American Rice, Inc.

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American Rice, Inc.

411 North Sam Houston Parkway East
Suite 600
Houston, Texas 77060
U.S.A.
Telephone: (281) 272-8800
Fax: (281) 272-9707
Web site: http://www.amrice.com

Private Company
Incorporated: 1987
Employees: 350
Sales: $515 million (1997)
NAIC: 311212 Rice Milling

One of the largest rice millers in the United States, American Rice, Inc. (ARI) produces, distributes, and markets worldwide white, brown, parboiled, and instant rice under a variety of brand names. The company’s U.S. brands include Blue Ribbon, Adolphus, Comet, A A, and Wonder. ARI also operates in a number of international markets under its Abu Bint, Cinta Azul, 4-Star, and Blue Ribbon brands. Although Saudi Arabia is ARFs single largest export market, the company operates in other middle eastern countries, as well as in Africa, Asia, Europe, Latin America, the Caribbean, and Canada. Erly Industries Inc. had owned an 80 percent stake in the company since 1993, but after filing for bankruptcy protection in 1998, ARI emerged in 1999, controlled by its creditors.

Birth and Growth as Agricultural Cooperative

Rice is classified in three major categories—long, medium, and short grains. The shorter the grain, the stickier the rice will be when it is cooked. Until rice is milled it is inedible because it is encased in a hard shell called the “hull.” Rice mills remove the hull and perform a variety of processes to produce the different varieties of rice found on supermarket shelves. If the rice is steamed within its hull before the hull is removed, the end result is termed “parboiled,” which when cooked is firm and fluffy with grains that remain separate. Once the hull is removed, the rice kernel is brown. Although brown rice is high in vitamins, minerals, and fiber, many consumers prefer white rice, which is produced when mills polish the brown fiber layers off the rice kernel. Mills also are responsible for enriching white rice to restore its nutritional value.

American Rice, Inc. was founded as an agricultural cooperative by a group of Gulf Coast rice farmers in 1969. Initially, American Rice only graded rice and provided market information services for its rice growers, who were based in Texas, Louisiana, and Mississippi. In an effort to protect the interests of its members, however, the cooperative began selling unmilled rice to mills on behalf of its farmers in 1971. Although this diversification enabled ARI to negotiate better contracts from mills, the cooperative’s farmers were, in large part, still at the mercy of the vicissitudes of the cyclical rice-growing market. But if the growers collaborated in the processing, packing, distribution, and sale of their rice, they would be in a more protected position. To this end, ARI bought what was then the Blue Ribbon rice mill, located in Houston, Texas, and began milling its farmerx’s rice in 1975.

ARI grew rapidly in its early years, increasing the number of farmers in the cooperative. With more than 1,500 rice growers included in its ranks by 1980, the cooperative was a formidable operation. As it grew, the company also launched or acquired a bevy of different brands, under which it sold different types of rice to distinct markets. For instance, when ARI purchased the Blue Ribbon operation, it gained the rights to the venerable Blue Ribbon brand, a long grain rice that dominated the market in the southeastern United States. Adolphus brand was particularly strong in the Houston area, where it had been sold since 1938, while Wonder rice had been popular in the southwestern United States since its inception in the 1940s. ARI also had a separate roster of international brands. Foremost among these was Abu Bint, a parboiled long grain rice that conformed to the tastes of Middle Eastern consumers. By 1986, ARI was one of the largest rice millers in the United States.

New Competitors in the 1980s

Despite its strength in the United States, ARI faced fierce competition from international rivals. In the early 1980s, new varieties of flood- and drought-resistant rice made it possible for countries that had once struggled to produce any rice at all to become self-sufficient. For example, South Korea had been one of the world’s largest rice importers during the 1970s, but had freed itself from dependence on other countries by the mid-1980s. Moreover, U.S. rice growers had steadily lost share in global markets to Thailand. Due to less expensive production costs, Thai producers could sell rice for about $100 per ton less than their U.S. counterparts. As a result of these factors, U.S. growers were “taking a beating on world markets,” according to the April 20, 1986 edition of the Houston Chronicle.

ARI addressed its shrinking global presence by banding together with other major rice producers and lobbying Congress for annual subsidies that would allow them to sell rice on world markets at deeply discounted prices. This strategy proved successful. The 1986 Farm Bill, for example, enabled U.S. rice growers to sell to international consumers for about $250 per ton, even though production costs actually ran between $400 and $500 per ton. Subsidies made up the difference.

In addition to meeting more vigorous competition abroad, ARI also had to ward off new domestic rivals. Since 1980, three large conglomerates—The Quaker Oats Company, Unilever, and Archer Daniels Midland Company—had begun marketing rice. Companies such as these had massive budgets for products development and promotion, as well as smooth distribution channels, and presented a formidable threat.

