crossroads
May 29, 2020

Dean Foods Bankruptcy Leaves Farmers Without Payment

 |  By: Anna-Lisa Laca

Despite COVID-19, this spring started out rather normal for Michigan dairy farmer Gary Rassmusen. While a pandemic across the country kept people from work, Rassmusen kept on with business as usual -- with the addition of a few sidekicks with extra time on their hands. He received inputs and as soon as fields were fit, he started planting. Just weeks later he learned he was trapped in the nasty web of the Dean Foods bankruptcy. 

Rassmusen is one of dozens of farmers who ship their milk directly to Dean Foods and have not been paid for their April milk. To top it off, it’s unclear when they will get paid and how much. 

“We’ve gotten a piece of paper saying what we should be owed but nothing has hit our bank accounts,” he says. “My field rep said someone should pay me between now and July, hopefully.”

On May 1, Dean Foods sold the majority of its assets to Dairy Farmers of America (DFA) and Prairie Farms Dairy. Additionally, assets were sold individually to other dairy companies. The sale of assets to DFA and others did not satisfy the Debtor-in-Possession (DIP) loan that kept Dean Foods operating through its bankruptcy proceeding until the time of sale.

Once the sale was complete, the funding provided to Dean Foods to continue operating during the bankruptcy proceeding dried up, a normal component of bankruptcy. While the syndicated lenders did work with Dean to provide for an orderly wind down of the estate, that money has not been enough for the remaining expenses the company had to pay from April, including farmers. 

“Following consummation of the sale transactions, Dean Foods was left with extremely limited liquidity and no operating revenues, restricting its ability to make payments in the ordinary course,” wrote Gary Rahlfs, chief financial officer at Dean Foods, in an undated letter to farmers who didn’t receive payment. “Generally speaking, most ongoing estate expense obligations, including the payable due to your company, remain junior to and can only be paid after the Dean Foods’ estates’ satisfaction of its obligations under the DIP facility.”

It’s not only dairy producers who have received the short end of the stick. As we reported earlier this month, Dean Foods failed to make their Producer Settlement Fund payments to several regions of the Federal Milk Marketing Order. Additionally, suppliers, logistics companies and even DFA are stuck in the lurch.

“We were surprised to learn the Dean Foods bankruptcy estate does not currently have sufficient funds to cover their April accounts payable. This means over $80 million owed to DFA for milk shipped, as well as money owed to other cooperatives and dairy producers who ship directly to Deans, will not be paid in the near-term,” says Monica Massey executive vice president and chief of staff at DFA, adding the lack of payment won’t impact DFA member checks. “The payment delays relate to milk supplied to Dean facilities in April, which was prior to DFA and others acquiring Dean’s facilities.”

Payments Coming, Maybe

Next week, Dean Foods, who declined an interview for this story, intends to file a chapter 11 plan that will govern the distribution of sale proceeds and the rights and treatment of all claims against Dean Foods, Rahlfs said in the letter. 

“Dean Foods anticipates that the plan will provide for the full payment of all administrative expense claims in the coming months (following the repayment of its senior secured superpriority post-petition financing facility),” he noted. “Given Dean Foods’ lack of operating revenues, the timing of payment of such expenses are dependent on the timing of further inflows of liquidity from the collection of outstanding receivables, the monetization of Dean Foods’ remaining assets, and the receipt of certain tax refunds due to Dean Foods, all of which are expected to occur over the coming months.”

At this point, impacted farmers have received their advance payments on May milk production from the new owners of the plants they ship to. Still, an extended postponement of a full month of revenue would be hard to overcome at any time, but particularly in the current environment with May milk prices dipping well below $13 per cwt.

“It’s a heck of a time to be going through this with Corona but also planting season,” Rassmusen says. “I’ve been on the phone lot with my vendors explaining the situation.”

An economic injury disaster loan through the Small Business Administration is keeping Rassmusen afloat. 

“Given the current state of milk prices and the challenging times we’re living in right now, this an unfortunate situation for all,” Massey says. 

While business analysts say bankruptcies are messy and a lapse in funds is normal for this kind of situation, all parties involved should have warned producers there would be a delay in payment for April revenue. At least that way they could have planned for it.