When freed from institutional food-police, what are consumers choosing?

_DSC0830Bad news meets dairy good news during COVID-19 pandemic

By Sherry Bunting, Farmshine, Friday, March 27, 2020

BROWNSTOWN, Pa. — We will get to the good news, but first, the bad news…

These are tough times for Americans, and dairy farmers are hearing from their cooperatives and industry in such a way as to put a black cloud of doom over 2020.

Farmers are getting letters and phone calls stating milk base penalties will be strictly enforced beginning this week, in the case of Land O’Lakes, MDVA, DFA — for example — which ask for “voluntary milk reductions” and make plans for dumping milk on farms and at plants as “potential plant closures” meet spring flush.

They indicate that the ability of plants to process milk could “worsen,” giving folks the sense that the ability to process all the milk is already bad. And the dairy industry is preparing its farmers for the possibility of no compensation for displaced / dumped milk.

National Milk Producers Federation’s bulletin and press releases this week state they are seeking three things from the federal government — asking to reopen 2020 Dairy Margin Coverage enrollment, to purchase additional dairy products for humanitarian feeding programs, and to compensate them for “milk disposal” they deem to be “a real possibility as logistical challenges on the farm and at manufacturing plants may create severe disruptions.”

In fact, just 11 days into the COVID-19 national emergency declaration, NMPF came out with an estimate that the dairy industry’s losses “may exceed $2.85 billion”. Analyst after analyst is coming out with new forecasts — projecting milk prices paid to farmers could fall well below pre-COVID-19 forecasts and conjuring up images of 2008-09.

While the pessimistic psychology in these letters, phone calls and industry proclamations is peppered with platitudes such as “we’re in this together” and “we’ll rise to the challenge”…  dairy farmers are already rising to the challenge all day every day producing the milk that consumers are turning to in their time of grave health concern.

The psychology in the letters and phone calls received by farmers stands in stark contrast to the good news.

Now for the good news…

A silver lining became obvious last week and is continuing this week. Consumers are reaching for the jug! In fact, they are reaching for so many jugs that some stores are reportedly limiting milk purchases to one gallon per shopper.

They are also reaching for cheese, butter, yogurt and other dairy products as stores and plants scramble to restock.

While the Dietary Guidelines Advisory Committee is poised to further clamp-down on the allowable percentage of calories from saturated fat (sources say new guidelines might drop to 7% instead of the current 10%!), what are consumers doing?

Consumers are currently free from the government’s flawed and unhealthy “food police” nonsense that the Dietary Guidelines foist upon us by dictating our nation’s institutional feeding and foodservice in schools, daycares, workplaces — even restaurants.

Those dairy farmers attending the dairy checkoff question and answer session in Chester County, Pa. on March 5 heard firsthand from DMI leaders that dairy checkoff foodservice “partners” — like McDonalds – “want to meet the dietary guidelines on saturated fat and calories,” which is why their meals, especially for children, only offer fat free or 1% milk and it’s why the cheeseburger is not on the Happy Meal board. (But you can get a slice of cheese on that kid’s burger if you ask for it, and you can get whole milk in your hot chocolate, they say, if you ask for it.)

In our collective American lives — pre-COVID-19 —  stealth-health according to government rules has been in effect more than we realized.

The point here is this: Supermarkets are where consumers get to choose what they want to feed their families when the menu is theirs to create. And consumers are learning that saturated fat is not to be so-feared, that Whole milk has less fat than they thought, and that Whole milk and dairy products provide more healthy benefits than they ever thought — including immune-building benefits.

Yes, milk education works. As soon as consumers get to choose freely, what are they choosing? They are choosing milk and dairy, and they are choosing whole milk over all other forms — when it is available.

While DMI leaders talk about “consumer insights” and “moving to where the consumers are” and “moving them away from the habit of reaching for the jug to try innovative new products”… what are we seeing when all the stealth-health controls are lifted and people are home choosing what they will feed their families during COVID-19 “social distancing” and “sheltering in place”?

We see them choosing the truly healthy comfort foods. They are choosing whole milk and 2% gallons and half-gallons, butter, full-fat cheeses and red meat for their families.

These items are quite literally “flying off the shelves.” This phrase is used in report after report this week about the demand pattern that is unfolding.

This supply-chain shift is something the dairy industry is wholly unprepared for, as the path charted for dairy processing and promotion has been so heavily linked to flawed dietary guidelines, institutional feeding, foodservice chain partners and new, more expensive, innovative products — that the concept of filling so many jugs with healthy, affordable, delicious milk is a bit off the charted path.

Even USDA Dairy Market News observed in its weekly report on Friday, March 20th what we also reported to you from our sources in Farmshine last week — that the surging demand at the retail level is more than overcoming reductions in sales to schools and foodservice. In fact, USDA DMN reports that retail milk demand is “overtaking inventories” and that retail orders are “heading into new territory.”

Pictures of empty dairy cases populate social media posts. And yes, USDA DMN confirms that Class I milk demand is ranging mostly from “strong” and “surging” in the West and Midwest, to “extraordinary” in the Northeast, to going “haywire” in the Southeast.

Given that the spring flush has begun, the current surge in fluid milk demand means less of this extra milk will go into manufacturing — as long as consumers continue the current level of fluid milk buying and as long as the milk is in the stores for them to buy.

This pattern should help the surplus butter situation, which was revealed again in last week’s February Cold Storage Report. Last year ended with inventories of butter up 18% compared with the end of 2018. The February report showed butter storage was still bursting at the seams.

But earlier this week, at a local grocery store, only a very local brand of butter was available. Zero Land O’Lakes butter could be found in the case.

