Dean Foods bankruptcy plan faces hurdles, controversy

Dairy Farmers of America has agreed to buy assets from Dean Foods, which filed for Chapter 11 bankruptcy in November. While the plan represents a major step for the stabilization of a large component of the U.S. milk processing sector, Cornell University agricultural economist Andrew Novakovic says there are hurdles to overcome before this proposal would become a reality.

Novakovic says: “The much-awaited confirmation that Dean Foods has negotiated a plan with their major supplier, Dairy Farmers of America, represents an important step forward in not only resolving the Dean Foods bankruptcy but also providing some idea of how this important component of the U.S. milk processing sector could stabilize and move forward.

“Nevertheless, this needs to be understood as a plan but not yet a done deal. Under U.S. law, there are two hurdles before this plan would become a reality.

“First, the judge presiding over the case in the U.S. Bankruptcy Court in Houston is obliged to review the plan put forward by Dean Foods, but an entity called the Creditors Committee can also put forward a plan. The Creditors Committee is composed of the largest groups to whom Dean Foods owes money. This includes its chief financial liability, the pension fund pertaining to many of its employees. Generally speaking, the plan put forward by the company that filed bankruptcy is considered the plan to beat, but the judge is responsible for assessing what is the best deal for the owners of Dean Foods debt, considering the viability of the reorganized company as well as the current value of the assets.

“The second hurdle is not a part of bankruptcy law but rather U.S. law pertaining to competition. The Justice Department had previously indicated that it was considering the competitive implications of the largest marketer of farm milk, and a major processing entity unto itself, acquiring the assets of the country’s largest dairy product processor. There has been some controversy about the merits of this plan even within the dairy farm community. Whether the Justice Department will intervene remains to be seen. If it did, it would more likely require some adjustments to the DFA plan, not prevent it altogether. There are precedents for this in the past, including previous transactions involving DFA and Dean Foods.

“The current announcement is a major step forward in providing a path for this major component of the U.S. dairy sector to stabilize and continue to provide a source of milk and other dairy products for U.S. consumers, but it isn’t quite yet a done deal.”