Courthouse
January 9, 2020

Is the Borden Bankruptcy a Sign of the Death of Fluid Milk?

 |  By: Anna-Lisa Laca

The news of Borden, one of the largest fluid milk processors in the country, filing for Chapter 11 bankruptcy earlier this week left many wondering if this a trend that will continue. After all, it was just 60 days prior that Dean Foods filed bankruptcy. While demand for fluid milk in the U.S. continues to decline, there seems to be more here than what meets the eye. 

“Clearly the fluid milk industry is a low margin business,” says Mark Stephenson an economist at University of Wisconsin Madison. “There’s not a lot of room for error in that industry and this is a time when we’ve got decreasing sales, so that becomes a bit of a problem for investors and those that are trying to make a liquid business.”

Fluid milk consumption has dropped significantly over the past two decades. Still, Andrew Novakovic, an economist at Cornell University, says there’s more at play here. If the problems facing Borden and Dean Foods were solely demand driven, then the other 25 or so fluid milk processors in the country would also be filing bankruptcy.  They’re not, as Novakovic explains. 

“It’s undeniable that when you got a sector that's under the kind of stress that beverage milk has been, that can make it tougher for companies that are in that business,” he says. “While I'm happy to stipulate that, I think what this has done is revealed the weak spots in certain companies that a more generous market would have allowed them to overcome.”

At the end of the day, a company’s profitability is determined by their return on investment. Just like dairy farms, return on investment is specific to an individual business.  

“So, there are some companies that are more profitable than others, and the differences are not small, the differences are pretty substantial,” Novakovic explains.

In the milk processing business there are generally three kinds of companies: cooperatively owned, family owned, and investor owned. Investor owned businesses can be publicly traded like -  Dean Foods -  or privately held - like Borden. The goal in either scenario is the same: produce a high return on investment for the investors.  

“Prairie Farms and the Hood Company, two of the largest fluid milk processors in the country are either cooperatively or family owned,” he says.  Kroger, Walmart and other vertically integrated processors also have a somewhat different performance expectation for their fluid milk business.  “I think this story is as much about business structures, more so than it is if people want to put oat milk in their latte.”

He says Dean Foods and Borden, as more invester driven companies, are run by people who are more exclusively focused on the bottom line profitability and with a higher expectation of what is acceptable, with only the goal of creating a return on investment. Ironically, the leadership at both companies came from the original Borden company. 

Deciding to File Bankruptcy

While there are startling similarities between Dean Foods and Borden, analysts agree their intentions in filing bankruptcy appear to be different. When Dean Foods announced bankruptcy in November, the announcement came with information that they were in talks to sell their assets. Additionally, the CEO of the company was nearly radio silent. That can’t be said about Borden. On the day of filing, Borden CEO Tony Sarsam was very vocal about the decision, saying Borden plans to survive the court proceedings. 

“Borden is EBITDA-positive and growing, but we must achieve a more viable capital structure,” Sarsam said in a statement, referring to the widely followed profit measure of earnings before interest, taxes, depreciation and amortization. “This reorganization will strengthen our position for future prosperity.”

That and their filing in Delaware, the state with the highest rate of success for debt restructuring in the country, shows Borden investors don’t plan to stop bottling milk any time soon. So why file bankruptcy? Novakovic says maybe the return on assets for the company wasn’t as high as investors wanted to see it. 

“The standard by which you judge performance, depends on what you see as your options,” he says. “Most of investors expect to get an 8% return on investment. How much of the bankruptcy decision is because they’re failing and how much of this is because they’re not doing as well as they want?”

According to Novakovic, Sarsam’s comments on the day of the filing indicates they think they’re doing well in their operations and they want to restructure capital to do even better bottom line. 

“They’re saying we want to change our liabilities of our assets and get a higher rate of return,” he says. “That’s a whole different proposition, than ‘oh gosh oat milk is killing us.’”

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