The Milkweed “Float like a butterfly, Dairy’s best information and insights sting like a bee.” Issue No. 475 • February 2019 This issue mailed on February 13 — Muhammad Ali Lost Export Markets Boost U.S. Cheese Inventories & Erode Prices by Jan Shepel focus on American-style cheeses, which include Cheese inventories in warehouses across the Cheddar – dairy’s price-setting benchmark variety. United States were being lowered in the early part of American cheese inventories started last year 2018, but after retaliatory tariffs were imposed by below 2017 levels – a perceived good indicator for trading partners late in 2018’s second quarter, those rising milk prices in the country. American cheese inventories jumped to levels significantly above year- inventories climbed less dramatically than in the pre- earlier levels. vious year, up to a July peak. American cheese in- The critical data for cheese inventories must ventories then dipped in August, before rising significantly above 2017 levels through November, Table 1 which is the last month for which data was available. Inventory numbers for 2014, 2015 and 2016 Cheese Inventories Versus were well below both 2017 and 2018 for the entire Exports After Tariffs year. In terms of total U.S. cheese production, 2018 data shows the numbers to be higher throughout the 2017 2018 year than all of those preceding years. But that’s not (Mill. lbs) (Mill. lbs) necessarily a a problem – due to solid, demand-driven output gains posted by Mozzarella and pizza cheese Jan. 752 740 during 2018. Comparing total January production in Roundup® herbicide’s active ingredient is Feb. 745 761 each of the recent years, 2014 began with 970 million Glyphosate. Glyphosate-based herbicides are pounds produced; 2015 began with over 990 million the world’s most heavily applied agricultural Mar. 805 768 pounds produced. In January 2017 there were 1,062 chemical. Later in 2019, China will impose million pounds produced and in January 2018 the Glyphosate residue limits on imported foods Apr. 835 780 total was nearly 1,100 million pounds of total U.S. and agricultural commodities – including dairy. cheese production. May 838 803 In this issue, we publish two lengthy arti- Each year the trend lines followed each other cles exploring Glyphosate issues. The first story June 810 800 pretty closely until Oct. 2018. That’s when cheese production hit a high of 1,130 million pounds pro- (pages 7-8) explores Glyphosate toxicity for dairy July 810 821 duced, according to the USDA, National Agricultural cows and livestock. The second story (pages 9- Statistical Service (NASS) and the AMS. 10) details a Utah business’ products that reme- Aug. 800 788 According to those same USDA sources, total diate Glyphosate residues from soils. These stories are not quick reads. Understanding the Sept. 780 802 stocks of natural cheese in all U.S. warehouses stood at 1,267,950,000 pounds on October 31, 2017 and downsides of Glyphosate for soils, livestock, Oct. 740 810 had risen to 1,372,517,000 by October 31, 2018. water quality and human health are critical. According to the U.S. Dairy Export Council, Nov. 732 802 the aggregate volume of dairy exports was 2,006,533 of dairy products to Mexico and China than it imports Dec. 747 NA metric tons in 2017 and 2,034,820 metric tons in from those countries. Mexico is the larger importer 2018. A report prepared for USDEC noted that the due to the North American Free Trade Agreement and (Source: USDA – NASS – AMS) United State exports well over ten times the number its geography – closer to U.S. markets. That report by Informa Consulting noted that in 2017 total U.S. dairy exports to the world were worth $5.4 billion. Of that $5.4 billion, China and Mexico Dean Foods on Financial Tightrope: combined to account for $1.9 billion – 35% of U.S. dairy product exports. March 1, 2019 Deadline Looms Mexico is the world’s fifth largest importer of by Pete Hardin The 8-K filing further noted: dairy products in terms of quantity and eighth largest The clock is ticking at Dean Foods – the na- “The Company is actively engaged in negoti- Continued on page 15 tion’s largest fluid milk processor. Dean Foods ations to amend or replace the Receivables Purchase See page 2 for Email Subscription details. processes about 30% of all fluid milk sold in the Agreement and the Revolving Credit Facility to pro- United States. vide liquidity and financial flexibility. We expect 02/19 The Milkweed estimates that Dean Foods pur- the new capital structure to include a revolving The Milkweed credit facility secured by our real estate and fixed chases about $300 million of farm milk per month. Dairy’s best source for news and analysis. assets as well as a securitization facility similar to Dean Foods is out of compliance with a critical To subscribe, send your check to: our existing Receivables Purchase Agreement. The agreement with lenders, according to