USDA DMN in its March 20 weekly report stated that cream is widely available, which seemed to contradict the agency’s description of whole milk sales and its notation in the report that butter churns have strong orders from retailers for what they call “print” butter – butter for retail sale, not bulk inventory.

So what do the numbers look like?

It’s more difficult than ever to get timely information from USDA AMS about packaged fluid milk sales, but here’s what virtually every dairy analyst is reporting this week. They cite the Nielson supermarket data showing fluid milk sales were up 32% last week, that sales of whole and 2% are dominating, when available, and that retail sales of other dairy product classes were up double digits.

Milk and dairy products are a centerpiece of “comfort food” and in-home meals. Families are enjoying milk again. Will they keep enjoying it after they return to school and work? Or will they be back in rush zone of packaged carbs instead of cereal and milk, and back in the government’s “stealth-health” or “fake health” zone where fat is restricted and carbs are unlimited?

It will take some time to sort out the buying patterns that linger after the initial surge in dairy demand currently experienced at retail, but here’s some additional positive news to think about.

When consumers are educated and get the opportunity to seriously whet their appetite. When they tune-out the frivolous ‘sustainability’ banter about cows and climate and can ignore the rules about saturated fat… When they focus-in on their families, turn to milk for health, flavor and comfort, and remember or realize for the first time what they were missing… Who knows what they will choose going forward – when they are allowed to choose?

Even when families return to work and school, they may remember coming to dairy for immune-building properties, for comfort, for health.

Nielson has a chart at its public website tracking key consumer behavior thresholds in six quadrants: Reactive health management, pantry preparation, quarantine preparation, restricted living, and living a new normal. It shows their consumer insights on how buying patterns evolve during a health emergency of the scale of COVID-19, and how this peels away some of the frivolous drivel and constraints that influence consumer behavior in ordinary times.

In the sixth phase, “living a new normal,” Nielson describes how “people return to daily routines of work and school, but operate with a renewed cautiousness about health.” It goes on to state that this creates “permanent shifts in the supply chain.”

Citing the use of e-commerce and hygiene practices as examples, this sixth phase of “living a new normal” when returning to daily routines could also apply to food and beverage purchases as consumers returning to true health and comfort during the first five phases may continue to prioritize true health and comfort after those phases have passed.

What do consumers really want? Where are consumers moving when they are free to move?

Without institutional control of daily diets and promotion, we are seeing a glimpse of the answer to that question within the context of COVID-19 pandemic buying patterns. Real whole nutrition, foods that build immunity, awareness of Vitamin D deficiencies in our population affecting immune system response, the role of other elements in milk for immune-building, preference for local food that doesn’t travel so far, and a revitalized awareness of how regional food systems are critical to our food security — these are perspectives that could prevail to influence buying patterns into the foreseeable future.

Uncertainty prevails right now, but hope is alive, and the good news is that milk and dairy have much to offer.

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Dairy industry navigates uncharted territory amid COVID-19 pandemic

By Sherry Bunting, Farmshine, Friday, March 20, 2020 (updated March 24)

BROWNSTOWN, Pa. — The ‘new normal’ brought on by the novel Coronavirus / COVID-19 global pandemic evolves rapidly as the U.S. is partway through the 15-day “flatten the curve” effort deemed critical by health officials. Federal, state and local governments worked together to launch the 15-day mitigation strategy early last week to blunt the trajectory of viral transmission so that it does not overwhelm medical and caregiving infrastructure when the virus is expected to reach its peak in 45 days.

The effort led to closures and cancellations of non-essential activities, with some large cities and highly affected states moving to “shelter in place” strategies.

National state of emergency

A national state of emergency was declared March 13. Alongside the more restrictive guidelines, new drive-through testing sites became available in all 50 states, and the Trump Administration cleared the way for certain anti-viral therapies used for other illnesses to move forward through FDA after trials showed positive results.

A 2 trillion-dollar response and aid package is also moving through Congress, and by March 18, President Donald Trump had invoked war powers to utilize military medical resources and ramp up private sector production of items needed to combat the virus.

A key difference from Influenza, say scientists, is COVID-19’s much more rapid rate of transmission and the current lack of management tools like vaccines and anti-viral therapies, making its burden to medical infrastructure a key concern.

Meanwhile, hospitals and health systems adopt strict visitation rules, take stock of bed and equipment capacity, and work through triage plans.

Markets and trade

Financial markets had steep losses again this week in response to the economy slowing to a virus-induced crawl. Travel restrictions and lack of availability of shipping containers are reported as just some of the disruptions to U.S. trade, including dairy. But remember, these disruptions are based on a viral epidemic that current steps are aimed at curtailing, so the longer-term impacts on human and economic health are hard to predict.

On March 18, President Trump and Canadian Prime Minister Trudeau announced the closing of the U.S-Canadian border to non-essential travel. Both leaders assured that trade crossings, especially food, fuel and medicines, will not be affected.

The dairy futures markets suggest that the brunt of the impact on product prices and farm-level milk prices will be felt after May, but this depends largely on what happens over the next two months.

Milk and dairy in demand

Meanwhile, gallon and half-gallon sales of Whole Milk and 2% — as well as cheese and butter and other dairy products — are experiencing surging demand at the retail level, more than overcoming reductions in sales to schools and restaurants to the point of retail milk demand overtaking inventories with retail orders heading into “new territory.”

Pictures of empty dairy case shelves populate social media posts, and USDA Dairy Market News reports Class I milk demand ranging mostly from “strong” and “surging” to “extraordinary” and “haywire.” Given the reported butter surplus in cold storage, the current surge in fluid milk demand means less milk for manufacturing to add to inventories as the spring flush builds.

