invested in the partnerships,” Mott says. “So how can we make sure that a person – not a shell – is responsible for fulfilling the obligation, the performance-to-contract?”
In a nonperformance case, a limited partner would be liable for their share of fixed costs, which recently have been up to $25 per ton – or $625 an acre on a 25-ton-per-acre crop.
Mott notes the new personal guarantees only attach to the partners’ obligations to the co-op, not to other obligations such as inputs like seed, fertilizer or fuel.
“If a partnership was going to borrow money from a bank, it would be common for a lender to require personal guarantees from partners,” Mott says. “We’re not doing anything much different than what a bank might do.”