Alliance with Erly Industries: 1988-90

ARI recognized that to best these domestic competitors, it would have to bolster its own marketing and distribution presence. Lacking the resources to expand rapidly on its own, ARI joined forces with Comet Rice, Inc. in June 1986. This alliance was dubbed Comet American Marketing (CAM), a joint venture that sought to sell and market Comet and American brands more effectively in the United States, Canada, and the Caribbean. CAM’s initial goal was a lofty one—to become the third largest supplier of dried rice to U.S. grocery stores by 1989.

Founded in 1903, Comet had existed since 1970 as a wholly owned subsidiary of Early California Industries. (Early was a diversified food products company that had been created through the merger of three California olive producers in 1964. After selecting Gerald Murphy to lead the venture, Early quickly branched into new sectors, acquiring Arizona Agrochemical—a forest fire retardant and agricultural consulting business—in 1968.) Upon adding Comet to its corporate fold, Early made a spate of rice-related acquisitions, purchasing United Rice Growers and Millers of California as well as a major mill in Greenville, Mississippi. Early eventually folded all of its rice operations into the Comet subsidiary. Recognizing that its future lay in rice rather than olives, Early sold off its olive business in 1985, along with the Early name, to Specialty Brands, Inc., for $86 million. The erstwhile Early took a new name, Erly Industries, and continued to operate Comet. Soon after CAM was formed, Murphy’s son, Douglas, was selected as CAM’s president, and Gerald served as president and chief executive officer of Comet.

The year 1986 brought additional changes to ARI. After launching CAM, ARI opened a new milling and storage plant to facilitate international shipping. Operating out of its original Houston mill, ARI had needed to truck in its grower’s rice from Louisiana, Mississippi, and elsewhere in Texas. After processing the rice, ARI again had to move it overland to a port, from which the milled rice could be shipped to international markets. The added costs were significant. Upon opening its new $30 million facility in Freeport, Texas, ARI moved its entire milling operation there. Unlike the Houston mill, Freeport was located on a deep water port, which made transporting raw and milled rice much more efficient.

But ARI was not finished revamping the way it did business. After incorporating itself in 1987, the cooperative opted to become a public company in 1988. At the same time, ARI solidified its relationship with Erly. In April 1988, Erly and ARI announced that Erly would acquired 48 percent of ARI. The $40 million deal consisted of two transactions. Erly purchased 3.9 million shares (about 24 percent) of ARI, while the Comet Rice unit acquired an additional 3.9 million shares of ARI. In return, Comet relinquished its 50 percent interest in CAM. With this exchange, ARI had access to the resources it needed to grow further.

Erly benefited from the 1988 transaction as well, by obtaining access to ARI’s impressive distribution network. By 1987, ARI represented 2,300 farmers and realized sales of $194 million (up from $169 million in 1996). More important, ARI was a key player in global markets, particularly in Saudi Arabia (the largest market in the world for parboiled rice). ARI dominated the Saudi rice market, sending one-third of all of its rice to the Middle East kingdom. ARI’s Abu Bint controlled about 70 percent of the Saudi rice market and was one of the most recognized brands in that country.

Company Perspectives:

American Rice, Inc. is the largest rice miller and marketer in America due primarily to our ability to globally source and market rice through traditional and new markets. ARI is proud to uphold its tradition of quality and innovation by providing the resources for procuring, producing, and distributing the quality brands required by the sophisticated markets of the world as well as rice of all types to the international market.

Merger and Expansion in 1990-97

Soon after ARI went public, the two companies announced plans for ARI and Comet to merge. As John Howland, ARI’s president and chief executive officer, explained to the Wall Street Journal on March 19, 1990, a merger would enable both Comet and American Rice to “achieve operating efficiencies not otherwise available to each company individually.” The proposed merger again involved two steps. First, Erly’s Comet Rice subsidiary would give its 48 percent interest in ARI back to Erly. (Comet would receive cash from Erly in exchange, which would allow Comet to pay down its debt.) Second, ARI would acquire Comet from Erly for 17.2 million shares of ARI stock. The end result was that Erly controlled more than 75 percent of ARI. The transaction was delayed for two years while ARI struggled to secure adequate financing, but the merger was eventually concluded in June 1993. Douglas Murphy was installed as ARFs new president and CEO, and his father served as chairman. The resulting company was one of the United States’ three largest millers and marketers of rice, with combined annual sales of more than $450 million.

After the merger was complete, ARFs sales soared as a result of favorable economic conditions. Japan’s 1993 rice crop was severely damaged by weather. As a result, in 1994 the country had to import rice for the first time in more than 25 years. The boost in sales this gave ARI was only a prelude to 1995, when the terms of the General Agreement on Tariffs and Trade (GATT) were implemented. Because GATT required countries to import a small percentage of all products consumed annually, the treaty officially ended U.S. rice growers’ long stalemate with Japan. (U.S. rice growers had been demanding since 1986 that the United States issue trade sanctions against Japan for its refusal to import U.S. rice). By the end of 1995, ARI accounted for more than 40 percent of total U.S. rice exports to Japan. ARI gained an additional platform to Asian markets in 1994, when the company formed a joint venture with Vietnam to produce rice and related products in Vietnam’s Can Tho province.