Milk and dairy products are a centerpiece of “comfort food” and in-home meals. In fact, as families settle into a period of greater isolation, more families are sitting down to eat together. Children are relaxing in the absence of extra-curricular activity schedules, and we may just find milk coming back to tables.

Schools, supermarkets, and restaurants adjust 

State governors have closed schools for at least two consecutive weeks, and now restaurants in many states are closed, except for takeout meals.

As the overall economy grinds to a virus-induced stop, uncertainty prevails even as essential services gear up for what may lie ahead. Amazon, for example, seeks 100,000 additional workers while limiting their warehousing and shipping to be focused on medicines and high-demand essential items.

Supermarkets are working to restock essentials, and there is a universally-reported surge in demand for milk and dairy foods that started March 13 and has accelerated nationwide since then. Stores are modifying operations, and relaxed rules for USDA meal reimbursement allow schools to provide grab and go meals to more families as children are home, and many adults find themselves suddenly out of work.

Supply chain planning and liquidity

Anticipating demand surges to be followed by periods of pull-back, milk plants and cooperatives are monitoring and planning for rapidly changing milk dispatch conditions. Many are looking ahead to make milk and dairy products available to food banks, as they are able, and especially if school half-pints are in inventory and as the product mix in demand is dramatically changing from foodservice to in-home use.

Concerns about liquidity have prompted The Fed to reduce the target interest to zero to 0.25%, and at the agricultural level, Farm Credit and other lenders sent communications Tuesday about working with customers impacted by COVID-19 as the full effects are not yet known in terms of Ag marketing and supply chain challenges.

Dairy market forecasts

Some analysts are going public with forecasts that dairy markets will suffer an average decline over the next 12 months that could be anywhere from 3 to 8% or 20 to 25% below the industry’s pre-COVID-19 milk price forecasts. Some have gone so far as to say milk prices paid to farmers could fall to 2008-09 levels as global and U.S. recession concerns emerge.

However, the underlying fundamentals of the U.S. economy are strong and will prevail unless both the fear and reality of the virus have a deep and long-lasting impact – something that cannot be forecast at this juncture.

Global Dairy Trade (GDT)’s price index is down 8% since COVID-19 fears became prevalent when the situation in China became known and Europe’s cases emerged. And yet, trading volumes have not declined in the biweekly GDT auction. This suggests global dairy demand is holding up.

A big supply-and-demand swing is always China, and there is a bright spot on that score.

Dairy is essential

Dairy is essential to a healthy diet, especially in times like these, and Milk’s immune-building properties are being recognized. For example, in China, where the virus is reported to have peaked and may be leveling off, Chinese dairy associations worked with the Chinese government to issue guidelines to “increase dairy consumption to build immune resistance,” saying “fight COVID-19 with dairy.”

A report this week in Food Navigator details these new dairy consumption guidelines in China as well as specific elements in milk that help boost the immune system. The formal stated: “Milk and other dairy products are an excellent source of high-quality protein and can also provide a source of Vitamin B2, Vitamin A, calcium and other nutrients essential for the human body. So a higher intake of these products for those low in protein, especially when higher immune resistance is required to fight the novel coronavirus, will be very beneficial.”

Dairy industry navigates ‘new normal’

Meanwhile in the U.S., four dairy processors and three milk cooperatives reported in email responses to Farmshine this week that even though all schools, some daycares and many restaurants are closed or curtailed, sales of fluid milk are surging to more than compensate.

“Quick changes in demand require a different product mix (whole gallons instead of 1% chocolate half-pints, for example). From a production standpoint, we have been reinventing the wheel every day for almost a week,” writes Carissa Itle Westrick of Valewood Farms Dairy, Loretto, Pa.

Another western Pennsylvania milk bottler indicated there are no sure answers to any questions just now, but that retail demand is higher, and the hope is that the school grab and go meals in most communities will be able to consume half-pint inventories.

In short, everyone is figuring out their “new normal”, and the industry is shifting its product mix from foodservice and institutional-style demand to in-home use demand.

In the Southeast, where fluid milk sales have been “lackluster” over the past several months, the situation changed dramatically since Friday, March 13.

“Up until last Friday, we had not encountered any changes in overall routing of milk to our regular fluid customers,” notes SMI’s CEO Jim Sleper.  “Then beginning Friday and ever since, it seems like all of our customers have added on additional milk to keep up with the surging demand resulting from customers stocking up, and we are seeing these extra loads far exceed the number of loads lost from schools being out.”

This observation is national in scope as confirmed by numerous industry sources, including Dean Foods, nationally, and other processors in the Northeast.

The concern in the balance is how long will this continue as home-bound refrigerators become full but also have the people at home to consume it?

Supply chain management?

Concern was expressed by some sources as to how the demand pattern will unfold if schools remain closed beyond two weeks right into the spring flush, especially if plants are short on labor or unable to remain open for a time.

According to a notice shared with Farmshine this week, Land O’Lakes informed its eastern members that beginning March 23, its base program will be strictly enforced, assessing members $10/cwt for their production over their individual base allocation, and asking members to “voluntarily” reduce their milk production as well as to prepare to dump milk.

The accompanying letter from Land O’Lakes indicated “business as usual” otherwise, for the moment, but that the cooperative is “preparing for a potential reduction in employee availability at plants across the country,” citing the possibility of having to dump milk. The letter also indicated that daily recorded messages would be sent to members in each milk shed about each milk shed’s respective situation.

All industry sources interviewed expressed heightened levels of emergency preparedness to bring some stability. As SMI’s Sleper put it, “We are treating this uncharted territory similar to our regular Hurricane Preparedness planning.”

Like the daily governmental briefings, milk processors and cooperatives are doing daily, even multiple times a day, conference calls among staff and board to navigate.

