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State shuts down Gregory grain facility

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The Daily Republic
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Mitchell South Dakota 120 South Lawler 57301

PIERRE -- Gregory Farmers Elevator Company saw its grain-buyer and grain-warehouse licenses suspended Friday morning by the state Public Utilities Commission.

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Commissioners voted 3-0 to suspend effective immediately. Commissioner Chris Nelson said it's clear the action was needed to protect against any further farmer losses.

There will be an automatic revocation in 15 days unless the elevator's management appeals or presents a work-out plan.

More than $300,000 of checks haven't been cleared and there is another outstanding payment.

State regulators have been monitoring the cooperative's financial status for two years. It is the first grain case for the PUC this year. Last year the PUC dealt with the financial insolvency of a Redfield grain buyer.

PUC grain-warehouse division director Jim Mehlhaff said the Gregory elevator's financial statements in 2011 showed they "were on the edge" with working capital of a little more than $10,000. "They'd lost $378,000 in (fiscal 2011)," he said.

Updated statements filed in October 2011 showed improved financial conditions, according to Mehlhaff. There was further improvement in the February 2012 statements, he said. "They were on an abbreviated inspection cycle at that time," he said.

On Aug. 2, the commission received a call from a producer who demanded payment and hadn't received his check. Mehlhaff said he sent two inspectors to conduct a "very thorough" examination on Aug. 3.

The elevator was in a negative working-capital situation at $108,000 in the hole.

"I guess 'treading water' would be a good way to explain their situation," Mehlhaff said.

The PUC received weekly reports. In November 2012 Mehlhaff learned the manager had been suspended and was under investigation for criminal embezzlement. An outside consultant was brought in.

PUC staff kept in close contact and gave the opportunity for a turnaround. On Feb. 20, the PUC staff attended a patrons meeting and explained the situation.

Mehlhaff said the consensus among patrons was a merger should be sought. "Plan B was to seek additional capital if that wasn't possible," he said.

A merger couldn't be achieved. A check from the elevator was presented by a board member, Sherman Vomacka of Gregory, for $144,000 and there wasn't sufficient cash to cover the check.

A patrons meeting was held March 21. A call for capital pledges was made. It generated $173,000 but $400,000 was necessary to provide "enough freeboard" to operate, Mehlhaff said. Another patron came forward later to offer $25,000 more.

"We left that meeting hopeful but concerned," Mehlhaff said. "The other day, it just became apparent they would not be able to raise the additional capital."

Mehlhaff said the $144,102 check remains un-cashed. Another check for $3,648 is outstanding. There is another payment owed of about $5,300.

Vomacka participated by telephone Friday in the PUC hearing. He said he agreed with Mehlhaff's statements explaining the situation. He is the elevator board's president.

"There is ongoing talks here, our local cooperative possibly coming to some ideas they might buy it. I don't know at this time. That's between the bank and the other cooperative," Vomacka said. "There is some hope there, right now.

Vomacka said he is the holder of the uncashed $144,000 check.

The elevator has an $800,000 warehouse bond and a $100,000 buyer bond, Mehlhaff said. "My assessment is all the producers should be taken care of and the bond would not even come into play," he said.

"My opinion is their equity is still sufficient but their working capital is not and it has not been and it appears they will not be able to bring it up to an area where they can continue as a going concern," Mehlhaff said.

A suspension would allow a two-week period for the elevator management to bring forth a plan to correct the problem.

Mehlhaff was asked by PUC chairman Gary Hanson whether the Gregory Farmers Elevator's financial situation was indicative of any problems involving other warehouses in South Dakota. "I do not see a weakening of the grain-handling industry in general," Mehlhaff replied.

Moments later Vomacka said he had just learned two checks have been returned and didn't clear. He said one is owed to a board member and the other is owed to a former board member.

Mehlhaff said the PUC relied on an audited May 31, 2011, statement and an Oct. 31, 2011, compiled statement to issue the 2012 license renewals. He said his office also received the Feb. 29, 2012, statement that showed improved financial conditions with $142,000 positive.

All of the money is owed to current or former board members. "That is something very, very honorable," commissioner Kristie Fiegen said.

A new law takes effect April 1 requiring that any warehouse or buyer who is in a negative working capital situation must notify the PUC. The law is part of a package of reforms passed by the Legislature at the PUC's request in the wake of the Anderson Seed insolvency a year ago.

Mehlhaff said he's unaware of any other warehouse or buyer who's currently negative.

He said it "would be key" for the Gregory elevator to bring in an experienced grain manager or partner with one.

"It was the former two managers who brought the elevator into where they are at now," he said.

The former manager facing embezzlement charges allegedly took about $17,000 over the course of a few months last year.

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