documents filed Company currently believes that it will complete The Milkweed with the federal Securities and Exchange Commis- this recapitalization no later than March 1, 2019, al- P.O. Box 10 sion (SEC) on January 24, 2019. That covenant with though it can offer no assurances that it will be Brooklyn, WI 53521-0010 which Dean Foods is failing to adhere involves the able to complete such recapitalizaton on accept- firm’s pledging up to $450 million of the company’s Subscription rates: able terms or at all.” (Bold emphasis added.) accounts receivables to wholly owned subsidiaries $80 per year (2nd Class); that are allegedly “bankruptcy remote” (according to Simply stated, Dean Foods’ accounts receiv- 1st Class Fast-Pak $140 (1st Class) the company’s late 2018 10-Q filing with the SEC). able are the funds payable to the company from *Foreign subscription rates, one year: The technical name for the accounts receivable-based companies selling branded and private-label dairy Canada: $120 (US$); foreign air mail: $175 (US$) notes is the “Receivables Purchase Plan.” products processed and distributed by the firm — To subscribe on-line, visit our website: i.e., packaged fluid milk, ice cream, whipping The SEC filing states that on January 19, www.themilkweed.com and click the cream, etc. From the recent SEC filing, it appears 2019, Dean Foods and certain subsidiaries (virtually “Subscribe Now link” on the home page. that virtually all Dean Foods’ dairy processing en- all dairy operations) agreed to Amendment No. 2 to terprises are included in pledging their accounts re- the Seventh Amended and Restated Receivables ceivable to those “bankruptcy remote” subsidiaries. Purchase Agreement. That’s because for the period (Name) ending December 31, 2018, Dean Foods was in “… Dean Foods must return to compliance with non-compliance with the Financial Covenant under covenants of the Receivables Purchase Agreement (Firm) the Revolving Credit Facility.” by March 1, 2019. The SEC filing lists the “Waiver Termination Date” (i.e., the date by which the ac- Exactly how Dean Foods is in default of the (Address) counts receivable-based notes may be cut off) as: covenant(s) is not clear from the filings. Continued on page 4 (City, State, Zip) Dean Foods on Financial Tightrope: 3/1/19 Deadline Looms, con’t Continued from page 1 dominant supplier of farm milk, nationwide. The two Dean Dairy Holdings, LLC big dogs in dairy –the biggest cooperative and the “… the earliest of (a) March 1, 2019, (b) the Suiza Dairy Group, LLC biggest fluid milk processor – chose to run in tandem date, if any, on which any Seller Party breaches its long ago. More than 20 years ago, management of obligations under this Amendment and (c) the date, if Alta-Dena Certified Dairy, LLC DFA’s and Dean Foods’ predecessor corporations any, on which the Collateral Agent shall enter into a Berkeley Farms, LLC hitched their horses tight in exclusive, or near-exclusive forbearance agreement with Dean Foods Company Country Fresh, LLC milk supply arrangements. DFA’s management prom- relating to (x) the Dean Credit Agreement and (y) the Dean East, LLC ised to lower Dean Foods’ raw milk costs by charging exercises of remedies with respect thereto.” Dean Foods less than the costs for maintaining the Dean East II, LLC (Note: Dean Foods is the “Seller Party” under company’s own supply of producers. In early 2003, the Receivables Purchase Plan. The Dean Credit Dean Foods North Central, LLC Dean Foods dumped over 2,000 independent producers Agreement refers to a separate package of borrow- Dean Foods of Wisconsin, LLC from their markets and pushed most of those producers ings. In its late 2018 10-Q filing with the federal gov- Dean West, LLC into the grubby mitts of a DFA subsidiary – Dairy Mar- ernment, Dean Foods listed a total of 17 financial Dean West II, LLC keting Services, LLC. DFA and Dean Foods absorbed institutions as lenders, including seven separate units about $200 million in settlement costs and legal ex- within the Farm Credit System.) Friendly’s Ice Cream Holdings Corp penses related to a pair of civil antitrust lawsuits filed The 8-K filing’s Amendment No. 2 specifies Friendly’s Manufacturing and Retail, LLC in the Southeast and Northeast. Allegations included that during late January and through February 2019, Garelick Farms, LLC restricting producers’ access to milk plants and under- Dean Foods must submit weekly financial reports, Land-O-Sun Dairies, LLC paying producers for their milk sales. each Wednesday, to its financial overseers. Mayfield Dairy Farms, LLC As noted in the January 2019 issue of The Milk- Dean Foods’ financial quagmire is complicated Model Dairy, LLC weed, seven of the 17 financial institutions lending by the fact recent company forecasts have projected funds to Dean Foods are units of the extended Farm Reiter Dairy, LLC that 2018’s fourth quarter numbers, by inference, Credit System.