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Dean Foods Cuts Ties with 100 Suppliers

by Sherry Bunting

Published: Friday, March 9, 2018

Against the backdrop of expanding raw milk production, and companies asserting and expanding their presence in a market where consumers are drinking less milk—namely the Fort Wayne Walmart plant where bottling begins this month—over 100 dairy farms in eight states, including 27 in Indiana, received 90-day termination notices from Dean Dairy Direct last Friday and Saturday, stating their agreements will be ended May 31.

Most of the affected farms in Indiana shipped milk to the Dean plant in Louisville, Kentucky, which also terminated 22 Ky. dairy producers. Another smaller Dean plant in the state is also affected.

Dean Foods confirms that the over 100 affected dairy farms are in the states of Indiana, Ohio, Pennsylvania, New York, Kentucky, Tennessee, North Carolina and South Carolina.

While the company will not provide a list of affected plants or a state-by-state breakdown in the number of farms or volume of milk affected, they have indicated that the state that may be hardest hit is Indiana, where the farms that are being terminated range from under 100 cows to over 1,000, but a majority are milking 300 to 1,000.

"This was an incredibly difficult decision. We tried very hard to avoid it and regret this decision had to be made," said Reace Smith, director of corporate communications for Dean Foods based in Dallas, Texas. In a phone interview Monday, she indicated that Dean Dairy Direct field representatives are serving as resources to these producers and can provide a list of contacts for potential milk buyers. They are also offering counseling.

"We are working with producers and contacting cooperatives and potential markets to try to work together to get through this thing," said Doug Leman in a phone call where he learned of the termination letters during a week of mission work in Haiti. Leman serves as executive director of the Indiana Dairy Producers.

He has been in contact with affected producers, the Indiana Department of Agriculture, and the plants and cooperatives that provide markets for milk in the region.

"I've had calls not just from the affected producers, but from many other Indiana dairy producers sharing their concern and asking if there is anything they can do," said Leman. "I'm encouraged by that, and I am encouraging our producers to keep their chins up through this difficult time in their lives, families and businesses in the hopes that we can work through this together."

Similar stories are playing out across four Federal Milk Marketing Orders where producers have been affected.

According to Jayne Sebright, executive director of the Center for Dairy Excellence in Pa., 42 farms shipping to three Dean plants in the eastern and western parts of the state have received notices. This includes over 20 producers in the eastern part of the state, including Lancaster County, as well as 20 in the western part of the state where the Dean plant in Sharpsville, Pennsylvania also ended agreements with shippers from Ohio, although the number of Ohio producers affected is unknown at this time.

In Tennessee, the estimated losses involve nine farms milking 60 to 300 cows, according to Julie Walker of Agri-Voice near Knoxville.

In Kentucky, the 22 affected farms from the Louisville plant include herds of 50 or fewer cows to as many as 250 cows, according to Maury Cox, executive director of the Kentucky Dairy Development Council.

Leman said he does not want to blame Walmart because, wherever the first Walmart plant would have been located, this was coming. Indeed, Walmart has entered a trend among retailers to move toward bottling their own private label store brands rather than contracting with Dean Foods and others to do it as part of a product mix that includes both brand names and store brands distributed.

While fluid milk consumption has been on the decline for 15 years—although stabilizing with more consumption of whole milk last year—retailers notice that nearly every shopping basket going through their stores includes milk. They seek their own store brand loyalty as loyalty to their store and some of the retail price wars happening in states without loss-leader protection are evidence of this.

"Walmart was going to come to Ohio, Michigan or Indiana, and I still believe it is better to have the plant in Indiana because it offers opportunities," said Leman.

In short, the region would likely have been affected by Walmart's decision to vertically integrate its Great Value and Member's Mark milk brand in the region, no matter which state the plant had been located.

In fact, sources indicate potential sites to the south are being eyed for a second Walmart plant in the future.

The Dean Dairy Direct letters of termination to dairy producers in the region were dated Feb. 26, 2018, which was the same day as Dean's 2017 earnings call where the company projected its strategy to "right size" its milk volume and consolidate the supply chain to achieve a "flatter, leaner and more agile" company into 2019.

But according to Smith, there are no official announcements of any plant closures at this time and that none of the plants involved have released all of their shippers.

"We still have a commitment to local milk," said Smith about the volume adjustments. "There are many factors that impacted this decision. We are seeing surplus raw milk when the public is consuming less fluid milk, and we see companies asserting and expanding their presence in a market where consumers are drinking three gallons less per years, per capita, since 2010, while the U.S. dairy industry is producing 350 more gallons of milk a day than the year before."

In addition to the overall imbalance, Smith said that, "The introduction of new plants when there is an industrywide surplus forced us into the position of further adjusting our milk supply according to demand."

As vertical integration of milk at the retail level leads to consolidation by the nation's largest milk bottler, Dean Foods, the company has diversified into soft dairy product brands that are just starting out of the gate and were discussed in the Dean earnings call.

Specifically, a letter received by Indiana and Kentucky dairy producers shipping to the Louisville plant stated "two indisputable dynamics led to this difficult decision. First and foremost, a retailer's new Class I fluid processing plant is coming online in the region, significantly decreasing our production as milk volume is moved away from our facility to this new plant.

"The second reason is bigger than all of us. The steady increase of raw milk production combined with the decrease of Class I fluid dairy consumption" the letter stated.

Letters received to the south and east did not specifically reference the new Class I fluid processing plant built by a retailer (Walmart) as had the letter to Kentucky and Indiana producers serving the Louisville plant and western Pennsylvania and Ohio producers serving the Sharpsville plant. Those letters indicated the plants had "lost a portion of customer fluid milk volume to a competitor through a customer-bid process."

The letter said further that Dean was "unable to lock-in enough new customer volume to offset this loss."

"This affects all size herds and is not a large or small farm thing," said Reace Smith. While she was unable to supply the specific list of plants or a state breakdown of farm numbers or milk volumes, sources in the various states confirm lost contracts among farms ranging in size from less than 100 cows to over 1,000 cows.

One thing is also clear in speaking with producers, veterinarians, organizations and others in the industry, the farms that are facing this difficulty are largely well managed farms producing high quality milk. In these states affected, whole transportation routes were terminated, presenting both challenges and opportunities for a collective effort in dealing with these market losses.

Walmart will not reveal the farms they have secured to supply the plant, but it is widely known that some of the milk will come from the north and that a processor was identified to balance their fluid needs that may or may not have involvement by cooperatives.

As in Indiana and other states, Cox said of Kentucky: "We, are contacting other potential markets for our producers and would like to meet with Dean Foods to see what more we can do for these producers and to have a better understanding about the future of the Louisville plant" (where both the affected Kentucky and Indiana producers shipped their milk.)

Dairy organizations, state departments of agriculture and other leaders indicate they want to let the dust settle and look at potential options for their respective state's producers. They are reaching out to producers and urging producers to reach out to them, and to each other.

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