Volatility road sign.
January 9, 2020

What Can Be Learned From Fluid Milk Bankruptcies?

 |  By: Dairy Talk

Taking any lessons from the bankruptcies of Dean Foods or Borden might be a stretch—even for the largest of dairy farms.

After all, these fluid milk companies count their revenues in billions of dollars. Dairy farms revenues range from hundreds of thousands to several millions. So the scale in which these businesses operate are of orders of magnitude of 3 or 4, at least.

The one commonality, however, is that both types of businesses operate in a commodity-driven market environment where a one percent change in supply or demand can result in a 10% change in price. This volatility can be brutal on both ends of the supply chain.

Farmers would argue, and to a point they are right, that fluid milk sellers have a bit more control on their selling price—at least short-term. But even they aren’t immune from market prices or competitive pressure from alternative beverages and mis-labeled vegan “milks.”

Dean and Borden are also virtual opposites when it comes to how they go to market. Dean is the ultimate commodity fluid milk broker—supplying pretty much a generic product at the lowest cost possible. At dairy meetings I’ve attended over the past four decades, Dean executives reminded me of Norwegian bachelor farmers who inherited the farm in their 50s and intended to farm the way they always did until the day they died.

Dean always pleaded poverty, arguing there was never enough margin in the fluid milk business to finance innovation. Only in the last few years did the company even offer a national brand. But simply branding a product with a pretty label without any type of imaginative product differentiation was an effort in almost predictable futility. 

Borden, on the other hand, was a player in branding, innovation and diversification. But those efforts came largely outside of the fluid milk category. It went on an acquisition binge in the late 1980s, and its food division focused on foods like pasta and pasta sauces. That acquisition strategy didn’t go well, and the company was sold to the vulturous investment firm Kohlberg Krvais Robers (KKR) in 1995. KKR’s specialty is the sale and break-up of companies, and it did just that to Borden over the next decade. Even Borden’s “Elsie the Cow” logo was licensed away to other dairy companies.

Even so, some analysts believe Borden can still be saved—perhaps with a bit (or a lot) of debt restructuring. And perhaps, maybe, they are right.

So what’s the take-home lesson to be drawn from these bankruptcies? It’s really is no different than it has always been.

Producing milk is a commodity business, and those who produce milk at the lowest cost are most likely to survive. That takes constant learning, keeping up on the latest research and applying that knowledge to your farm. It means cow comfort, so that cows can exhibit the incredible genetic potential they carry in their DNA.

 It also inevitably means growth, spreading fixed costs over more cows and more hundredweights of milk produced. It sometimes means radical change—such as consideration of robotics or crossbreeding. The hardest lesson of all is to never stand still.