Dairies in Trouble: Borden Makes Surprise Bankruptcy Filing
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.
‘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
- Massive debt
- Collective bargaining at Dean Foods and Borden drive up costs
- Untenable pension plans
- Equity stripping
- Overproduction coupled with falling consumer demand
- USDA price supports keep marginal dairies in business until they finally give up
- Loose interest rate policy at the Fed
I am not quite sure how to rank those factors and some of them are related.
- 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