What Caused Eastern Livestock’s Problem?
Nov 15, 2010
(See Update: Don’t Blame FDIC for Eastern Livestock’s Problems)
If the rumors are true, and some pretty savvy people think they are, Eastern Livestock may have had less than a million dollar bond to cover the more than $100 million the company had in outstanding checks when it was forced into receivershp.
I call it a “rumor” because nobody at USDA’s Grain Inspection, Packers and Stockyards has called back to verify or deny it.
And it isn’t that I didn’t try. I spent serious hours last week talking to people about the company’s problems. I’m still not sure exactly what happened or how such a respected, long-time firm could run into such problems in what was basically a sideways to up market. This sort of thing is expected during surprise down markets—I can’t begin to tell you how many “broke cattle feeder” rumors I chased back after the dairy buyout. But everybody is a bit surprised this would happen in this market. I can’t tell you many facts. Too many folks didn’t call back.
But this is a blog and not a news story, so I can tell you want sounds most likely to most people. First, let’s get one rumor out of the way: Jim Odle at Superior Livestock assured me Eastern was current with them and was always “prompt” in paying for cattle purchased on that auction.
So here’s what I think because smarter guys than me think it: I think the Federal Deposit Insurance Corporation told the Fifth Third bank to call Eastern’s notes. Without, obviously, much regard to how many thousands of innocent cattle producers, cattle truckers, cattle traders, cattle auction markets and—by the way, FDIC-insured country bankers—would be impacted.
The last official thing I saw last week from USDA said they had found more than $80 million in bad checks. They said there were a total of $120 million written. That won’t all be lost money. The cattle are still there. One would assume there is also a lot of money in Eastern’s account as well.
So it won’t all be lost to the people who earned it. But nobody knows how long it will be before they—or the bankers holding their notes—get paid, or how much they will get when it’s all over.
A lot of people—and I found nobody who has actually talked to founder and owner Tommy Gibson since the bankruptcy—figure the bond may cover the losses. They say that there is probably a dollar’s worth of asset for every dollar’s worth of float. The key word, of course, being “probably.”
Those folks say commission firms like Eastern seldom get paid for cattle until after they’ve written checks to the sellers. Given Eastern’s size—by some estimates it handles 10%-15% of the stocker and feeder cattle selling in the U.S. every year, and probably a higher percentage than that during the fall run—it would be easy to believe $120 million could be out at any time.
However, those are folks who say they trust Tommy Gibson. Most of them say they’d be shocked to learn this was the “Ponzi scheme” others believe it was. But even they say, if the rumors of Eastern having just an $800,000-$900,000 bond are true, GIPSA may expect some unfriendly scrutiny from the industry. The P&S regulation says bonds should cover two day’s trade, and GIPSA is charged with making sure that traders keep their bonds up to date.
Lots—lots and lots, judging from the cattle insiders I talked to—say that the agency has been strict on auction markets and their bonding requirement, but much less so on traders.
No surprise, probably, but several suggested that GIPSA should have been enforcing the laws Congress told them to rather than tying itself into knots trying to develop new, controversial, laws on their own.
Whatever the case, this looks to be a royal train wreck in the cattle industry.
No few of those hot checks went to ranchers and farmers who had delivered their year’s calf crop to Eastern—or into Eastern’s web of cooperating dealers and brokers. Another big chunk was written to sale barns, especially those in the Southeast where fall calf harvest was in full swing.
In many if not most cases, cattle moving through those auctions were combined with larger lots and there is not way to find them. At any rate, the livestock auctions, not the producers who sold the cattle, will stand any loss. Some auctions—there are scores of them holding bad checks--may well fail, in which case their own bonding agencies should protect sellers and buyers alike.
For direct sellers, the challenge is much worse. Some of them heard about the wreck in time to turn trucks around. Some auctions did the same. In those cases, they may have a hot check, but they still have their stock.
I talked with a couple of feedyard folks who said they are trying to find affected sellers and pay them directly. Chandler Keys at Five Rivers, for instance, said they were “doing everything we can to find them and see that they get paid.”
But many loads of the cattle this time of year would have been weaned calves going to stocker operations, where the new owners will have to worry about how sound their titles to the cattle are. And the sellers and their bankers may be caught in a geologically-slow bankruptcy process.
It’s early in this. The bank has sued to force Eastern into bankruptcy. GIPSA has sued to get a cease business order. No doubt, later people will start returning phone calls.
For now, it’s just conjecture and rumor. But one thing is for sure: It’s the start of a nightmare for a lot of people who did nothing wrong. One would hope that the folks at FDIC and Fifth Third thought long and hard about all the other dominos in the line before pushing one over so suddenly and without warning to such an interdependent industry.