Transportation, labor and pricing

In a paper released this week by Dr. Andrew Novakovic of Cornell, the key points of vulnerability for the dairy industry are transportation and labor.

“Transportation disruptions could quickly scale to an industry problem,” he writes.

He also noted that the health of the labor force in milk plants affects the availability of milk more quickly than that of an individual farm.

American Farm Bureau also expressed to USDA that labor, supply chain issues and possible price manipulation top the list of immediate issues farmers are raising.

Optimism and commitment as food providers

In a letter to Secretary of Agriculture Sonny Perdue, AFBF president Zippy Duvall pledged that, “America’s farmers and ranchers will be with you every step of the way, doing all that we can to help you win this fight and to ensure the health, safety and prosperity of all America.”

Sleper also expressed positivity. “Uncertainty seems to breed pessimism especially with the stock market and dairy commodity pricing,” he wrote in an email. “We will endure this like we have other situations.  For SMI, we encountered extremely low milk prices over the past four-plus years, a shortage of available labor, two major bankruptcies, and hurricanes. I’m amazed how resilient (our farmers) have become.”

Novakovic cites a few positives to think about: “Overall, I am optimistic that the food industry, beginning with farmers, will rise to this challenge,” he writes. “Given the longstanding concern and emphasis around animal health and food safety, I think agriculture and food businesses have a leg up in doing what is needed now.”

In fact, FDA released information this week stating that COVID-19 is NOT a foodborne pathogen, confirming that there is no evidence of food or food packaging being associated with any transmission of COVID-19.

“We are lucky in the dairy industry that the sanitation and food safety practices we have in place every day protect us from a variety of outside threats. We have expanded these plans, with an eye toward the unknown,” writes Itle-Westrick in an email. “But as a small business, the possibility of one employee becoming ill is something that would have a big impact on our production and distribution capability, so we are protecting against that.”

Even though schools are closed, their needs continue at a smaller, though increasing, scale. Numerous mainstream media outlets are picking up stories showing how schools are providing these grab and go meals (without congregating) in communities across America.

Krista Byler head chef of Union City Schools in Erie County, Pennsylvania says inventories allowed them to feed participating students for one week, and that they’ll need items like bread, rolls and milk for next week.

“We had sufficient milk on hand to handle breakfast and lunch for one week of service, and will be placing a milk order on Friday for the week of March 23rd,” said Byler in a Farmshine interview.

“I think every foodservice employee in this district is a mom, a grandma. We definitely have a heart for the children here, and we just want to make sure they have the food they need.”

Resources for dairy and agriculture

While there are likely many resource bulletins being put together for farmers and dairy producers,  two good ones include Pennsylvania’s Center for Dairy Excellence at https://www.centerfordairyexcellence.org/covid-19-farm-resources/ and Indiana’s Purdue University at https://www.purdue.edu/newsroom/releases/2020/Q1/a-guide-for-local-producers-to-navigate-the-covid-19-outbreak.html

Gratitude

AUTHOR’S NOTE: Instead of pessimism, a can-do spirit prevails as farm-to-table sectors navigate these unprecedented challenges, including restaurants that are on the front lines as vulnerable small businesses taking a huge hit but in many cases providing takeout meals, even at discounted prices, with an eye on the situation.

As dairy farmers continue their important work each day, we thank you — and all involved in the food supply chain — for your essential contributions

May God bless the medical professionals, caregivers, first-responders… and the farmers who feed us. Stay safe, have faith, and be well as we all pull together to stay apart and curb transmission to starve the enemy COVID-19.

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Judge insists on open, transparent, fair process in sale of Dean Foods assets

Dean-plantsBy Sherry Bunting, Farmshine, Friday, March 20, 2020

BREAKING NEWS UPDATE: After the below story about the March 12 bidding procedures hearing was written and filed with Farmshine for yesterday’s press deadline, docket 1167 — posted late last evening — shows that a motion was filed ahead of today’s anticipated hearing to modify the proposed bidding procedures and withdraw the prior request for DFA to be Stalking Horse Bidder in the sale of Dean Foods assets, noting that DFA will remain a potential bidder in modified proposed bidding procedures. Docket 1167 states in part:…after extensive discussions, DFA and the Debtors (Dean Foods) determined to proceed without being the Stalking Horse Bidder and without Bid Protections. Accordingly, the Debtors (Dean Foods) are withdrawing their request for approval of DFA as a Stalking Horse Bidder, and any approval or authorization of the Stalking Horse Asset Purchase Agreement or Bid Protections. Critically, this withdrawal by the Debtors (Dean Foods) of their request for a Stalking Horse Bidder does not signal a withdrawal by DFA from the bidding process, and the Debtors (Dean Foods) expect and believe that by avoiding litigation over procedure, all parties-in-interest, including DFA, will focus on developing competitive and value-maximizing bids. In addition, the Debtors (Dean Foods) have been working around-the-clock to respond to continuing data requests from the Ad Hoc Group in an effort to provide that key constituency with all of the information needed to formulate a bid…”

HOUSTON, Tex. – Last Thursday (March 12) a hearing here on the Southern Foods Group bankruptcy considered a motion to approve Dairy Farmers of America Inc. (DFA) as “stalking horse bidder” and to set bid procedures outlined in the Dean Foods / DFA $425 million Asset Purchase Agreement covering 44 of Dean’s 57 plants.

Judge David R. Jones instead asked for Dean Foods to come back with a sale process that is “open, transparent and fair to everyone.” He also set a hearing for Thursday March 19 to revisit new bidding procedures and protections sought by DFA,

Judge Jones also expedited proposed sale dates, indicating March 30 at Noon as a deadline for bids to be submitted, a quick turnaround for Dean to “declare winners” ahead of April 1 for parties to file objections, and April 3 as a sale hearing. Dean confirmed this week  that these are the dates they are working with pending the March 19 hearing outcome.

