Is sale to DFA best solution in Dean Foods financial woes?

While Dean Foods signaled that it was "engaged in advanced discussions" with the country's largest dairy co-op, other industry watchers are advising against a quick sale.

Last week the country's largest milk processor filed for bankruptcy, claiming a steady decline in fluid milk consumption and the public's penchant for alternative products are to blame.

The Dallas-based milk processing giant announced that it was looking to sell its assets to Dairy Farmers of America, a cooperative that represents over 13,000 dairy farmers, many of which produce milk for Dean Foods.

The downturn has had an outsize effect on Dean Foods, which derived 67% of its sales from fluid milk last year, according to its annual report. The company has lost money in eight of its last 10 quarters and posted declining sales in seven of the last eight.

Dairy farmers that produce milk for Dean Foods are understandably concerned over the latest development. Last summer, Walmart canceled its contract with Dean Foods when it opened its own milk processing facility in Ft. Wayne, Indiana — bottling 100 million gallons of milk annually for 600 Walmart stores.

More than 100 dairy producers, stretching from Indiana to Pennsylvania, who had been shipping to Dean Foods lost their contracts earlier as a result.

Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, said since the news of Dean Foods' legal woes hit the news, his phone has been ringing off the hook.

"Dean Foods is big in the market, representing at least a third of fluid milk sales (in the U.S.) and 10% of total milk sales, so this is big news in the dairy industry," Stephenson said. 

Many of the calls Stephenson has been fielding are from milk producers, anxious to know what the bankruptcy or acquisition by DFA could mean for them. 

While he doesn't believe farmers should be alarmed over not being paid for their milk due to agricultural security bonding in states like Wisconsin, New York and Pennsylvania in the event processing plants fail, there will be some impact.

"Fluid milk sales have been difficult and hard but Dean's bankruptcy doesn't mean (fluid sales) are going to be worse off," he said. "I think the worse case scenario for farmers is there may be increased hauling costs in the event that some of those older, inefficient or out of the way plants are closed."

Bob Cropp. Professor Emeritus and Dairy Marketing Specialist at University of Wisconsin-Madison said selling Dean Foods to DFA may raise some anti-trust issues.

"I can see why DFA is interested in buying Dean's, as they supply quite a lot of milk. The Department of Justice may see some anti-trust issues so (a sale) is not a certainty," Cropp said.

Peter C. Carstensen, a professor emeritus at the University of Wisconsin Law School told The New Food Economy that a sale between Dean Foods and DFA could raise a conflict of interest that could result from "trying to lower prices paid to farmers in order to boost their revenues as a milk processor."

He warned that a "DFA buyout of Dean Foods could give it monopoly-like power over the milk market."

"What you're going to see is increased risk of tacit collusion on the consumer side, raising the price of milk for consumers," he told The New Food Economy.

Darin Von Ruden, president of the Wisconsin Farmers Union, said he is concerned about Dean Foods selling itself to Dairy Farmers of America.

"That's two of the five biggest companies in the country, and when you start looking at that kind of consolidation, is that good for producers? The answer is probably no," said Von Ruden, who is selling his dairy operation to his son.

A group of Dean Foods bondholders also vocalized its concerns over the potential sale of the giant milk processor to DFA, intimating that the sale may not survive antitrust challenges and the beleaguered company should be casting the net further for other potential options including other buyers, restructuring or alternative financing, according to Bloomberg.

Dean Foods' financial troubles hasn't been a secret and it's bankruptcy filing came as no surprise to those in the agriculture industry. Anna Lisa Laca, editor of Farm Journal's MILK said talk had been circulating this summer that Saputo, one of the top cheese producers in the USA, may emerge as a potential buyer.

"We thought they may be interested in some of Dean Foods' assets, but I haven't seen any reporting that indicate that's going to move forward," she said during a recent broadcast. "But that could be an option." 

In a statement to the Kansas City Business Journal, a DFA official said the cooperative's primary concern is to ensure secure markets for its members' milk.

The Associated Press contributed to this report.