it would be smart to buy any fertilizer plants in the United States that went up for sale, but only if Koch could pay the price of replacement value—meaning the amount of money that it would take to rebuild the plant if it were destroyed. In other words, it would be smart to buy the plants for the cost of their physical equipment and not much more. At that price, the plants could stay in business for years, even if they didn’t exactly thrive.
The Koch Nitrogen team had to figure out which plants to buy. They settled on an unlikely target: one of the largest fertilizer producers in the United States and a powerhouse of modern agriculture, a gigantic, farmer-owned co-op based in Kansas City called Farmland Industries.
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Koch Industries had been closely scrutinizing Farmland Industries since at least the 1990s. This was only natural for Koch—Farmland was a big competitor in fertilizer, grain, and other markets. Koch didn’t just want to compete against Farmland—it wanted to understand Farmland better than Farmland understood itself. Koch put together a small team that X-rayed Farmland’s business. A team at Koch studied every piece of publicly available data about Farmland and then reverse engineered the data to figure out what was happening inside the giant cooperative. Koch used the data to figure out Farmland’s cost structure, profit margins, and cash flows.
It didn’t take long for Koch to grasp a truth that was well known to Farmland executives, which was that nitrogen fertilizer sales were pivotal to the company’s business model in 1995. Koch also detected a weakness in Farmland’s business model. Farmland was a co-op, meaning that it was owned by thousands of members who also sold their products through the firm. It was a uniquely midwestern form of capitalism that blended community control with industrial scale. In this way, Farmland was the opposite of Koch Industries, which was tightly held by Charles and David Koch. Farmland was owned by thousands of farm families and small business owners who shared in Farmland’s annual profits and voted on its actions. But it also hindered Farmland—decisions were influenced by its member-owners, who considered factors beyond the simple return on investment.
“It was Socialism,” as Koch Agriculture president Dean Watson put it. And Koch’s traders believed that Socialism was always destined to fail.
Farmland would, in fact, collapse. And the company’s fertilizer plants were the catalyst that destroyed it. During the 1990s, Farmland’s fertilizer plants were immensely profitable, dispensing waves of cash. Farmland’s member-owners used this money to expand, buying pork processing plants, grain elevators, and even an oil refinery. Free cash flow from nitrogen fertilizer helped fund it all. This was possible because natural gas was cheap. By the end of the 1990s, Farmland was one of the largest purchasers of natural gas in the United States; it was buying all the supplies it could get to stoke the fertilizer money machine. In doing so, Farmland had become an energy company without even realizing it. Farmland had gotten deeply entrenched with a commodities business during an upcycle, without thinking too hard about what life might look like during the inevitable down cycle.
When the crash came, it decimated the profits in Farmland’s nitrogen division. This sapped the cash flow to every other division. The whole co-op machine began to falter. Farmland couldn’t pay its debt obligations, which increased its debt obligations as creditors demanded repayment. In 2002, Farmland was trying to raise as much capital as possible by selling off its businesses. Bankruptcy looked imminent.
Packebush and his team studied Farmland’s network of fertilizer plants, and they identified something that no one else saw. Farmland owned a constellation of plants that zigzagged through the Corn Belt in a crooked line that looked a little bit like the Big Dipper turned on its side. The long handle of the Dipper started up in Fort Dodge, Iowa, and ran in a long slope down through some of the most fertile cropland on earth, down through the town of Beatrice, Nebraska, where there was a large nitrogen plant, and then bending to meet Dodge City, Kansas. At the edge of the Dipper’s cup was Farmland’s crown jewel—the company’s massive fertilizer plant in Enid, Oklahoma.
Farmland’s plants had a key advantage: they were located right next door to their customers—the farmers. This gave them an edge on transportation costs. If these plants closed, there would be a dramatic fertilizer shortage. It would be simply impossible to import all the fertilizer that midwestern farmers