Vulture Capitalism is Milking the Dairy Industry Dry

Some of the biggest names in milk are going bankrupt.  Last November, Dean Foods filed for Chapter 11 and last month, Borden Dairy has followed suit.  Both companies specifically cite the increase in demand for plant-based milk alternatives (and Borden’s inability to pay its pension obligations) as the main driving force behind their reorganizations.  And, you can’t say that it isn’t plausible. In 2016, Elmhurst Dairy shut down, reorganized, and rose from the ashes with a new line of nut milks.   

But the last two sentences of this article disclose the final nail in Borden’s coffin, being bought out by Kohlberg Kravis Roberts & Co., an equity firm.

I have to admit, none of my business-related classes in college actually explained to me what an equity firm is, so I had to do a little digging to educate myself on exactly what that means.  Basically, equity firms buy out smaller companies in hopes of making them profitable.  However, this doesn’t necessarily mean making the company successful in the long-term, it’s all about the return on investment for the firm.  

In many cases, this means the equity firm turns around and sells off most of their new holding’s assets and saddle them with debt from other holdings to make those holdings look more appealing. There’s a reason that equity firms are also called “vulture capitalists.” It happened when Toys R Us was bought out by Bain Capital and KKR in 2005. It happened when Sears was bought by Edward Lampert the same year.  And it happened when Borden Dairy was bought by KKR in 1995, and KKR sold off all of Borden’s subsidiary assets and left only the dairy operations. 

But, if you still are adamant that there’s a perfectly not-so-socialist explanation for their demises,  you could say that the dairy industry as a whole just doesn’t understand how supply and demand works. For instance, take the 1.39 BILLION pound surplus of cheese that’s just… being kept somewhere.  American cows have been overproducing for years, and instead of scaling back their production, the industry has been going full speed ahead in hopes that someone will buy it all someday.

So maybe equity firms’ involvement isn’t the sole reason for dairy’s demise, but people tend to hand-wave “can’t keep up with competition” (Invisible-Hand-wave?) whenever a big business goes under without understanding the more predatory motives lurking in the background of the bigger picture.

[One brief aside- I have also made a short update to last week’s Mr. Peanut article given recent… developments.]