DFA: Time to write new history
By Dave Natzke
Leaders of Dairy Farmers of America (DFA) hope 2013 is the year they can write off some history – figuratively and financially – and focus on the future.
More than 1,500 members and guests attended DFA’s 15th annual meeting, Mar. 19-20, In Kansas City, Mo. And, despite reporting strong sales, operating and net income, a $216 million (net of tax) litigation charge in 2012 resulted in a net loss of $133 million for the year.
Randy Mooney, DFA chair and dairy producer from Rogersville, Mo. used the theme for the 2013 meeting – “From this Land” – to celebrate the productivity of DFA and its dairy producer members. However, his address also touched on the past.
“The milk we produce on our farms that comes from this land is important to our members, our cooperative, our industry, our communities and to (feeding the world),” he said. “But it's not just what we do, but how you do it that is important. DFA has not always fully appreciated the impact of our behavior, about how we act or how we are perceived to act. As America's leading dairy cooperative, we have a responsibility that extends beyond the simple measures of pounds of milk marketed or dollars of revenue generated.”
“The legal issues we are nearly a decade old,” Mooney said. “As much as anything else, they represent a failure of the co-op to fully understand that how we behave is important. Our past mistakes will not be repeated.”
Smith: ‘Righting’ the business
DFA president and CEO Rick Smith noted some strong business partnerships and joint ventures remain from earlier years in the co-op’s history. All DFA partnerships and joint ventures have been profitable the past four years, despite the volatility in the dairy industry.
“The original founding principles of this organization remain valid and relevant,” Smith said. “But there are some ‘buts’,” including government investigations, lawsuits and underperforming and/or soft assets.
“We had to right the business, we had to change our culture, be more proactive in areas we may have neglected, and transform how we operate,” Smith said, who assumed the helm at DFA in 2006. “We've changed the way we do business.”
“How we executed did not always take into account expectations of others and, in some cases, expectations we helped create,” Smith told DFA delegates. “Others had different perceptions of us than we did. We had to deal with the government, concerned about both our size and our conduct. We were a lightening rod, and we brought some of this on ourselves. Some of this was clearly avoidable. We did not appreciate that when you seek the spotlight, sometimes that spotlight gets hot.”
The finishing touches in DFA’s business transformation have been settlements of ”Southeast Milk” and other lawsuits, Smith said, adding that the co-op took the financial charge for the year to put historical, legacy litigation matters behind it.
The $216 million (net of taxes) litigation charge includes a $159 million private litigation settlement in the Southeast Milk antitrust lawsuit, completed in late January 2013.
“We’ve very clear that we did not violate our mission,” said Smith. ”We were always trying to do things in the best interest of dairy farmers. But some of the things we did scared people. Some people saw the way we did things as a threat. We sometimes used terminology that we meant one way, but others perceived another way, and we didn't fully appreciate that.”
The litigation charge also budgets for a $46 million settlement in a class-action lawsuit by cheese buyers, relating to cheese trading activities on the Chicago Mercantile Exchange in 2004. That settlement is expected to be announced any day.
"In terms of the class-action involving cheese, we admit everything we did,” he said. ”We just have a different view of whether it's OK.”
"We're a dairy co-op,” Smith said. “We exist so dairy farmers can come together to produce results better than they can get individually. Our whole purpose is to see where we can create an environment where people can do better. And arguably, buying cheese on a public exchange, where anyone can get on and buy and sell cheese, is pretty defensible. But, we bragged about what we were doing. In some degree we insulted the system, and we paid a price for that. Although it’s defensible, you can't risk millions of dollars in the event you don't prevail (in a lawsuit). It's a business risk you can't take.”
A class-action suit filed on behalf of consumers over the cheese trading activities remains, Smith said.
Despite the litigation charge, 2012 was a strong financial year for the co-op, with record earnings and cash flow. DFA directed the marketing of 61.4 billion lbs. of milk for both members (39.4 billion lbs.) and others in 2012, representing nearly 30% of total U.S. milk production. Milk payments to members for milk marketed were $7.3 billion in 2012, which equated to an average of $18.49/cwt., down $2/cwt. from 2011. Cash returned to members in 2012 through DFA’s various equity retirement programs was $32 million.
Net sales totaled $12.1 billion in 2012, and net income increased more than 100% in 2012 — $83 million for 2012, compared to $40 million for 2011.
