Dairies in Trouble: Borden Makes Surprise Bankruptcy Filing

-edited

Yesterday, Borden filed for bankruptcy. Dean Foods filed in November.

Please note One of America's Oldest and Largest Milk Producers Files for Bankruptcy.

Borden said it filed for bankruptcy because it cannot afford its debt load and its pension obligations. It has 3,300 employees, 22% of whom are covered by a collective bargaining agreement.

The company said it also has been hurt by broader industry trends, including a 6% drop in overall US milk consumption since 2015. Borden noted that more than 2,700 family dairy farms went out of business last year, and 94,000 have stopped producing milk since 1992. With the wholesale cost of milk rising due to fewer suppliers and retail milk prices weaker due to lower consumption, the margins for milk processors like Borden have suffered, the company said in its filing.

Blaming KKR

‘Irrational’ Bankruptcy Filing

Blame KKR? No so fast KKR Blasts ‘Irrational’ Bankruptcy Filing

KKR & Co.’s credit arm in court papers Tuesday said Borden had “no economic justification” for its sudden decision to file chapter 11 protection after lengthy negotiations with creditors aimed at avoiding bankruptcy.

Borden, a 163-year-old milk producer known for its spokes-cow Elsie, had “an almost fully-baked out-of-court restructuring solution” in hand but instead “recklessly” entered an “economically irrational” bankruptcy without identifying a financing source to keep the company running, according to the objection.

KKR, a lender under a $175 million term loan, said it wasn’t given any notice about the filing or a sense of what Borden hoped to accomplish through chapter 11.

KKR said the company’s strategy “seems to boil down to somehow using the bankruptcy process to negotiate a transaction that will be more advantageous to Acon,” which took a major stake in Borden in 2017.

Milk Production 2009-2108

Milk Production vs Dairy Herd Size 1980-2014

Per Capita Fluid Milk Consumption

Seven Major Problems

  1. Massive debt
  2. Collective bargaining at Dean Foods and Borden drive up costs
  3. Untenable pension plans
  4. Equity stripping
  5. Overproduction coupled with falling consumer demand
  6. USDA price supports keep marginal dairies in business until they finally give up
  7. Loose interest rate policy at the Fed

I am not quite sure how to rank those factors and some of them are related.

Related Points

  • Overproduction is related to price supports.
  • Collective bargaining is related to unsustainable pension plans.
  • Massive debt, equity stripping, and loose monetary policy are related.

It's easy to blame any one thing but that is too simplistic. Point 7 merits further discussion.

Loose interest rate policy at the Fed

Problem seven is universal.

Interest rate policy has been so loose that it promotes equity stripping while keeping zombie corporations alive.

I wrote about that angle just a bit ago.

Strong Bid for Junk

Please consider As Companies Scramble to Raise Cash, Even Junk Gets Strong Bid

Corporations very close to default have no trouble borrowing cash.

Corporate executives keep borrowing and borrowing, paying themselves exorbitant salaries while selling productive assets the companies need to keep alive.

Crop supports are a agricultural-specific enabler. But the The Fed is the overall economic enabler.

Mike "Mish" Shedlock

Comments (25)
No. 1-11
NormGriffin
NormGriffin

“No financial justification” for the filing. Hilarious.. Probably what the oil and gas bond holders are going to say shortly.

roddy6667
roddy6667

Dairy farmers lead the pack of welfare queens. 75% of a dairy farmer's income is from subsidies supplied by the taxpayer. Every year millions of gallons of milk are poured down storm drains and thousands of tons of cheese are stored in caves because it can't even be given away. In other words, about 3/4 of the dairy farms need to close so supply can equal demand. The consumer pays a low price in the store, but a higher, hidden one when he pays his taxes.

Sechel
Sechel

It's a leverage story. When you load up on debt and carry a big debt load you lose as a company all flexibility. Small changes in profitability and margins have large ramifications. If Borden had no debt they would have easily come through this.

Blaming a drop in milk prices or volumes is confusing the catalyst for the cause. Over leveraged companies fail with the slightest downturn

abend237-04
abend237-04

How to make a milk zombie from unkickable cans you can find in your own industry. Compliments of Congress and The Federal Reserve, United States of America.

