By Brandy Harrison
GUELPH — The court has given Organic Meadow more time to get its house in order but the organic dairy co-op put part of the blame for its financial woes on an “adversarial” tug-of-war over milk supply with Dairy Farmers of Ontario (DFO), according to court documents.
“Unfortunately, the relationship between DFO and Organic Meadow is not good,” said Organic Meadow CEO Don Rees in a sworn affidavit to support an extension of creditor protection.
On April 2, Guelph-based Organic Meadow Co-operative Inc. and its two related companies filed for creditor protection under the Bankruptcy and Insolvency Act, giving it 30 days to restructure and make a debt repayment proposal. On April 29, the Ontario Superior Court of Justice extended the protection until June 16.
The three companies — the co-op, the owner of the Guelph processing plant, and the licensed dairy processor — owe more than $22 million to creditors, including $9.3 million to a Calgary-based venture capital firm, about $3.2 million to Farm Credit Canada, and more than $900,000 to DFO, largely for March milk shipments. The co-op also has about $760,000 outstanding in loans from its members.
Rees pointed to the operation of the supply management system as the “root cause,” saying it can’t secure reliable access to its members’ milk, which accounts for more than 70 per cent of the organic pool.
Organic Meadow managed its own milk until 2008 when control passed to DFO, which pools organic milk to sell to processors.
In his affidavit, Rees cited supply issues starting in September 2013 that worsened last November, when a province-wide shortage of organic milk hit home. Demand outstripped supply by an estimated 800,000 litres per month by the end of March, but supply is now rising, according to DFO.
With priority allocation given to fluid milk and cream, Organic Meadow didn’t have enough milk to make cultured products like yogurt, cream cheese, and butter, said Rees.
“Until the demand of Organic Meadow’s competitors for the available organic milk — milk produced by the members of [the] co-op — is fully satisfied, Organic Meadow is unable to obtain organic milk to produce dairy products for sale to its customers,” he said.
From November to March, the co-op’s sales dropped 20 per cent, amounting to about $800,000 in lost revenue, Rees estimated in the affidavit.
Non-fluid dairy markets are crucial in a highly-competitive market for milk, he suggested. It’s difficult to compete with multinational companies, which have stolen market share by combining conventional and organic sales in bids to retailers, he said.
The dispute with the dairy board centres on DFO ending an arrangement that ensured steady supply, said Rees. It “resulted in a great deal of mistrust between Organic Meadow and DFO,” he said.
The purchase and development of Organic Meadow’s Guelph processing plant is also part of the financial burden, according to a report by the court-appointed trustee, MNP Ltd.
But new payment terms were the tipping point, said Rees. With only a few days notice, a 22-day payment window shrank to 24 hours as of April 1. It was “impossible” to pay outstanding bills and for upfront delivery and Organic Meadow had no choice but to seek creditor protection, Rees said.
“If DFO had cut off Organic Meadow’s supply of milk as it was threatening to do, Organic Meadow would have had to immediately cease to carry on business,” he said.
After Organic Meadow filed for creditor protection, it agreed to pay DFO in advance but DFO also requested a premium it would reconcile monthly. Between April 1 and 20, Organic Meadow overpaid by $41,000, which put a strain on cash flow, said Rees’ affidavit.
But Graham Lloyd, DFO’s director of communications, said the shortage isn’t the only factor at play. In June, July, and August last year, the market was oversupplied, with between seven and 10 per cent of organic milk added to the conventional pool, he said.
“We don’t think it’s an accurate portrayal of how they got themselves into difficulty,” Lloyd said, adding that Organic Meadow has a responsibility to recruit new members and DFO has increased incentive days, quota, and the organic premium to boost supply.
Lloyd said DFO is developing an organic allocation policy with the Ontario Dairy Council to stimulate the market. There was an agreement in place when Organic Meadow was one of only two organic processors, he said, but declined to discuss arrangements with individual processors. “We need to ensure all processors have equitable access to milk.”
Organic Meadow has been restructuring for years and has reduced costs significantly in the last 18 months, said Rees, expecting 2015 to be a break-even year. It has even identified a potential partner or investor. The unnamed investor, who could make a proposal after its 45-day due diligence period is complete on May 14, has considered buying Organic Meadow, the MNP report indicated.
Organic milk supply is uncertain if the co-op doesn’t right itself, suggested Rees.
“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.”