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DFA’s Bogus “Assets” Equal 86% of Members’ Equity by Pete Hardin * $151,201,000 “Goodwill.” Here’s a bogus “asset” if there ever was one: DFA’s claim of $151.2 million of “Goodwill.” In accounting parlance, “Good- Dairy Farmers of America pledges virtually every asset it controls – will” is the amount overpaid for an acquisition. In other words, DFA is carry- including funds outstanding for members’ milk payments as collateral for the ing $151.2 million of accumulated overpayments. Here’s an example that dairy co-op’s indebtedness. DFA’s 2010 financial audit boasts of $665.107 million in farmers (or, better, their wives) can understand. If a farmer pays $2,000 for a “assets.” But close inspection of some DFA “assets” raises serious questions Holstein milk worth only $1,000, then the farmer technically has a $1,000 cow about the co-op’s financial integrity. In view of crooked antics at DFA, mem- and $1,000 of “Goodwill.” The cow may die, but the farmer still maintains bers’ best interests are served by asking tough questions. Let’s look at some of $1,000 of “Goodwill” for that deceased critter on the books. what DFA calls “assets”: In 2010, DFA’ boosted its “Goodwill” by $32.64 million, according to the * $150,000,000 “Preferred equity securities.” In 2003, DFA offered as audit, due to the acquisition of Castro Cheese Company, Inc. – a marketer of collateral for borrowings some $150 million of “members equity.” Equity is Mexican-style cheeses. The total purchase price of Castro Cheese was $59.7 theoretically the owners’ (i.e., dairy farmer members) share of the business. million (“Acquisitions” – page 19 of DFA’s 2010 audit). Of that $59.7 million, That fall 2003 borrowing against member equities required a special, hastily- DFA reported “Goodwill of $32.6 million (“$19.1 million deductible for tax pur- called meeting for approval by the co-op’s entire delegate body. poses) and another $23.0 million to intangible assets. In other words, numb- The $150 million of “preferred equity securities” are members’ equity, against skulls at DFA accumulated $55.6 million of “Goodwill” and “Intangible which DFA has borrowed. The entire amount comes due for payment by DFA Assets” on the $59.7 million purchase of Castro Cheese on October 29, 2010. in 2018. Why does DFA list that $150 million as an “asset,” when those funds are in fact members’ equity that against which will come due for payment to DFA’s “Assets” and Equity: more holes than a piece of Swiss cheese lenders some time in 2018??? Add up just three of DFA’s above-cited “assets” … without regard to any * $272,641,000 “Intangible Assets.” The $272,641,000 listed by DFA’s other questionable items on DFA’s financial audit (such as the $134 million in 2010 audit as “Intangible Assets” is a fiction. That figure breaks down into deferred employee pension obligations), and what do you have? three components: DFA “Asset” Listed Value on 2010 audit – Future milk supply agreements: $142.585 million. (Editor’s note: The 1977 Consent Decree with the U.S. Department of Justice prohibits DFA from Preferred Equity Securities ..................................$150,000,000 engaging in raw milk supply agreements with fluid milk processors of more Intangible Assets ......................................................272,641,000 than one year in duration. So DFA created 20+ “one-year, renewable milk sup- ply contracts” … and then creates a value of $142+ million! Funny thing: two Goodwill ....................................................................151,201,000 of DFA’s major raw milk buyers (Dean Foods and Grupo LALA) are searching Total..........................................................................$573,845,000 out their own raw milk supplies. – Customer relationships. $21,501,000. (Editor’s note: These days in the Those bogus, specious “assets” total $573,845,000. That figure repre- dairy business, “customer relationships” are about as good as the last check that sents 86.2% of DFA members’ total equity! With funds for outstanding didn’t bounce.) payments for members’ raw milk sales already pledged as collateral for – Capitalized software. $21,641,000. Most computer software loses its DFA’s borrowings, and massive potential legal liabilities, DFA appears to value a lot quicker than the 10 years over which DFA is amortizing this “asset.” be in darn poor financial shape to weather the coming financial storms, both within and outside the dairy industry. “Assets” – $272 million of “Intangible Assets” attributed to possibly ille- (Note: DFA members in New York State have not received a copy of the co- gal raw milk supply arrangements alleged, customer relationships, and comput- op’s 2010 financial audit, despite NYS Ag & Markets law specifying that