Part of the reason for expediting dates in a more “open” bidding process is the company’s liquidity concerns in the face of financial and commodity market challenges due to school closings and other supply chain happenings related to novel coronavirus / CoVid-19.

It was revealed that 22% of Dean Foods’ sales – approximately $52 million per month – is school milk and foodservice sales.

In separate inquiries this week of several fluid milk processors, including Dean Foods, a surge in demand for milk is being reported that began last Friday when widespread school closings were also announced.

This surge in store demand is currently more than making up for any losses due to school closings in the short-term, but uncertainty is the cloud over everything, especially in this bankruptcy sale where liquidity provided by a combination of cash flow and bankruptcy financing was projected on March 6 to last through June after being projected last fall to last through July. It was noted that recent events may further compress these liquidity projections, an important factor to keeping the bankruptcy from falling into a Chapter 7 category.

In the three-hour hearing with two recesses for parties to confer, Judge Jones heard from counsel representing Dean Foods, DFA, an ad hoc committee for dairy cooperatives, and committees of creditors, bondholders, labor unions and others.

Department of Justice concerns over specific plants included in the 44-plant DFA bid were also referenced, but not explained or detailed, and the Judge expressed his desire to see the winning bid mix handled in a way that would be open to potential regional buyers for single plants and in a way that puts forward the best “mix” that returns the best value, while also keeping the jobs going and milk flowing, and hinges on satisfying any known DOJ concerns.

It was indicated that communication between DFA and DOJ and Dean and DOJ have been ongoing since October.

Essentially, the Judge asked Dean Foods to provide information needed by bondholders working on a potential restructure, to simplify the bidding procedures so that anyone who is not a bankruptcy attorney can understand them, and to provide the opportunity for potential buyers to bid on one plant or multiple plants.

Judge Jones again issued a plea for all parties to work together in the sale of the company he said is in everyone’s best interests to see continue and is “important to our country.”

“I am giving you full flexibility to propose and handle this however you want to handle it and reserving flexibility to drive this process if I have to,” said Judge Jones, indicating that he hoped an auction would not ultimately be necessary on all assets.

Throughout portions of the hearing, counsel for Dean indicated the need for bid protections for DFA, given their work in putting together the first actual sale plan covering a majority of assets.

Part of the “stalking horse” status sought for DFA by Dean’s original motion was to include “break up” fees averaging $15 million per plant that would have to be paid by bidders winning plants in an auction situation and pulling them out of DFA’s 44-plant bid. Judge Jones wasn’t convinced that breakup fees were necessary; although he did indicate that DFA should receive something for their contribution in putting together the first bid for a substantial portion of Dean’s assets to get the process moving – something no other entity has done to-date.

In fact, Judge Jones stated that he was less concerned about breakup fees than he was about the bidding process itself.

Counsel for the creditors committee said they were receiving broad interest from potential bidders on single or multiple plants, but that without a fair and open process and without documents needed to formulate bids, these potential bidders would be operating in the dark or unable to participate.

Judge Jones said that, “It’s theoretically possible to cobble together bids for individual plants (in the asset mix), and they are all telling me they are not getting a fair shake because you won’t give them the opportunity to make a bid for one or two or three plants,” said the Judge. “My way does that.”

He said that they (DFA) aren’t going to get copies of the other bids and that DFA would not have to break down their bid to a plant by plant pricing.

“No way, that’s not going to happen. I am trying to give examples of how unhappy I am with this process. I hear you trying to talk me out of it, and I assure you, I am far more stubborn than you,” said the Judge. “At the end of the day, I get to be right or wrong.”

With the expedited bid deadline — a date certain when every interest would put its best bid forward for a single plant or multiple plants — everyone involved would see everyone else’s bid at the same time, and they would be made public.

In essence, no one got everything they wanted, and everyone got something they wanted in the new process parameters set forth by the Judge to be revisited at the hearing this week (March 19).

Interests pleading for time to put together a bondholder restructure did not get extra time, and interests looking for special protections to streamline majority assets going to DFA did not get that either.

Judge Jones asked no less than three times: “Why do you need an auction at all?”

He said further that Dean has “the best advisers in the world. You have gan asset mix that is incredibly hard to have an auction on to be fair. Let’s set a deadline for everyone to put their best foot forward by that date (potentially March 30 Noon), then you put together the best deal (the best mix of winning bids March 31) and ask me to approve it (potential sale hearing April 3), and if someone has an issue with it, they can stand up and take their shots (objections by April 1). This forces people to put up or shut up.”

Bottom line, said the Judge, “I want a fair and open process, not just for two parties, but for all parties.

“I am not going to lawyer this deal, but I want a process where… everyone gets a shot. The (process) that you have outlined doesn’t do that,” he said of the bidding procedures in Dean’s motion.

In the bankruptcy proceedings, all proof of claims are due by March 27 with the first omnibus hearing still on the court calendar for March 30, followed by another on April 22. Information is available at https://deanfoodsrestructuring.com/ and dockets can be found at https://dm.epiq11.com/SouthernFoods

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Co-ops seek bid process modifications, object to ‘stalking horse’ status in DFA bid for 44 Dean plants

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6 co-ops covering 3000 farms and 10% of milk cite bid barriers, antitrust concerns, detrimental impacts

By Sherry Bunting, Farmshine, Friday, March 13, 2020

HOUSTON, Texas – New ripples emerged this week in the Dean Foods Company (Southern Foods Group LLC) Chapter 11 sale proceedings in the bankruptcy court of the southern district of Texas.

