Dairy farmers discuss effect of Dean Foods bankruptcy

As the nation's largest dairy processor and fluid-milk distributor moves through bankruptcy proceedings, dairy farmers and others in the business speculate on how Dean Foods' restructuring will impact those who ship milk to the company and its subsidiaries. Dean Foods said it is in "advanced discussions" with Dairy Farmers of America on a potential sale of its assets.

Dairy farmers who belong to DFA agree that the nation's largest dairy cooperative may not have much of a choice but to step in to keep at least some of Dean's 58 manufacturing facilities open. They also agree that DFA, which supplies most of Dean's milk, may be dairy farmers' best hope for preserving those plants.

"They're the only ones that could pull it off. There's nobody else around," said Sacramento County dairy farmer Case van Steyn, who serves as chairman of the DFA Western area council and vice chairman of the DFA board of directors.

Dean Foods provides an outlet for about 20% of DFA members' milk, according to the credit-rating agency Moody's, which downgraded DFA's rating outlook from stable to negative following announcement of Dean's bankruptcy. The agency said it expects DFA's operating performance will be negatively affected next year due to disruption from the bankruptcy.

By getting involved, DFA is "trying to protect dairy families" who are at risk of not having anywhere to send their milk if Dean plants close, said Tulare County dairy farmer Ron Locke, a DFA member.

"It's hundreds if not thousands of farms that ship their milk to those Dean Foods plants," he said. "If Dean Foods was allowed to dissolve, all those contracts for those dairy families would probably be tossed out and they would have to find new homes for their milk."

For now, at least, those plants will continue to take milk and operate. Since Dean Foods filed for Chapter 11 bankruptcy protection earlier this month, the company has received interim court approval to access up to $475 million of its $850 million debtor-in-possession financing to continue "operating as normal as we work toward the sale of our business," Dean Foods President and CEO Eric Beringause said. The company noted its restructuring process could take as long as a year to complete.

In California, Dean Foods owns Berkeley Farms in Alameda County and Alta Dena in Los Angeles County, both fluid milk bottling plants to which DFA sells milk. In all, Dean Foods has more than 50 national, regional and local dairy brands as well as a vast private-label business that makes up half of the company's brand mix, according to its 2018 annual report. Though fluid milk accounts for 67% of its business, Dean Foods also makes and distributes ice cream, cultured products, juices, teas and bottled water.

But Dean's fluid-milk business has been singled out for its financial troubles. Beringause said the company continues "to be impacted by a challenging operating environment marked by continuing declines in consumer milk consumption."

U.S. per-capita consumption of fluid milk has dropped every year since the U.S. Department of Agriculture began tracking it in 1975, when Americans drank 247 pounds of milk annually. In 2018, annual per-capita consumption stood at 146 pounds.

"Most fluid-milk bottlers are doing OK and have built into their planning this gradual decline," said Dan Sumner, an economist at the University of California, Davis. "There are more company-specific issues in (Dean's bankruptcy) than the broad and general shift away from beverage milk products."

Sumner, who said he has studied Dean's economics in detail, particularly when it merged with Suiza Foods in 2001, said the company "aggressively bought out or merged with many local dairies and did a couple of big mergers to create the present company with debt and other problems."

George Mertens, a Sonoma County dairy farmer and DFA member, agreed Dean's financial woes have been "coming on for a long time" as the company made major acquisitions through the years but continued to lose money.

"When they were buying all those plants in 2005, I know some oldtimers were saying, 'They're going to go broke someday. You watch and see.' And sure enough, they went broke," he said.

Though some DFA members believe the co-op's decision earlier this year to nearly double members' assessments may be related to Dean's bankruptcy and anticipation of acquiring its assets, Monica Massey, DFA executive vice president and chief of staff, said the DFA board "has been discussing and analyzing potential changes to the DFA capital plan for more than two years, due to the growth of our business over the last 20 years and the desire to continue investing in milk markets and strengthening the cooperative's financial position."

The Berkeley Farms and Alta Dena plants, both located in urban centers, "are in strategically great areas" for California dairy farmers, provided their infrastructure "isn't too far gone," said Anja Raudabaugh, CEO of Western United Dairies. But if the plants need a lot of investment, she said, it will be difficult for the co-op to sell its members on the purchase.

"They'll have to really make the case to the farmer that not having some money now is better for them in the long term," Raudabaugh added.

The existing plants may well have value, Locke said, but added that his concern is with the potential cost to DFA members should DFA decide to buy them.

"We've had four years of bad milk prices," he said, "so any more money taken out of our check hurts us."

Massey said DFA does not anticipate any more increases to member assessments to pay for any potential Dean acquisitions. The new assessments approved earlier this year go into effect in January.

Should the sale go through, another concern is whether DFA can manage so much of Dean's infrastructure and run the plants profitably, said Gary Genske, an accountant in Orange County who specializes in dairy accounts and who operates a dairy in New Mexico that ships milk to DFA.

"How does anybody take on that huge amount of growth in one big bite?" he said.

Massey said DFA continues to evaluate whether the purchase of some or all of Dean's assets makes sense for the co-op and its members, adding other potential buyers may be interested in Dean's assets.

"Any potential transaction would be contingent upon various approvals, an extensive review of Dean Foods' assets and thorough due diligence, among other conditions, including approval from the U.S. Department of Justice and the bankruptcy court," she said.

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)