Milk Processors Are Going Bankrupt as Americans Ditch Dairy

(Bloomberg) -- Two of the largest U.S. milk processors have gone bust within eight weeks of each other, and one of the main causes turns out to be pretty fundamental.

“While milk remains a household item in the U.S., people are simply drinking less of it,” Dean Foods Co. said in its November bankruptcy filing. “The decline in dairy sales has occurred in conjunction with the rise of oat, nut, soy and other alternative ‘milk’ products at retailers and food service locations across the country.”

Circumstances were so similar that Borden Dairy Co. used the same language almost verbatim in court papers this week to describe its predicament.

The rest of the milk-processing business is feeling the pain, too. Companies like HP Hood LLC and the former Elmhurst Dairy changed their product mixes or ditched milk altogether. Dairy milk consumption per capita -- which excludes powdered forms -- fell more than 25% from 2000 to 2018, according to data from the U.S. Department of Agriculture.

Critics point to dairy as a prime source of saturated fat, which has been linked to heart disease. Vegan groups have even taken to Twitter, using the hashtag #DairyIsScary to promote a diet free of cow milk for health and environmental reasons.

Scary Dairy

Dairy proponents point to studies showing that milk and dairy provide vital nutrients and may protect against some chronic diseases. Nevertheless, Borden and its mascot Elsie, the smiling cow with long eyelashes and a necklace of yellow flowers, became instant trolling targets when the company filed for bankruptcy last weekend.

One tweet read: “Ciao, Elsie. Hope you land on a lovely sanctuary.” Another riffed on Borden’s own statements about people drinking less dairy, saying, “Here’s to drinking none of it.”

One reason processors are going broke is that the drop in milk consumption drove many dairy farms out of business, with the cows sent to slaughter. Fewer suppliers meant that the surviving farmers were able to charge processors much more for raw milk -- up 27% since January 2019, according to Borden’s court documents -- which squeezed profit margins for Dean and Borden.

“We buy milk from farmers, so when their prices go up, that’s more cost to us,” Borden Chief Executive Officer Tony Sarsam said in an interview.

It didn’t help that Borden and Dean built up heavy debt loads. Borden’s petition said interest was costing it about $21 million a year, on top of quarterly payments totaling $2.35 million. Dean listed debts of more than $1 billion.

While other fluid milk processors won’t necessarily be forced into bankruptcy, many will get new owners or shut down as demand continues to fall, said Michael Boland, a professor of agricultural economics at the University of Minnesota. Milk plants in states like New Mexico, Arizona and Texas, where high average temperatures help companies save on energy costs, will likely be more successful than those in regions including the Midwest, Boland said.

“Plants that only produce fluid milk might not be viable,” he said. “I don’t think it’s all doom and gloom -- new ownership may be able to find a way to lower costs in certain geographies -- but I do think some of the plants will close.”

Some closures are already happening. Associated Milk Producers Inc., a dairy cooperative owned by farmers in the Midwest, announced in November that it was shutting production at two plants, one in Iowa and the other in Minnesota, citing a decline in milk production and fewer dairy farms in the region. Small processors that don’t close could be bought by larger cooperatives like Dairy Farmers of America, which is in advanced talks to buy Dean.

A Dean representative declined to comment on the ongoing bankruptcy case.

Cheese Demand

Another big challenge is that traditional milk processors are losing sales to retailers like Walmart Inc. that now manufacture their their own milk -- often selling gallons at a loss to lure customers into their stores. Walmart was one of Dean’s major customers until the retail giant opened its own dairy plant, taking away about 100 million gallons of milk annually from Dean, according to court papers.

One bright spot is that value-added milk products, like cheese, yogurt and sour cream, are growing. After it completes its reorganization under bankruptcy, Borden plans to invest in products like chocolate milk and dairy-based dips to capture some of that growth, Sarsam said.

“Fluid milk is being assaulted on every side,” said Matthew Gould, an analyst at Dairy & Food Market Analyst Inc. “But pizza sales keep increasing, new mozzarella plants are being built, and butter brands like Kerrygold continue to rise.”

Other milk companies are venturing into the dairy-free space. Elmhurst 1925, which operated dairy facilities in the New York City region, closed its doors in 2016 and emerged a year later as a plant-based beverage producer without any cow products.

For other dairy companies, though, giving into the alternative milk market isn’t an option.

“Borden has a 163-year history that has stood for the goodness of dairy for all that time,” Sarsam said. “We’re going to stay squarely focused on that.”

To contact the reporters on this story: Olivia Rockeman in New York at orockeman1@bloomberg.net;Lydia Mulvany in Chicago at lmulvany2@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Nicole Bullock

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