In addition to attempting to grow by gaining access to broader geographical markets, ARI also strove to expand by entering new business sectors. In 1994 the company had founded Comet Ventures Inc., which specialized in rice byproduct technology. In 1996 ARI reunited Erly with the olive business it had shed in 1985, when ARI acquired the Campbell Co.’s olive business for $38 million. (In 1987 Campbell had purchased Erly California Industries from Specialty Brands. In the intervening years, Campbell had built up other olive brands as well, all of which were included in the ARI purchase.) ARI christened the new division Early California Foods and anticipated that its new unit would prove a boon in two ways: by diversifying ARFs revenue base, and by improving its marketing and distribution capabilities (because of the fact that many of ARFs rice markets were in olive-consuming countries, and others were in olive-producing ones). “[N]ot only do olives fit ARI,” Douglas Murphy told the Houston Chronicle on June 14, 1986, “olives are something we understand and returning to the olive industry is like going home.”

Troubled Times in the Late 1990s

ARFs good fortunes waned at the close of the 20th century, however, as the company was buffeted by legal troubles. In 1995 Kingwood Lakes South L.P. and the Tenzer Co. sued ARI, Erly, and Gerald and Douglas Murphy, alleging breach of contract and civil fraud and conspiracy claims stemming from a failed real estate venture. ARI lost the suit and was ordered to pay $7 million. In 1997 the Powell Group, which owned 14.9 percent of ARFs stock, sued the Murphys for breach of fiduciary duty, waste of corporate assets, and illegal corporate loans. Led by Nanette Kelley, the Powell Group claimed that the Murphys had squandered ARFs revenues by using corporate funds to pay for their personal legal problems (including the Lakes South/Tenzer suit).

In December 1997, ARI reported a third quarter loss of more than $5.2 million and a total loss of $10.9 for the first nine months of the fiscal year. ARFs problems stemmed in part from a packaging company in Saudi Arabia (Rice Milling and Trading Investments) that had breached its contract with ARI to distribute Abu Bint rice. Although ARI built an alternate distribution system as quickly as it could, Abu Bint shipments did not reach Saudi grocery stores for six weeks, costing ARI more than $15 million. At the same time, ARFs Early California olive business began losing about $1 million per month in 1997 and 1998 because of a global slump. In February 1998, ARI defaulted on loans worth more than $100 million, and Gerald and Douglas Murphy began to sell what would come to more than 700,000 shares of ARI stock in a six-month period.

ARI announced a massive restructuring plan in June 1998. In addition to reducing its global work force by one-third, the company pledged to refocus on its core rice milling operations. That summer, ARI sold Early California Foods to Musco Olive Products for $39 million and spun off Comet Ventures Inc. as well. Moreover, the Vietnamese government rescinded ARFs Vinafood license after four years of near-constant losses. Not surprisingly, Gerald Murphy abdicated his position as ARFs chairman (although his son remained as president and CEO).

Key Dates:

1964:: Early California Industries is founded (later renamed Erly Industries).
1969:: American Rice agricultural cooperative marketing association is founded.
1970:: Erly acquires Comet Rice, Inc.
1975:: American Rice purchases Blue Ribbon rice mill in Houston and begins milling its own rice.
1986:: Comet Rice and American Rice form Comet American Marketing, a joint venture.
1987:: American Rice is incorporated.
1988:: American Rice becomes a public company.
1989:: Erly combines Comet Rice with American Rice, giving Erly a majority ownership of American Rice.
1993:: American Rice and Comet merge; Erly acquires 80 percent stake in American Rice.
1994:: American Rice forms Vinafood, a joint venture with a Vietnamese state-owned rice processor.
1998:: American Rice and Erly file for bankruptcy.
1999:: American Rice emerges from bankruptcy proceedings.

In August 1998, American Rice filed for Chapter 11 bankruptcy protection. The following month, Erly did as well. In January 1999, ARFs creditors—which included the Internal Revenue Service and the Securities and Exchange Commission—filed a chapter 7 petition against the elder Murphy, which forced him into personal bankruptcy. During its restructuring in bankruptcy proceedings, ARI was separated from Erly, and Douglas Murphy resigned. Nanette Kelley was elected ARFs new president and CEO and Joseph Radecki the chairman. ARI emerged in October 1999 as a private company, closely held by its creditors. Its future remained uncertain, although Kelley and other ARI bondholders remained optimistic. “It’s a very good business, a wonderful company,” Radecki told the Houston Business Journal. Early in 2000, Steven Weinred was appointed ARFs interim CEO and president.