Shrimp versus Sugar

The state must soon decide
who to loan $5 million. The choice is
fading past or unproven potential

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By Tim Ruel
truel@starbulletin.com

he directors of a loan program run by the state Department of Agriculture must soon make a weighty assessment of the risks in raising shrimp and sugar.

The state Legislature this year approved $5 million to loan to companies doing business on Kauai, to offset the 400 jobs lost when sugar grower Amfac Hawaii closed its Lihue Plantation and Kekaha Sugar Co. in November. The Agriculture Department's lending division normally issues loans of less than $1 million.

The interest rate on the loan can go as low as a tempting 3 percent. Two Kauai-based candidates that lobbied the Legislature for the loan -- sugar farmer Gay & Robinson Inc. and shrimp grower Controlled Environment Aquaculture Technology Inc. -- have both applied for the money.

The two companies arguably represent Hawaii's agricultural past and its unproven aquaculture potential. Both are fending off challenges from overseas competitors and neither has an easy path to a profitable future.

Gay & Robinson, a private family business founded in 1889, is asking for $4 million with a 10-year maturity period. Controlled Environment, a 6-year-old public company more commonly known as Ceatech USA, is seeking $4.5 million with a 16-year maturity period. Both companies want to expand their operations with the money.

Incidentally, Ceatech and Gay & Robinson are among several Kauai companies that have formed a cooperative to negotiate a lease with the state for 7,700 acres left behind by Amfac. Gay & Robinson wants to use 4,300 acres of the plot for its planned expansion. Ceatech, as well as Pioneer, Syngenta and a local farmer, hope to use the other 3,400 acres for shrimp, seed corn and diversified agriculture.

The executive board of the state Agriculture Department is expected to pick one or more loan candidates at an upcoming monthly meeting. Other companies have applied for the money, but with much smaller requests. The board has the option of breaking up the $5 million into pieces; for example, it could award one company $2 million and the other $3 million. The level of collateral is up to the board.

Board Chairman James J. Nakatani, vice president of Nakatani Farms Inc., could not be reached for comment. Doreen Shishido, administrator of the department's loan division, said she is reviewing the applicants, and will make her recommendations whenever the board meets to discuss the matter.

The department must base its decision on several criteria including:

>> creation of employment

>> security

>> potential downside

>> the applicant's track record.

"They do have a hard decision," said Jonathan Chun, state Senate majority leader and vice chairman of the Senate Agriculture Committee. Chun (D-South Kauai) has written a letter in support of Ceatech's application.

"They were very active on this bill," he said. "In concept, the Senate committee was very supportive of Ceatech's idea, not to say Gay & Robinson is not deserving of it."

To Bill Spitz, agriculture economics expert for Kauai County, the call is not so easy. Ceatech has a good product in a tough market, he said. But the excess residue from Gay & Robinson's sugar would be burned to fuel the Garden Island's electricity needs.

Both Ceatech and Gay & Robinson decline to say who is more deserving. The two companies represent different loan risks for the state.

Ceatech, a Colorado corporation, currently has a $3 million note from the Bank of America, issued in 1998. Last year, Ceatech had the due date on the note extended to April 2007 from December 2006, according to state land records. The note is backed by the company's long-term lease of land owned by the state on Kauai, where Ceatech runs its shrimp farms. Until the loan is paid, the company can't pay dividends. The company's executives all earn less than six figures.

Ceatech is largely owned by its current and former officers as well as the nonprofit union fund Unity House Inc., which had about 10 percent of Ceatech's shares as of Aug. 3. Ceatech's stock began trading publicly in 1997 on the over-the-counter market at $3.25 a share. The stock closed Friday at $1.03.

In January 1999, Ceatech founder and Chairman J. Albert Garcia died, leaving the company to look for capital on its own. In April of this year, Ceatech's shareholders pledged an extra $3.9 million in convertible debt. As of Jan. 31, the company had $1 million in outstanding convertible debt.

Ceatech grows shrimp in 40 one-acre ponds and wants to spend the $4.5 million in state funds to build as many as 22 more ponds, depending on the final size of any loan issued by the state.

Ceatech believes the expansion would put it on the track to profitability, although it needs a total of 100 ponds to make full use of its current processing facilities.

Ceatech has lost $6.19 million since its inception. The firm's net loss widened in the second quarter to $490,748 from $357,653 in the year-earlier quarter, on falling revenue.