Just three days before the March 12 hearing on Dean’s motion to approve DFA as “stalking horse bidder,” an ad hoc committee for dairy cooperatives filed a limited objection on Monday, March 9 regarding the Feb. 17th DFA-Dean asset purchase agreement that covers a majority of Dean’s assets.

If Judge David Jones grants stalking horse status to DFA’s $425 million bid for 44 of the 57 plants and other itemized assets and liabilities, this would become part of the bidding procedures, which the March 12 hearing is expected to further outline, and it would provide certain protections to DFA’s initial bid.

“A potential sale of assets to Dairy Farmers of America Inc. (DFA), if approved, would effectively consolidate DFA’s grip on the national milk market. The ripple effects of the sale will detrimentally impact all of DFA’s competitors, from the largest dairy cooperatives and milk producers, to the smallest farmers,” the objection stated.

“For exactly this reason, the ad hoc committee, which includes certain creditors of (Dean) and competitors of DFA, was formed to… monitor the Chapter 11 cases, examine the impact that a sale to DFA would have on their businesses, and to the greatest extent possible, ensure that some semblance of fairness remains in the competitive process for the benefit of all dairy cooperatives,” the objection stated.

The ad hoc committee represents what is described as a broad cross-section of U.S. farm milk, covering over 3000-member dairy farms producing nearly 10% of the nation’s milk.
Six cooperatives are listed in the objection, and they have a mix of circumstances — one is a creditor of the debtor (Dean Foods) some are non-creditors except for non-pool payments that are owed, some are current suppliers of Dean Foods, and some are competitors in retail milk distribution.

According to the objection on the case docket, the six co-ops are:

• Lone Star Milk Producers, Inc., based in Wichita Falls, Texas with 120 member farms in eight states, marketing 1.9 billion pounds of milk annually;

• Agri-Mark Inc.,with 850 member farms in New England and New York marketing 3.3 billion pounds of milk annually;

• Cayuga Marketing, LLC, based in Auburn, New York with 30 member farms producing 1.3 billion pounds of milk annually;

• Cobblestone Milk Cooperative, Inc., Chatham, Virginia with 19 member farms from Virginia to Georgia marketing 0.6 billion pounds of milk annually;

• Maryland and Virginia Milk Producers Cooperative Association Inc., with 930 member farms in multiple states of the Midatlantic and Southeast producing 2.5 billion pounds of milk annually; and

• Michigan Milk Producers Association with 1300 member farms in Michigan, Ohio, Indiana and Wisconsin producing over 5 billion pounds of milk annually.
The limited objection seeks to address “certain fundamental flaws in the bidding procedures,” which “exacerbate the antitrust issues that plague the debtors’ proposed sale to DFA.”

• In a separate action, Southeast Milk, a Florida-based dairy cooperative also filed a similar objection this week.

At the start of the Chapter 11 cases that were all lumped together under Southern Foods Group LLC, the debtors, Dean Foods, proclaimed intentions of expanding the sale and marketing process and of exploring restructuring alternatives. Instead, the objection asserts that Dean Foods “spent months negotiating and finalizing proposed bidding procedures with DFA that only serve to create unnecessary competitive issues.”

Cited barriers to competing bids included the multi-step qualification process and compressed time frame that make it difficult for others to bid, including the use of terms that are not defined.

“Perhaps by design, these procedures make it a foregone conclusion that DFA will be the successful bidder for all stalking horse assets, even assuming that an auction were to occur,” the objection states.

On these and other grounds, the ad hoc committee for dairy cooperatives filed the limited objection and submitted that, “The proposed bidding procedures are not reasonably designed to secure the highest and best bid for the sale of the bid assets.”

While the debtors assert their proposed bidding procedures were designed to facilitate a flexible, robust and competitive bidding process, the objection asserts that, “The debtors have closely held all sale-related information and other information that they consider to be potentially confidential.”

In addition, objections are raised about the bidding procedures being “strategically crafted to prevent any of the stalking horse assets (44 plants) from being siphoned off by DFA’s competitors and broken down into auction lots that could yield a greater aggregate sale price for the debtors’ estates.”

The breadth of the DFA-Dean asset purchase agreement is a barrier if approved as ‘stalking horse’ assets because few, if any, bidders could compete on those assets collectively — keeping potential regional buyers that could be affected by the outcome from actually bidding.

Several modifications are requested, including how qualifications are set, how much discretion is given to Dean on separating auction lots, extension of the time frame, and a dual track auction process that would provide for back-up successful bidders and back-up alternate bidders for auction lots as separate sale transactions in the event that the DOJ does not provide the necessary regulatory approval for the sale to DFA.

Stay tuned.

 

Change is constant. Innovation is great. But please respect The Milk.

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By Sherry Bunting, Market Moos, Farmshine, Friday, February 28, 2020

Winter dairy conferences have been replete with talk of a changing dairy industry along with optimism about the future of innovation in dairy foods and beverages. If you’ve read the food and grocer trade magazines or watched the dairy case at supermarkets, the name of the game is new-new-new, everyone wants to put out something new. Some new products fly off the shelves, others not so much.

The big new non-dairy competitor in the milk case these days, for example, is oat beverage — and as the trade journals state, it’s a virtual explosion.

But dairy beverages are getting a makeover too in some quarters.

Meanwhile, we have retailers telling us that 95% of shoppers put a gallon or half gallon of real dairy milk in the cart.When asked what can be done to put more of those attention-getting nutrition tidbits on fancier milk labels, the answer inevitably is “there’s only so much real estate to work with on a gallon milk label,” or “we don’t change our gallon milk labels very often,” or “there are a lot of regulations about what we can and can’t put on a gallon milk label.”

