This week, one of the largest U.S. processing and packaging  providers of whole milk, Dean Foods, filed for bankruptcy protection, in what Supply Chain Matters views as yet another visible example to the consequences of industry disruption.

While the development serves as an obvious new setback to the U.S. farming and agricultural interests, it provides another example of how rapidly changing consumer tastes and preferences continue to have an impact on consumer-focused food products industry.

According to The Wall Street Journal, Dean Foods operates upwards of 60 dairy plants across 29 U.S. states, after years of cumulative acquisitions of regional dairy producers and brands. The company markets the DairyPure, TruMoo and sDean Foodsome private milk brands along with Dean’s and Friendly’s branded  ice cream. Customers include major grocery chains, institutions, schools and restaurants.

Various reports indicate three broad factors that likely drove the dairy producer to this latest state.

The first is changing consumer preferences and tastes that are shying away from traditional cow’s milk in favor of non-dairy, perceived more healthy alternatives such as almond or oat milk. There is likely diet and sustainability aspects to such preference changes, with more consumers dealing with lactose intolerance of in beliefs that milk produced from cows adds more CO2 and carbon exposure to the environment vs. plant-based milks.  Data from the U.S. Department of Agriculture indicates that consumption of fluid milk has declined 26 percent during the last two decades. Yet, over a similar period, U.S. consumption of dairy products such as cheeses and yogurts has grown 20 percent. Consumers obviously have distinct and differing preferences.

Another factor relates to retail industry trending. Dean’s once largest retail customer Walmart elected to operate its own private branded dairy operation in 2017. According to a report from Business Network CNBC, that decision alone forced Dean to cancel more than 100 milk contracts with dairy farmers residing in eight states. Similarly, national grocery and foods retailers such as Kroger and Albertsons operate their own plants to supply privately branded product. Adding to the challenge was a decision by grocery food chain Food Lion to stop buying from Dean in 2018. With more and more store cooler space being allocated to either private milk or alternative non-dairy forms of milk, the challenge of restricted growth became significant.

The third factor was internal finances, with the company reporting net losses in seven of its last eight quarters. The company is reportedly burdened with very high unfunded pension costs and debt load. A MarketWatch report indicates that two of the four company pension plans are listed as “critical.” In February, the dairy producer undertook a review to explore strategic options including sale, but efforts were reportedly rejected by senior management. The company third CEO in three years assumed control in late July, providing a turnaround and private equity experience pedigree. The producer’s CFO and General Consul resigned in September.

 

Implications

The Dallas based producer has indicated it plans to leverage Chapter 11 proceedings to secure the funding and payroll needed to maintain operations and avoid supply disruptions until another buyer or buyers can be lined-up. Reportedly, advanced talks are underway with the Dairy Farmers of America, one of the largest U.S. dairy farmer cooperatives relative to selling “substantial assets.” According to the WSJ, the Kansas City based  dairy cooperative has been closely following Dean’s financial plight and reportedly prepared for executing available bankruptcy options.

For U.S. farmers and agricultural interests, the Dean Foods bankruptcy is yet another punch in the gut development after continuing to deal with the cumulative global market demand declines brought on by the ongoing U.S. and China trade war.

Individual farm bankruptcies remain on the rise as U.S. farmers are caught in the vice of climate change impacts of severe storms, rising operating costs and declining global and domestic market opportunities. The combination of consumer, market and specific financial factors that have resulted in the Dean Foods bankruptcy add to the burden and the consumer demand and supply network consequences. While U.S. branded agricultural products have a reputation for quality, import tariffs cut-off market growth opportunities. While many countries protect their domestic agricultural supply networks in global trade negotiations, U.S. agricultural products have become the pawn in leveraging trade negotiation outcomes.

As a resulting consequence, the availability and distribution of independent branded pure milk products will likely be far different in the coming months depending on what ultimately transpires from the Dean Foods developments.

 

Bob Ferrari

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