Troubled organic milk processor blames supply-managed milk board for its woes

Friday, May 1, 2015

by SUSAN MANN

A long-simmering, acrimonious dispute between Organic Meadow and Dairy Farmers of Ontario over organic milk supply has spilled into the public realm as Organic Meadow was granted a court-approved extension Wednesday to file a proposal for creditors.

The Ontario Superior Court of Justice, bankruptcy and insolvency section, in London approved an extension to June 16 for Organic Meadow to develop its proposal for creditors. Early in April, Organic Meadow Co-operative, Organic Meadow Inc. and Organic Meadow Ltd. each filed a Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act so they could restructure their operations. MNP Ltd. was appointed trustee.

In its April 27 report, the trustee says it supported the companies’ request for an extension so that a potential purchaser, who has filed a Letter of Intent dated March 30, 2015, has time to complete its due diligence. The 45-day due diligence process is underway and expires May 14. The potential purchaser wasn’t identified in the report.

An Organic Meadow official also declined to comment on the potential purchaser’s identity. “As a privately-held organization, we do not publicly comment on such affairs,” marketing manager Michelle Schmidt says by email.  “The continuation of the formalized restructuring process will allow the organization the opportunity to put forth a viable proposal and maximize value for all stakeholders.”

The trustee’s report says before Organic Meadow sought creditor protection it was in the process of finding a strategic partner or investor. “Given the nature of their business, the likelihood of a going concern sale or investment is enhanced while the companies remain in possession and control of and carry on their business,” the report says.

Dairy Farmers of Ontario did not oppose the request made by Organic Meadow in court April 29 for an extension, says Graham Lloyd, general counsel and communications director. “We reserve our rights to oppose at another date.”

Dairy Farmers is an unsecured creditor and is owed about $850,000 for unpaid milk deliveries made in March.

In an April 24 affidavit sworn in Guelph, Organic Meadow CEO Don Rees says each of the Organic Meadow entities have separate boards and maintain separate financial statements. The co-op is a holding company that holds controlling ownership in Organic Meadow Inc., which owns the Organic Meadow and Steen’s Dairy brands, the dairy processing plant in Guelph and has an ownership interest in Organic Meadow Ltd. On behalf of the co-op, Organic Meadow Inc. administers the relationship with organic farmers to expand the organic milk market in Ontario. The Organic Meadow Ltd. entity operates the processing plant.

Rees couldn’t be reached for comment.

Organic Meadow Ltd. sells more than 85 Organic Meadow and 10 Steen’s Dairy branded products to retailers and distributors across Canada. In 2015, Organic Meadow Ltd. has gross revenues of almost $30 million, he says in the affidavit.

Throughout his affidavit, Rees described the relationship between Dairy Farmers of Ontario and Organic Meadow as “not good” and “difficult.” He also portrayed a picture of the tremendous power Dairy Farmers of Ontario has over the processor.

“The ability of Organic Meadow to operate is entirely dependent on DFO,” he says. But “in many respects the viability of the organic milk market in Ontario is, in return, dependent on Organic Meadow continuing to operate.”

The co-op’s 60 dairy farmer members produce more than 70 per cent of Ontario’s organic milk supply and “the follow-on effects of the failure of Organic Meadow would, I believe, have a serious adverse impact on the organic milk market in Ontario,” he notes.

The trustee’s report says since filing for creditor protection, Organic Meadow, its lawyer and the trustee “have spend considerable effort and time stabilizing the companies’ relationships with key stakeholders,” mainly Dairy Farmers of Ontario and RBC, which provides operational funding and is Organic Meadow Ltd.’s senior, secured creditor.

Organic Meadow has blamed Dairy Farmers for its financial problems because throughout the late fall and winter period it provided Organic Meadow Ltd. with inadequate supplies of milk to make its yogurt, cream cheese, butter and other products. Organic Meadow began to experience supply problems in September 2013, but “the situation worsened in November 2014 through March 2015,” Rees says in the affidavit. The operation of the supply management system for milk “is the root cause of the financial situation” Organic Meadow faced in April 2015 that required it to file for creditor protection.

Organic Meadow’s inability to buy the organic milk from its own farmer co-op members from November 2014 to March 2015 “resulted in a 20 per cent reduction in sales and lost revenue of about $800,000,” Rees says.

Under Dairy Farmers policies, farmers sell their milk to Dairy Farmers of Ontario, which pools it and sells it to processors. Processors manufacturing drinking milk and cream get first crack at the milk supplies, along with those making yogurt and ice cream. Milk to make other products, such as cream cheese and butter “can only be purchased by processors if there is a surplus after the requirements of processors for drinkable milk and cream are satisfied,” he says.