Of course dairy producer audiences are always reminded that that The Milk is a low-margin product.

Put simply, this means the industry doesn’t want to do much with low-margin commoditized milk, they’d rather put their effort into high-margin products, which means new, different, adjusted, blended, extended, ultrafiltered and differentiated products for which they can charge more — all the while loss-leading The Milk right into low-margin or no-margin territory because 95% of shoppers put in their cart. Something is wrong with this picture.

When asking a retailer who spoke at a dairy conference recently in the Southeast if there’s anything that can be done to stop the ridiculous levels of loss-leading we see at stores (outside of Pennsylvania of course), his answer was a question: “How does that sell more milk?”

Explaining that the extreme loss-leading for real dairy milk ($1.50, $1.25, 99 cents/gal) pushes stress back through the supply-chain and conditions consumers to disrespect the most nutritious option — that admittedly most shoppers still put in their cart — my explanation was met with a shrug, and this reminder: “It’s got to be moved, and we eat the loss, and the only thing more expensive than selling milk cheap is throwing it away.”

Hmmmmm. Doesn’t the decision to do extreme loss-leading make The Milk an even lower-margin product?

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By the looks of the whole milk shelves in supermarkets and convenience stores — more often than not these days — they’re understocked, hardly in danger of being overstocked, even in Pennsylvania where loss-leading is prohibited.

With all of these new and “high-margin” dairy case beverages and foods and blends and mixtures and substitutes competing for space, at least one retailer revealed that shelf space will begin becoming an issue.

There are opportunities for real whole dairy milk within this strange set of marketing circumstances. It is a curious fact that sectors with more variety — like today’s dairy case — do more in sales overall, but where is the respect for The Milk?

It becomes apparent why the gallon jug is both loved by retailers as the “get you in the store loss-leading staple with a high turnover (but shorter shelf life) ” and at the same time ignored precisely because it is the low-margin high-turnover product they say they don’t make money on taking up all of that space that could be used for high-margin products with longer shelf life and better return.

The answer lies somewhere in the middle of this scenario, and maybe it begins with a simple request of retailers and the dairy industy: please respect The Milk. If we don’t respect it, how can we expect consumers to respect it, desire it and want to pay what it is worth?

unnamed (80)Single-serve 16 ouncers with pretty packaging, that’s one way to differentiate that so-called low-margin whole milk. Experiential flavors is another. Flavored milk is hot, growing by double digits year over year.

But gallons? For families? They are the shopper-draw that doesn’t “capture growth” … just captures customers through the doors where they can buy it cheap.

Processors and cooperatives that are innovating in the real fluid milk space have their work cut out for them when store-brands continue to loss-lead The Milk into a space of disrespect within a dairy case that is literally bursting at the seams with high-margin new products seeking to capture growth… after taking it away from The Milk that got the shoppers in the door.

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While Dean negotiated with DFA, other interests requested documents they never received

Dean-DFA-plants3Antitrust issues at core of motion to form equity holders committee

By Sherry Bunting, Farmshine, Friday, March 6, 2020

HOUSTON, Tex. – Ahead of next week’s hearings on the Dean Foods Company (Southern Foods Group LLC) bankruptcy and sale, it is illustrative to review the motions hearing of Feb. 19. On tap for March 12 is the hearing to consider DFA as “stalking horse bidder” with the asset purchase agreement DFA and Dean agreed to on Feb. 17 involving 44 plants at a $425 million bid as reported Feb. 21 in Farmshine.

Also on tap next week is a hearing set for March 10 on the motion presented by Joshua Haar to form an adhoc committee of shareholders.

During the Feb. 19 motions hearing, there was extensive discussion about professional bonus payments to keep top staff on board during the bankruptcy. An attorney representing the Teamsters Union challenged these retention bonuses in the face of knowing union contracts will be renegotiated by new buyers, especially if the buyer is DFA.

The bottom line in that exchange was summed up by Judge David Jones’ comment that he is guided by his own interpretation of the numbers, trusts his own bankruptcy experience and skill sets and has clear concern that all parties should work together to see that the assets of Dean Foods continue to operate. Period.

In fact, Judge Jones often chided attorneys to talk in terms of the “practicality” of the situation above their own “strategically” motivated interests.

“I need what’s left of this company to be comfortable and stay in place,” said Jones. “We need to get to a sale process and have people see the opportunity for future jobs to stay in place.”

He showed low tolerance for any party expecting to get 100% of what they have gotten in the past (except for retaining the “critical institutional knowledge” provided by professional staff receiving bonuses), and he indicated that the retention bonus payments are necessary in that regard, giving him “some comfort that we may actually make the end of this because good people will stay in place.”

The Teamsters’ concerns were for financial awards and windfall profits to “talent at the top” while their member employees become creditors owed vacation and so forth.

To understand how Judge Jones views the national fluid milk model of Dean Foods, he said: “This is a business model that worked in the 60s and doesn’t work in 2020,” he said. “I could give a first-year business student this business model and they would look at me and say this is a model that doesn’t work.”

Judge Jones asked during motions, “Why not be hand-in-hand on this issue? I do not want to be responsible for school children not getting their milk, that means a lot to me.”

Saying that the Unions have overstepped in trying to prevent the payment of retention bonuses to professionals that constitute “institutional knowledge,” Judge Jones granted the debtor’s (Dean’s) motion to approve the “key employee retention plan” consisting of a schedule for paying these bonuses.

