ESG’s Got a Lot to Do with the Price of Milk

The traditional U.S. dairy industry continues to face dim prospects, amid dwindling demand for fresh whole milk as consumers increasingly opt for plant-based alternatives.

Changing dietary patterns have effectively led to the demise of iconic dairy firms Borden and Dean Foods, which each recently filed for bankruptcy, while U.S. farmers struggle to resuscitate what seems to be the last breaths of a dying business.

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The Dairy Farmers of America (DFA), for example, said Monday that it agreed to acquire “a substantial portion” of Dean’s assets and business in a stalking horse bid of US$425m. If successful, the purchase would grant DFA 44 of Dean Foods’ facilities, as well as its Mexican subsidiaries and interests in Organic Valley.

DFA CEO Rick Smith said that given Dean is “the largest dairy processor in the country and a significant customer of DFA, it is important to ensure continued secure markets for our members’ milk and minimal disruption to the U.S. dairy industry.”

He added that as a “family farmer-owned and governed cooperative, no one has a greater interest in preserving and expanding milk markets than DFA. We are pleased that we have come to an agreement on a deal that we believe is fair for both parties.”

The transaction remains subject to various approvals, including from the bankruptcy court overseeing Dean’s Chapter 11 reorganization and the U.S. Department of Justice. 
 
If approved by the bankruptcy court at a hearing scheduled for March 12, 2020, DFA will serve as a “stalking horse bidder” in a court-supervised sales process.

Dean Foods in mid-November said it had intended to use the Chapter 11 reorganization process to “protect and support its ongoing business operations and address debt and unfunded pension obligations while it works toward an orderly and efficient sale” of the company.

The firm also noted that it had secured US$850m worth of debtor-in-possession (DIP) financing to support its operations and had been engaged in advanced discussions with DFA about a potential sale of substantially all its assets.

Eric Beringause, who joined Dean Foods as CEO in July 2019, also blamed the “challenging operating environment marked by continuing declines in consumer milk consumption” as the culprit thwarting the company’s “best efforts” to make its business “more agile and cost-efficient.”

Dallas-based Dean Foods, whose portfolio of brands includes Berkeley Farms, Country Fresh, Friendly’s, Garelick Farms, and Land O Lakes, boasts an estimated 15k employees across the country.

Around mid-December 2019, credit default swaps (CDS) on Dean Foods had been settled in a credit event auction at a final price of just US$0.09 – about half of what the company’s bonds indicated at the time the auction was called, according to Creditflux.

The Dying Dairy Industry

Meanwhile, dairy farms across the U.S. appear to be facing a significant dilemma, amid lower demand for conventional milk, lower intake for producers, and rising costs for consumers – which the latest figures from the U.S. Bureau of Labor Statistics show climbed 6% year-on-year.

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In fact, Borden CEO Tony Sarsam said that despite the company’s recent “numerous achievements”, it continues to be impacted by “the rising cost of raw milk and market challenges facing the dairy industry.” He added that these challenges had contributed to making its “current level of debt unsustainable.”

Borden said it plans to continue its business operations as usual, under the court’s supervision, while it pursues a financial restructuring to reduce its current debt burden.

The 163-year-old company, which employs around 3,300 people, operates 13 milk processing plants, as well as nearly 100 branches across the U.S. that produce and distribute close to 500m gallons of milk annually for its customers.

Against this backdrop, the U.S. plant-based retail market has been reaping the benefits of changing consumer behaviors – from fresh whole milk to alternative milks such as those sourced from almond, coconut, oat, hemp and soy.

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Market Impacts

The financial markets seem to be a mirror of the changes in the dairy industry, as the sector increasingly focuses on plant-based products and more environmental, social and governance (ESG)-related attitudes among consumers and corporations alike.

For example, prices on March CME contracts of Class III and IV milk futures have plunged around 7.1% and 5.4% since their latest 52-week peaks of US$18.21 and US$17.765, respectively, according to the IBKR Trader Workstation. The Non-Fat Dry Milk futures March contract has also fallen around 8.2% since late January 2020.

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Further evidence may be gleaned from the performance of certain exchange-traded funds (ETFs), including Defiance’s DIET (NYSE: DIET)— a Next Gen Food & Agriculture ETF, which was launched in mid-November 2019 – around the same time as Dean Foods’ Chapter 11 filing.

Defiance describes the fund as one that offers exposure to companies centered on “the whole range of technological, ethical, environmental and social challenges of ensuring food security.”

DIET, which includes among its top holdings former DowDuPont agrichemical company Corteva (NYSE: CTVA), Swiss flavor manufacturer Givaudan (OTCMKTS: GVDNY) and Canadian fertilizer firm Nutrien (NYSE: NTR), has seen its shares grow nearly 4.6% since its inception, according to the IBKR Trader Workstation.

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In the meantime, investors tuned-into the increasing popularity of how ESG is triggering changes in the dairy industry, as well as in other areas of food, beverage and consumer behavior, will likely be keeping a close eye on the survivability of other companies slow to adjust to new business models.

Some upcoming events in the ESG industry include:

Wed, February 26

ESG-IG Forum (New York, NY)

Wed, March 3

The Merits of Environmental, Social, and Governance (“ESG”) Investing (New York, NY)

Thu, March 4 – Friday, March 5

Private Equity International’s Responsible Investment Forum (New York, NY)