GruesomeHarvest
GruesomeHarvest

It's an udder catastrophe!

Carl_R
Carl_R

That chart is pretty dramatic. Far, far less cows, and far, far more milk. It just goes to show what you can do with a ton of hormones. I'm not a big milk drinker, but I won't touch the chemical stuff. I pay a lot more for milk from grass fed pasture raised cows, but I wouldn't have it any other way.

midwest dairyman
midwest dairyman

Wow! When I come to a site like this I'm almost overwhelmed with the disinformation I see. Roddy youre almost there when you call me a welfare queen you are right except my income from the government for the year was .0075% yes that is three fourths of one percent of my gross income came from the government direct to the dairy. Carl the reason milk production is up is not because of hormones being inducted into our cattle the BGST hormone was outlawed over most of the country 10 years ago. Nor are there any tolerable levels of antibiotics in the milk you drink the tolerable levels are measured in parts per billion with a b. The reason production is up is because the poor performing farmers have either quit the business from being poor managers and or not caring for the cattle properly. New technology providing continued better care and more nutritious food for our livestock along with better parentage have improved production of everyones cattle from grass fed to organic to conventional milk production. The amount of stress coming from these bankruptcies to the farmer is incredible. Most dairy farmers work 80 hours plus a week to survive . Most that have been direct sales to these two processors will lose one twelfth of there years income,for many that is not financially survivable. The age of the Amercan farmer keeps getting older the young don't want a difficult insecure life subject to the whims of the megacorps. You as a consumer will have limited options in the future. Good Luck1

caradoc-again
caradoc-again

The deflation of increased efficiency will now soon enough be replaced by the inflation of limited suppliers & pricing power shift as the number of market participants reduces.

Perhaps interesting - when the next general bust comes, and multiple markets are culled of indebted players, the initial hit will be deflationary and possibly followed by the chance of a substantial inflationary snap back. Tge ripples will go on for years in monetary response and politics.

Dairy just happens to be in slo-mo.

ajc1970
ajc1970

Per capita fluid milk consumption is only a fraction of the demand, so that chart paints a misleading picture. Takes 10 pounds of milk to make a pound of cheese and our cheese consumption is up at record levels.

KidHorn
KidHorn

Not surprised. Milk and ice cream are dirt cheap. Cost about the same as 20 years ago. Although ice cream used to come in half gallon sizes. Now it comes in 1.5 liter sizes. About 20% smaller.

Herkie
Herkie

I went to college in Cowlumbus Ohio, in my first year towards my BS Finance degree we were asked to identify companies we thought would be M&A targets and we thought it. I picked Borden for several reasons but it really surprised my prof since it's headquarters was only a few blocks from my school and nobody had heard even the slightest rumor about such a thing.

Among other things I wrote about how they were having a great deal of trouble with their snack brands especially in the western US, and handed in a bag of their chips with my assignment from the vending machine rightoutside the classroom door. These mylar bags were almost round with the gasses they were packaged with. Turns out the trucks would get to the west coast and most of the bags had ruptured and what is obvious to me and probably most of you never seemed to occur to the management at Borden, the elevation and thus lower pressure outside the bags was causing them to burst.

Of course I only used that as an example of the ledaershipo there, their financials made them a massive bet for takeover and I am still surprised it did not end up in a bidding war. But, once the deal was done (announced only about 4 months after I wrote my paper by the way) the new private firm raided the pension funds and issued vast new debt. Calved off chunks of the company for cash, and the future of Borden was basically set in stone, they were going to use it as a cash cow (um LOL) and load it up with debt that they would then file BK on, because it was taken private and not traded it was not filing public prospectuses which stated what the pay and bonuses were, but my bet is they were massive right up to the end.

Sure enough in the BK filing they cited UNSUSTAINABLE DEBT!

How is that even possible when the Fed is shoving billions per day out the door to corporations at negative rates? How could they not have simply just refinanced the debt and restructured the company? Or, was it unsustainable simply because they had so ravaged the firm internally that it could not even survive at a negative interest rate?