This exchange about “working together” — with the goal of keeping Dean assets operating — set the stage for Judge Jones to hear a motion by Joshua Haar to form an ad hoc committee of equity holders (shareholders). Haar is the attorney son of Jonathan and Claudia Haar, the New York dairy farmers who were part of the original representatives of the dairy farmer class in the previously settled Northeast Class Action Antitrust Lawsuit against DFA and Dean Foods.

Before hearing Haar’s motion, Judge Jones said he is “getting a sense of urgency,” in regard to seeing an end point and that he did not want to entertain motions that “extend the case on the backs of the vendors, including the farmers supplying the milk.”

In other words, he did not want to see the timeline of this case extended for an “exercise” that did not materially provide a practical solution.

Judge Jones offered to hear Haar’s motion the very next day, for which Haar said he would not be ready. Asking Haar if one hour is sufficient, Judge Jones set hearing on the appointment of an equity committee at 3 p.m. March 10 – two days before the March 12 hearing on the DFA “stalking horse” bid.

As part of this discussion, it was noted that the ad hoc committee of bondholders wanted time to put a plan forward, that they are “actively working on the financing and need time for equity holder involvement,” said Haar.

“On this equity committee request, there will never be an equity recovery here,” said the Judge. In fact, he added later that equity or share holders in Dean Foods, a publicly traded company “are in the worst possible place. If the debtor’s numbers are right, their money was lost years ago, and this is an event that recognizes history.”

Haar’s lengthy motion described milk supply chain and potential antitrust issues inherent in a DFA purchase, seeking time for other options to surface.

Judge Jones said he read the motion, but added: “I want you to understand the standard that is required for an equity committee. I’ll always give you the opportunity to talk and give the shareholder’s view of the world, but if you are looking for a committee, that’s a tough burden, and I expect you not to waste everyone’s time.”

He warned against a prepared speech of “just words… Telling me all the things you might do that are eloquent, I tend to be more blunt… especially when I tell people what’s coming and they choose to ignore it. I want you to represent your people. This is about people. But that’s what I expect.”

He expects an equity holders committee to be able to contribute to the process of the Dean Foods reorganization and sale, not to use one group of stakeholder for the sake of others.

Haar indicated that among the equity holders are persons and entities “connected to 15% of the U.S. milk supply” so in that sense this motion was not trying the milk supply antitrust concerns but rather what could be a legitimate consideration of a better way to move forward with offers that could potentially allow equity holders to participate in value recovery.

It was apparent that Judge Jones needs to be convinced with numbers and math and actual bids that can be consummated in the next few months, not the eloquence of ideas about what can or should or could be some time in the future.

Harr said of the motion that, “We can add significant value to the estate.”

With that, the hearing for Haar’s motion was set for March 10 with response motions due March 3.

Next up in the vein of “other options” was the existing creditors committee. Their attorney indicated concern as to how the asset purchase agreement negotiations with DFA took place.

“They got bid materials. We issued requests for these materials. The debtor (Dean Foods) wanted to share these materials but were unable to share them with us because DFA put a confidentiality clause on it,” said the attorney for the Dean creditors. “We did a letter writing campaign. DFA would not agree. We did file an emergency form to compel the bid materials, and an hour before the bid deadline, the documents flowed to the advisors for the committee.”

In other words, too late to analyze the issues.

As the negotiations between Dean Foods and DFA continued, the creditors committee apparently repeated its requests for information and were told “no.”

 

Finally, a week before the Feb. 19 motions hearing, they received a two-page slide packet from DFA that “gave very little information and did not give the information about what Dean plants were included and excluded in that asset purchase agreement until it was announced publicly.

“The creditors committee’s initial impression is negative,” said the attorney representing the committee, indicating it will be heavily contested. “First and foremost, we are concerned about aggregate consideration… it is not clear that there is enough (in the bid) to pay-in-full the creditors.”

She mentioned that DFA, in addition to seeking stalking horse bidder status, is also a large creditor of Dean Foods with significant payables and that their bid could represent a “dollar-for-dollar deduction in value of assets to cover their claims.”

The Judge was un-moved. “If integration fixes the problem, then we ought to be working on integration,” he said, telling the DFA lawyer to work with the lawyer for the creditor committee. “Get her at your table,” he said.

The response from counsel for the creditors was that they want a seat at the table and would “engage in good faith, but there could still be a contested hearing on March 12.”

Attorneys for DFA and Dean indicated engaging in dialog with the DOJ on antitrust issues.

A potential bondholder bid was also referenced. The attorney for the creditors said the bondholders have done a “tremendous amount of work looking into financial investment into the company. We are hopeful the process can get there before March 12 with a more value-maximizing offer than the one on the table now.”

But again, it was mentioned that a “critical piece of information is still missing. There is some information that the ad hoc bondholder committee needs that the debtor is not willing to provide and we implore the debtor to turn it over now so the bondholders have the information. The next two weeks are critical.”

One item needed is “milk payables. We need to see, or the financiers need to see that, and it has been difficult getting it provided to us for third-party financing.”

Judge Jones offered his office as mediator for emergency hearings to get that flow of documents moving in the event that having the information allows other bid processes to go forward.

In short, the creditors committee, ad hoc bondholders committee and lenders were “left out of the information flow” during the Dean negotiations with DFA on their asset purchase agreement. They all read it at the same time (when it became public on Feb. 17) and are looking for a bid with more value to come in.

Judge Jones turned to the Dean Foods attorney and said “you took this in and you know what to do. I am trying to convey my sense of urgency here. Let’s figure out how to move the process forward. We all have the same goal.”

(Facilities in South Dakota, North Dakota and Minnesota — where Dean bottles under the Land O’Lakes brand — are excluded from the DFA-Dean asset purchase agreement. The licensing of the Land O’Lakes brand elsewhere is also excluded.)

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