Lloyd says “we don’t agree with his (Rees’) assessment.” Organic Meadow’s financial conditions “prior to us identifying that we would need to receive assurance for payment of milk gave us no confidence that they would be in a position to pay for milk on an ongoing basis.”

About Organic Meadow’s lost sales due to inadequate milk supplies, Lloyd says, “I don’t think their numbers support the assessment they have concluded. There was no shortage of milk prior to November. If you look at their business operations in the period prior to November of 2014, they were losing money on a regular basis.”

Lloyd notes, “to suggest that their financial troubles began in November 2014 is not consistent” with their actual operations.

Since Organic Meadow filed for creditor protection, there has been continued acrimony in the relationship between the two sides with Rees saying Organic Meadow plans to launch appeals of Dairy Farmers decisions on milk supply if things can’t be worked out through negotiations.

The situation has also given the public a peek into the fierce competitive pressures from multinational corporations Organic Meadow faces in the organic fluid milk market, which it developed and grew.

Rees says the drinkable organic milk and cream market is highly competitive with multinational companies recently entering the market and “taking advantage of Organic Meadow’s years of investment to grow the organic dairy market. They have taken market share away from Organic Meadow by submitting bids to grocery retailers and food service companies that combine large conventional milk sales with small, add-on organic milk sales.”

He adds that Organic Meadow is finding it increasingly difficult to compete in this market but continues to do well in specialty channels, but with relatively small volumes. Organic Meadow is able to be profitable in the market for organic dairy products, such as yogurt, cream cheese and butter, and is “increasing its focus on these markets.”

But milk supply problems plague the company. “Until the demand of Organic Meadow’s competitors for the available organic milk – milk produced by members of Organic Meadow co-op – is fully satisfied, Organic Meadow is unable to obtain organic milk to produce dairy products for sale to its customers.”

Rees says the milk supply dispute between Dairy Farmers and Organic Meadow is “adversarial” and “resulted in a great deal of mistrust between Organic Meadow and DFO.”

Currently “there appears to be sufficient organic milk available to meet Organic Meadow’s needs,” Rees says. But the “hang-over from supply issues Organic Meadow Ltd. encountered in November 2014 through March 2015 is, however, still having effects on Organic Meadow and its financial performance.”

Dairy Farmers change in Organic Meadow’s payment terms to cash on delivery from previously giving it 22 days to pay for milk supplies made it impossible for the company to both pay the $850,000 it owed for March milk deliveries and meet the new terms. Dairy Farmers threatened to cut off Organic Meadow’s milk supplies if it didn’t comply with the new terms, Rees says, noting he considered Dairy Farmers would actually follow through with that threat and then Organic Meadow “would have had to immediately cease to carry on business.”

The board carefully considered the situation “but resolved to commence these proceedings with a view to staying the obligation to pay the $850,000 and with a view to ensuring a stable supply of organic and conventional milk,” Rees notes.

Organic Meadow makes some dairy products under the Steen’s Dairy brand using conventional milk. There isn’t a shortage in conventional milk supplies. BF

DFO had promised milk supply says Organic Meadow CEO

by SUSAN MANN

The crux of Organic Meadow’s milk supply dispute with Dairy Farmers of Ontario is it considered it had an arrangement with the marketing board that provided the dairy-processing arm of the company with enough milk to meet its needs, says CEO Don Rees.

In an April 24 sworn affidavit, Rees says “the root of the dispute between DFO and Organic Meadow involves the termination by DFO of that arrangement.”

Rees adds “DFO contends it had grounds to terminate the arrangement.” But Organic Meadow’s view is the marketing board did not have “proper grounds” to end the deal.

There were no details in the affidavit on the terms of the arrangement.

Graham Lloyd, DFO general counsel and communications director, says that even though Organic Meadow co-op members produce 70 per cent of the organic milk supply in Ontario that doesn't impact "how we treat processors with respect to milk supply." He said they treat all processors equally "with respect to milk allocation" and Dairy Farmers doesn't give any processors preferential treatment.

In a footnote to the main affidavit, Organic Meadow says it has triggered its appeal rights regarding Dairy Farmers’ decision to terminate the milk supply arrangement and “if there is no negotiated resolution with DFO we will have to proceed with that appeal,” Rees explains.

He adds that Dairy Farmers is preparing an organic milk policy that Organic Meadow “hopes will address” milk supply matters. But so far Dairy Farmers hasn’t released a draft of the policy for comments.

“All current and future investors will find a clear organic milk policy to be of benefit to their investments in Organic Meadow,” he says.

The company may also be heading to court over milk supply. “If DFO and Organic Meadow cannot come to terms on going forward supply, further attendance before the court to determine the terms DFO can impose on Organic Meadow Ltd. may be required,” Rees says. BF