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Request for Management Explanation of Performance and Plans

(May 18, 2004)

Copied below is the text of a letter sent to the directors of Farmer Bros. on May 18, 2004, requesting their response to investor concerns raised by the company's May 13, 2004 report of quarterly results and the subsequent 20% drop in the company's stock price.

The letter asks the directors to publicly report management's explanations of performance and their plans for recovery, with specific attention to the following issues:

  1. Declining coffee sales

  2. Shrinking service area

  3. Information systems project

  4. Management of derivatives investing

  5. Employee pension security


575 Madison Avenue
New York, New York 10022
Telephone (212) 605-0335
Facsimile (212) 605-0325

                                                            May 18, 2004



By telecopier: 310/320-2436


Messrs. Guenter W. Berger,

Lewis A. Coffman,

Roy E. Farmer,

Thomas Maloof,

John H. Merrell, and

John Samore, Jr.

c/o Farmer Bros. Co.

20333 South Normandie Avenue

Torrance, California 90502



To the members of the board of directors of Farmer Bros. Co.:

            The company’s May 13th report of quarterly results raised serious concerns among Farmer Bros. shareholders, as you must know from observing the immediate 20% drop in the stock’s market price.

            The report suggests that the company’s coffee business is shrinking rather than growing, and that management is either unable or unwilling to present a recovery strategy.  There was no mention of any plans for expanding the geographic service area or product lines.  Instead, the only reported project for the company’s future was a four year information system “update” which is expected to cost $11 million, or about $10,000 per employee.  This information does not justify commitments of capital.

            Assuming the board does in fact have information that justifies your commitments of shareholder capital, investors need to know what it is.  This applies not only to public investors but also, and especially, to the company employees whose pensions are concentrated in Farmer Bros. stock with a $63 million debt burden – about $23 for each share securing the debt, or 85% of the stock’s market value after its recent price drop.  Their retirement plans as well as their careers depend on your responsible management of Farmer Bros.

            Following are some of the issues that should be addressed:

1.                  Declining coffee sales:  In the May 13th press release, management stated that the company’s declining coffee business revenue “continues to reflect general economic conditions.”  This appears to be inconsistent with the experience of other small coffee companies such as Green Mountain and Peet’s Coffee, which reported 18% and 19% increases in sales, respectively, with 10% and 41% increases in net income, or with food distributors such as Sysco which reported a 10% increase in sales a 16% increase in net income.  Eliminating the variable of geographic expansion, both Kraft and Sara Lee also reported increases in coffee revenue for their US markets.

    Please explain what competitive factors are believed to be causing Farmer Bros. to lose market share in the coffee business, and what management plans to do about it.

2.                  Shrinking service area:  Although there has been no mention of it in management’s statements, comparisons of the lists of coffee sales branches in exhibits to recent Form 10K filings shows that Farmer Bros. has closed four locations in the past two years, including two that supported the Eastern boundaries of the company’s service area in Shreveport, Louisiana, and Nashville, Tennessee.  Only one new branch was opened during this period, in a California location that would not expand the service area.

    Please report the reasons for this reduction of geographic service area, and correlate the lost sales volume from the abandoned locations with the company’s reported revenue.

3.                  Information systems project:  It has been reported that the company has spent over $4 million on an information systems “update” project since its initiation in 2002, and expects to spend another $7 million to complete it by June 2005.  Management also stated at the annual meeting that important strategic initiatives should be deferred until the information systems project is completed.

    Please explain how this administrative project will contribute to the company’s competitive success in either its coffee business or investments, and why it requires the devotion of senior executive attention and the preemption of strategic actions.

4.                  Management of derivatives investing:  In Item 3 of the recent Form 10-Q, titled “Quantitative and Qualitative Disclosure About Market Risk,” the company reports extensive investments in hedging and derivatives transactions, but does not disclose the amounts involved.

    Please report specific details of the company’s total capital commitments and risk exposure, as well as the identity and qualifications of the people who are responsible for these transactions.

5.                  Employee pension security:  Management has issued several statements promoting the positive effects of an ESOP plan on employee morale, but the publicly filed documents do not appear to include any provisions for protecting employee pension interests in the event that the value of “unallocated” ESOP stock falls to a level that cannot support the ESOP debt.  As noted earlier in this letter, this is a very real concern with the current debt level at 85% of stock value, far above what would be permitted for a margin loan.

    Please report any provisions which have been approved by the board to protect the security of company employees, and to assure the continued employee morale that is critical to competitive viability.

            Your responses to these issues should be presented publicly, for the benefit of all investors.  Anything you present will of course be distributed to participants in the Forum for Farmer Bros. shareholders and posted on the program’s web site.


                                                            Sincerely yours,





                                                            Gary Lutin



The Forum is open to all Farmer Bros. shareholders, whether institutional or individual, and to professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives.  As stated in the Forum's Conditions of Participation, participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

There is no charge for participation.  Franklin Mutual Advisers, LLC, the manager of funds owning approximately 12.6% of Farmer Bros. shares, provided initial sponsorship for the Forum and arranged for it to be chaired by Gary Lutin.  Continuing support and guidance of the Forum is provided by an Advisory Panel of actively interested shareholders.

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