LAGGING LOANS The delinquency rate for low-interest loans administered by the state Department of Agriculture during the past 10 years: 1990-91:6.12% 1991-92:5.86% 1992-93:4.99% 1993-94:32.04% 1994-95:25.92% 1995-96:23.36% 1996-97:7.14% 1997-98:9.40% 1998-99:9.14% 1999-00:7.26% 2000-01:5.84%* *Covers a 10-month period ending April 30 Source: State Department of Agriculture

The company was turned down by private lenders last year, but is still talking with lenders other than the state, said Edward Foley, who joined Ceatech as executive vice president and chief financial officer last year. Foley replaced Ronald L. Ilsley, who was fired as chairman and chief financial officer of Ceatech in 1999 after he publicly accused the company of being unable to service its debt. Ilsley also slammed the board for eliminating the position of chief executive officer, and charged the company with improperly storing shrimp.

After he was fired, Ilsley sued Ceatech for more than $1 million, claiming wrongful termination and breach of contract. He settled with the company earlier this year for $113,000. Ilsley, who is still a minority shareholder of Ceatech, declined comment. He is now chief financial officer of Valencia, Calif.-based hydrogen innovator DCH Technology Inc.

Production has expanded at Ceatech since then, said Foley. Projections show Ceatech can service an extra $4.5 million in debt, he added.

The company is convinced there's a market for the shrimp, and all it needs to do is build.

"We're not a dot-com company," said Foley, who has previously worked for Dole Food Co., Castle & Cooke Inc. and C. Brewer Homes Inc.

Several of Ceatech's officers joined after working at the nonprofit Oceanic Institute in Makapuu, which received federal funding to create a competitive domestic shrimp industry. Previously, other shrimp growers in Hawaii have come and gone.

Ceatech's technology has created a higher-end type of shrimp. One of the questions the state must ask, noted Sen. Chun, is whether the market will go for more expensive shrimp.

To Foley there is no question. When asked if Ceatech could survive without the state loan, however, Foley said he was not sure he could answer the question. "We're exploring other alternatives as well," he said. He also declined to comment on how many jobs could be created with the extra ponds. As of Jan. 31, Ceatech had 51 employees, according to its annual report.

Gay & Robinson, meanwhile, represents another type of debt risk for the state. The company has no outstanding loans, but has been struggling with profitability in an extremely difficult international trade environment. Foreign producers are propped by their governments. At one time, Hawaii was home to 32 separate sugar plantations operating on all major islands, with nine mills on Kauai alone. When Amfac left the sugar business, Gay & Robinson became the only grower left on Kauai. The only other sugar plantation in the Hawaiian Islands is Hawaiian Commercial & Sugar Co. on Maui, owned by Alexander & Baldwin Inc.

On the bright side, a bill pending before the U.S. Congress would prop up U.S. sugar prices. Even if the legislation isn't approved until next year, it could guarantee profitability for Gay & Robinson, said Alan Kennett, the firm's president and general manager.

Gay & Robinson would use the state money to expand its sugar fields to include 4,300 acres of land formerly occupied by Amfac.

The company has 295 salaried and bargaining unit employees, and could add up to 25 more, Kennett said.

G&R has already signed an option to buy's Amfac's sugar terminal in Nawiliwili Harbor, which is capable of loading all the sugar G&R can plant. G&R also spent $750,000 at a May auction to buy Amfac's equipment.

With the expansion, the company could process up to 70,000 tons of sugar, 50 percent more than what it grows now, lowering per-ton production costs. The company is also looking into niche markets for sugar.

G&R wants to plant the sugar as soon as possible, but based on the usual two-year growing and harvesting timetable, the firm would not see any return from the investment until 2003, Kennett said.

While analyzing the sugar and shrimp business for potential liabilities, the state Agriculture Department must consider the intent of the state loan program: to serve as a lender of last resort, filling gaps left by traditional local lenders.

"In general, these government loans are going to be inherently risky, because that's the whole point of these programs," said Chun.

However, a loan program also must consider its solvency, and duty to taxpayers who fund it.

The Hawaii Capital Loan Program, run by the state Department of Business, Economic Development and Tourism, has been plagued for the past decade by its loans. More than half of the money is delinquent. One of the companies that borrowed under the program, high-tech firm WorldPoint Interactive Inc., has entered a vicious legal battle with the state over its loan.

In comparison, the Agriculture Department's loan division has been relatively solvent for the past 10 years, with delinquency typically staying below 10 percent, except when the Hamakua Sugar plantation closed on the Big Island in 1994.

"You would be foolish to award a loan if they don't have a chance of paying it back," said Chun.

So the question remains for the state board of agriculture: shrimp or sugar? Or both?

"I think it is a good question," said Ceatech's Foley.