“We have worked for a number of years to improve DFA’s financial strength,” said Smith. “In 2012, we had a profitable year. This, combined with the support of the financial community, means we are in a position to manage the short-term impact of these non-recurring items on our overall balance sheet.”
“Don't worry about DFA,” Smith said. ”DFA will be fine.”
The key question going forward revolves around the business climate of dairy producers, said Smith, who identified concerns related to drought and feed costs.
Smith gave his annual profile of DFA membership by herd size. Herd numbers declined by about 445 from 2011, to 8,252. Each herd-size group produces about 25% of DFA’s total milk production:
• 109 dairy producer members average 4,170 cows.
• 221 members average 2,053 cows.
• 706 members average 641 cows.
• 7,193 members average 63 cows.
Regardless of size, all sizes are dealing with similar issues.
“While milk prices have, on average, elevated, costs have skyrocketed,” Smith said. “We used to say we could make $18/cwt. milk work. $18/cwt. milk doesn't work anymore.”
Smith noted recent changes in dairy industry dynamics has somewhat reversed a long-term trend of milk production to the West. He termed declining western production both part of a cycle and a structural shift in the industry, and further evidence that federal dairy policy has to change.
“The milk price is going to have to come up in parts of the country to approach equal cost of production, or we aren't going to have production there, because it's not sustainable,” he said. “The way the industry operates truly has to change.”
Noting there were differences among DFA members on appropriate dairy policy, Smith said there is a consensus that current dairy policy also doesn't work. The Dairy Security Act is the best compromise, he added.
“The status quo in dairy policy doesn't cut it. We need to take the risk for change,” Smith said. “The Dairy Security Act, when it has been put to vote, has passed, and I think it will be passed again. All it needs is to be put to a vote.”
Smith said DFA was taking a stronger look at global dairy markets than it had in the past.
“We want to be prepared to take advantage of the opportunities as things continue to change, including opportunities in the global marketplace,” Smith said. ”It's going to take both technology and sustainability to feed the world. There are not enough resources to feed the world doing the things they way we are currently doing.”
Although still a ”small player” at about $300 million in foreign sales annually, Smith detailed DFA's plants in Portales, N.M. and Fort Worth, Colo., as well as a new plant coming online later this fall at Fallon, Nev. as situated to produce products for the global market. DFA now has marketing representatives in Mexico City and China, he added.
DFA continued to grow its commercial investments in 2012. The Cooperative’s Fluid Milk and Ice Cream Division acquired Guida’s Dairy®, based in New Britain, Conn., and Cass-Clay® Creamery in Fargo, N.D. In addition, more than 20 new products were launched in the Consumer Brands division under the Borden®, Cache Valley®, Plugrá® and La Vaquita® brands.
The Ingredients Division also continued to expand, with a focus on export opportunities with global customers in strategic markets. DFA exported 203 million lbs. of product in 2012, for a third consecutive year of record export sales. In 2012, DFA also broke ground on the state-of-the-art dairy ingredients facility in Fallon, Nev., which will serve as a consistent supplier of quality dried dairy ingredients for export to customers around the world.
Earnings of affiliates were $58 million in 2012, and cash distributions from DFA affiliates totaled $36 million. Two affiliates, Stremicks Heritage Foods® and Southwest Cheese, commenced or completed major capital projects in 2012 to increase production capacity and improve operational efficiencies. These investments will increase markets for our members’ milk and enhance returns in future years.
Mooney: Policy, sustainability issues
Mooney said DFA was committed toward working to strengthen the U.S. dairy industry, through efforts to reform dairy policy, including support of the Dairy Security Act; support of federal milk marketing order reform; and support of trade agreements that benefit U.S. dairy. In addition, DFA would continue to develop future dairy leaders, and develop programs to assist dairy producers.
He said the entire dairy industry faces a challenge of communication with consumers when it comes to “sustainability”.
“What we do is feed a hungry world the safest, highest-quality, most nutritious food there is,” Mooney said. “What we do is important, but communicating how we do it may be are biggest challenge. The dairy industry has spent too much time talking among ourselves. We have relied too long on perceived emotional connections with consumers that farmers will trust us. We pay too much attention to our own emotions as farmers, and not enough attention to the past two generations who no longer have a direct connection to the farm. We have to tell the whole story of the goodness of milk in a way the typical consumer can understand, and that we are the original best stewards of the land, and tell it to all stakeholders.”