As pork producers filed year-end financial reports for 1998 or prepared statements for 1999 operating loans, accountants and lenders were forced to give a look at a new item on many producers' balance sheets, the ledger account.

And with that new ledger account item totaling hundreds of thousands of dollars for some producers, the look accountants and lenders were giving ledger accounts was long, hard and concerned.

The ledger account is the account tied to some forms of packer contracts. Under these contracts, when the open market price drops below a pre-determined (or "contract") price, producers receive the pre-determined price. But, they create a deficit (or "ledger account") with the packer equal to the difference of the two prices.

On the flip side, when open market prices exceed the contract price, producers still receive the price they've contracted, but their ledger balance is reduced by the difference between the two prices.

It's dangerous to generalize on contracts though, as they vary from packer to packer. In some, a split of the up or down side may be involved, for example.

Although the extremely low prices of recent months have resulted in some staggering ledger account balances, it appears that most lenders and accountants are taking an understanding, yet wary, view of these balances.

An informal survey conducted by a Minnesota banking association showed that six out of seven banks that dealt with ledger contracts were classifying them as contingent liabilities, rather than accounts payable.

How to classify ledger accounts is a subject accountants have wrestled with. "In reviewing these contracts, we only see producers having a financial obligation for payment of their ledger account when certain events happen. So, we're calling these balances a 'contingent liability,' making them a footnoted item on the balance sheet," explains Dale Carlson, an accountant with Schuetzle and Carlson, New Ulm, MN.

The differentiation is huge. By not putting the ledger account balance on the balance sheet, otherwise sick balance sheets can be made healthy with the stroke of a pen.

Lee Fuchs, Senior Lending Officer for Agribank, St. Paul, MN, while cautioning that it's tough to make generalizations on multi-varied contract terms and individual producer's financial situations, thinks that ledger accounts should be listed as a liability. "If it's probable that they're going to have to pay it, and the amount can be reasonably estimated, then it's a liability," said Fuchs.

Fuchs thinks a strong case can be made, though, for listing the ledger balance as a long-term liability. He recommends breaking out the amount you think will be paid back in a year's time as a current liability.

"Most of the lenders and accountants out there may be trying to take the more lenient way and calling it a contingent liability and they will probably get away with that until the (bank) regulators catch up with this," said Fuchs.

Carlson also adds that all the contracts have their own nuances and that each must be reviewed individually. He says that if the account is interest-bearing, a different classification may be needed. Or, if the packer has the right to cancel the contract if the producer is deemed financially unstable, another classification may be needed.

The question of what the packer is going to do is one that weighs on many producers' minds. Ray Bjornson, vice-president with Hormel Foods, Austin, MN, says actions probably speak louder than words.

"If we didn't intend to honor these contracts and stick with them for the long term, we certainly would have found a way out of them before now," Bjornson comments. He says Hormel bought about 50% of its hogs under various ledger contracts in 1998. Hormel processes about 32,000 hogs per day in plants in Illinois, Minnesota and Nebraska. When prices dropped below $15/cwt., if 16,000 of those hogs were on a ledger contract, the contracts were costing Hormel about $1 million/day.

Accountant Carlson fears that "one of the saddest things that's going to happen here is that some producers will not live as long as the contracts." The producer may have figured on paying back the debt through hog sales when times were good, says Carlson. He's unclear on what will happen when the spouse or heir has no desire to maintain the hog operation and must settle the account with cash.

Hormel's Bjornson, while not having had to deal with a death of a contract holder, says that they will be willing to help transfer or re-assign contracts.

"We look at a ledger contract as nothing more than a cash flow stabilizer," says Tom Ricke, regional manager Norwest Ag Credit, Des Moines, IA. He says that "yes, you are incurring a liability, in effect getting a loan." But, compared with the alternative of receiving the open market price, he considers those on contract as probably better off.

"Looking beyond the near term and into the future is key in evaluating a ledger account," says Norwest's Ricke. "Right now all we're looking at is who's going to survive. But at what cost does a ledger contract provide survival?" he wonders. "In many cases, producers have forfeited future profits to pay for this." Ricke says that some of his clients are now being approached by a packer that wants to accelerate the payback schedule.