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Borden Dairy initiates Chapter 11 reorganization

Company will continue operating as normal as it works toward achieving more viable capital structure.

A second large dairy company has filed for Chapter 11 bankruptcy, signaling continued trouble in the dairy sector. Borden, founded in 1857, announced Jan. 6 that it and certain affiliates have initiated voluntary reorganization proceedings in the District of Delaware under Chapter 11 of the Bankruptcy Code.

The company intends to use the court process to pursue a financial restructuring designed to reduce its current debt load, maximize value and position the company for long-term success. Borden also said it plans to continue operating in the ordinary course of business, under the court's supervision, and remains focused on being a service-oriented dairy company that offers delicious and nutritious products consumers love.

"Despite our numerous achievements during the past 18 months, the company continues to be impacted by the rising cost of raw milk and market challenges facing the dairy industry," Borden chief executive officer Tony Sarsam said. "These challenges have contributed to making our current level of debt unsustainable. For the last few months, we have engaged in discussions with our lenders to evaluate a range of potential strategic plans for the company. Ultimately, we determined that the best way to protect the company, for the benefit of all stakeholders, is to reorganize through this court-supervised process."

Last year marked several major milestones for the company, including the revival of Borden's spokescow Elsie, the brand's reintroduction in Ohio and the launch of several innovative products that earned local and national media acclaim, such as state fair-inspired milk flavors, gingerbread eggnog and Kid Builder. The company's growth last year outpaced the industry as it increased year-over-year sales.

Sarsam explained that Borden is earnings positive and growing, "but we must achieve a more viable capital structure. This reorganization will strengthen our position for future prosperity. Over the past 163 years, we have earned the distinction of being one of the most well-recognized and reputable national brands. We remain committed to 'The Borden Difference,' which is our promise to be the most service-oriented dairy company that puts people first. We will continue serving our customers, employees and other stakeholders and operating business as usual throughout this process."

Regarding "business as usual" at Borden, Sarsam noted that the company had proactively filed expected motions as part of the court-supervised process, which allow it to pursue day-to-day operations. The company will be seeking court approval for these requests during the coming days and said it intends to work closely with creditors, customers and employees to identify value-maximizing restructuring plans that will benefit all stakeholders.

"Borden Dairy is a heritage American brand that has been in business since 1857," Sarsam said. "We have a very tenured workforce of 3,300 people who live and breathe our values of teamwork and creative problem solving, and I am extremely confident and optimistic about our continued success in the future."

Borden becomes the second large dairy company to file Chapter 11 reorganization after Dean Foods Co. announced Nov. 12 that it had initiated voluntary Chapter 11 reorganization proceedings in the Southern District of Texas, just two months after deciding to conclude a strategic alternative review that began in February.

More to come?

Borden’s bankruptcy has “an awfully lot of parallels to Dean Foods,” Dr. Mark Stephenson, dairy economist at the University of Wisconsin, told Feedstuffs. However, he said without knowing a great deal about the decision, “I think this is probably really shining a spotlight on the fact that this is a low-margin business.”

He added, “Fluid milk really has very little room for error and mistakes, and that has always been the case.”

While Borden has a strong brand name, he said the thin margins, combined with declining per capita consumption of fluid milk, makes it a difficult business to be in. Also, he said, "like Dean Foods, this is a business that has been assembled and acquired a couple of times, so you have a number of different plants that have been put together primarily in the South and Southeast part of the country, and that is an area where we’re fluid deficit considerably. So, I suspect this has just been a difficult time for them.”

Dairy prices have improved over the past couple of months, but while rising prices are great for dairy farmers, Stephenson said “they aren’t necessarily great for processors.”

Product prices have been going up, and that regulates those minimum prices for fluid plants as well, he explained, adding, “These folks have a hard time getting away from that.”

Additionally, he noted that retailers are pretty sure consumers don’t like to see highly volatile or fluctuating prices. As such, retail chains tend to absorb a lot of these fluctuations. “When prices are declining, prices won’t go down as much at the retail level and at the processor level because they’re making back some of the margins they lose when the prices are going up," he said.

Stephenson said he has no explanation for why Borden made its decision but added that he thinks the company "is probably just looking at the bigger picture here. They’re recognizing that they’re just being caught in area where they don’t see liquidity for the next year or two, and that’s not a great thing for those investors.”

As for whether the number-two U.S. dairy processor and distributor filing Chapter 11 may be a sign of more to come, Stephenson said, “We have a lot of things to probably watch and see.”

Elaborating, he explained that there are different kinds of fluid milk plants. Some of the plants have a brand name and manufacture and sell to a lot of different companies. These also put up product for store brands.

However, there are other plants in the country, like Kroger, Safeway and Walmart, that are captive plants. “Those have a cost advantage in many ways, because they’re only putting up their own product, and order taking is easy for them; it’s internal. Distribution is easy. That’s something that a Borden or Dean Foods doesn’t get to have,” Stephenson said.

Further, he said other companies warrant watching, like HP Hood or Byrne Dairy. “Maybe they’re doing well, but it would be another to watch,” he noted.

There are also some co-ops that are processing, he added.

Stephenson said the current climate is reminiscent -- although for different reasons -- of the 1980s, when he first started his career in the industry. “We’re purging the industry again,” he said.

The National Milk Producers Federation said in a statement to Feedstuffs that some of its member cooperatives providing milk to Borden could be affected by its bankruptcy filing.

“We will work closely with those cooperatives to provide whatever assistance we can throughout the process,” the organization said.

Despite the disconcerting announcement from Borden, NMPF said U.S. dairy remains a “strong and diverse” industry.

“Looking more broadly than milk in a glass, per-capita dairy consumption has been on the rise since the 1970s, with 2018, the most-recently reported year, being the most popular year for U.S. dairy since 1962,” the organization said. “Fluid milk remains a staple in 94% of U.S. households today and continues to outsell plant-based imitators by a margin of more than 11 to one.”

 

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