dairy co- er software? ops must provide members with financial audits prior to the annual meeting.) “Intangibles” and “Goodwill” Grew Faster than the DFA’s Net Income by Pete Hardin Cheese purchase was for $59.7 million in cash, but boosted DFA’s “intangi- ble assets” by $23 million and hiked “Goodwill” by $32.6 million. ($19.1 Talk about “peddling backwards” … million of Goodwill in the Castro Cheese purchase was reported as According to DFA’s 2010 financial statement, the co-op recorded $43.725 “deductible for tax purposes.”) million worth of “net income attributable to Dairy Farmers of America.” That figure is less than .005% of what DFA reported as “net sales.” Hard to believe: For a purchase of $59.7 million, DFA’s 2010 finan- cial audit wrote off an accumulated $55.6 million in bogus assets such as Meanwhile, growth of bogus “assets” listed on DFA’s financial audit grew “Intangibles” and “Goodwill.” (Editor’s note: Beware of Mexicans bearing in 2010 (vs. 2009) by $68.64 million. In the analysis of The Milkweed, those cheese companies.) bogus assets include: “Intangible Assets” – +$36 million in 2010 Thus, in 2010, DFA’s bogus “assets” grew by $68.64 million – about 55% “Goodwill” – +$32.64 million in 2010 more than the claimed “net income attributable to Dairy Farmers of America.” One must wonder: without novel creation of such bogus assets, would DFA’s As detailed in the accompanying major story, the biggest portion of internal operations have taken a red ink bath in 2010? growth in both these categories was attributed to the October 2010 acquisi- tion of Castro Cheese, a distributor of Mexican-style cheeses. The Castro DFA’s Basic Numbers from 2010 Financial Audit For 2010, Dairy Farmers of America reported $9.829 billion in net sales. DFA Acquires Kemps/Marigold That figure compared to 2009’s price-depressed dollar volume of $8.077 billion. Operating income for 2010 at DFA was $53.249 million – down nearly $7 by Pete Hardin million from 2009’s total of $60.073 million. Oops. The Milkweed failed to note last month that DFA is back in the fluid Net income from DFA’s internal operations totaled $43.725 million in milk processing business – a sector in which the co-op (and its predecessor) has 2010. That figure dropped nearly $22 million from 2009’s figure of $65.564. had its clock cleaned repeatedly. DFA and affiliates (such as Dairy Marketing Services) sold some 63 bil- DFA gained the Kemps/Marigold business from HP Hood in April. lion pounds of milk in 2010 – almost exactly one-third of the nation’s milk sup- Kemps/Marigold operates plants in the Upper Midwest, producing fluid milk ply. The number of DFA member farms dropped to 9,168 as of December 2010. and other dairy products such as yogurt, ice cream, and cottage cheese. That total is a decline of 9,572 from the end of 2009. Kemps/Marigold produces particularly excellent ice cream and cottage cheese. Details of the acquisition were not reported. DFA’s 12/31/10 financial DFA’s 2010 Financial Audit Available audit notes that the co-op owned 22% of HP Hood LLP. That ownership stake in HP Hood goes back several years and relates to lendings to Hood from DFA. Persons interested in acquiring DFA’s 2010 financial audit may obtain a Why HP Hood needed DFA as a source of borrowed funds is not known, except copy from The Milkweed. This document, as analyzed in the accompanying arti- that DFA must have offered very cheap interest rates. cles, paints a chilling picture of DFA’s financial condition. The nation’s largest DFA (and its predecessor co-op, Mid-America Dairymen) enjoy a sorry dairy farmers’ cooperative is overtly burdened with bogus assets and debts. history in fluid milk operations. DFA mercifully dumped its money-losing fluid A copy of DFA’s latest audit is an important document for all firms doing milk processing business – National Dairy Holdings (NDH) – onto Grupo business with the co-op, as well as a valuable resource for firms currently in LALA in May 2009. In 2007, NDH lost $134 million. That year, NDH default- litigation with DFA. Persons/firms interested in obtaining a copy of DFA’s ed on notes and DFA took over a majority ownership stake, which forced report- 2010 audit may do so by sending a check to The Milkweed at the following ing of NDH’s financial fiasco on DFA’s 2007 audit. address: Going way back, in 1989, a Mid-Am fluid milk subsidiary – Country P. O. Box 10, Brooklyn, WI 53521-0010 Foods – lost $12 million. The next year, Mid-Am turned over management of its fluid milk companies to Prairie Farms, which has managed the firms prof- Here’s a list of the rates: itably ever since. Normal persons & firms: $25 each. A spokesperson for HP Hood stated that no value of the transaction of Lawyers & law firms: $75 each.

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