2015 a tough year for Ontario's mid-sized dairy processors

Thursday, December 17, 2015

by SUSAN MANN

For the second time this year an Ontario dairy processor filed for creditor protection, and while both companies are still in business the situation highlights the tough market environment for small- to medium-sized dairies.

Agricultural economist Al Mussell, owner of the Guelph-based company Agri-Food Economic Systems, says it’s difficult for medium-sized dairy processors to operate because their customers “have gotten so much larger.”

Customers, such as Loblaw Companies Limited, Sobeys Inc. or Costco Wholesale Canada Ltd., “look for their suppliers to grow with them in size,” he notes.

This puts a lot of pressure on the medium-sized companies, he says.

Moreover, “we know they (large grocery retailers) are tough to deal with” and have previously issued letters to suppliers saying they couldn’t accept any price increases, he adds.

In addition, the major retailer customers “don’t want to have a large number of suppliers,” Mussell says. “They want to deal with a relatively small number (of suppliers).
 
To serve the major retailers effectively, processors need to be national in scope and have operations across the country, Mussell says. “If you’re a little guy, how do you effectively serve these really large retail chains?”

In August, privately held cheese manufacturer Silani Sweet Cheese Limited filed a notice of intention to make a proposal under the Bankruptcy and Insolvency Act. The Schomberg-based company has been in business since 1968 and has about 150 employees.

Chief executive officer Joe Lanzino couldn’t be reached for comment.

Silani continued to operate during the creditor protection process and is still in business, as is dairy processor Organic Meadow Co-operative and its two related companies that each filed notices under the same Act for creditor protection in April.

The Organic Meadow companies developed a proposal for unsecured creditors (including Dairy Farmers of Ontario (DFO), which was owed $850,000 for unpaid milk) that was accepted and approved by the court earlier this year. Organic Meadow is also restructuring its company.

According to documents posted on the website of Silani’s trustee, Grant Thornton Limited, the company owed $33.8 million to creditors, including $26 million to secured creditors Farm Credit Canada and TD Canada Trust, and $7 million to unsecured creditors. DFO was owed $610,000 and treated as a critical supplier throughout the process.

Graham Lloyd, DFO general counsel and communications director, says the marketing board made arrangements with Silani “that any outstanding amounts owing at the time of the filing for creditor protection will be satisfied.”

Lloyd says “we continue to supply them with milk.”

Silani’s financial troubles stemmed from several factors, including lower sales volumes, reduced margins, customer discounts, marketing costs, legacy costs from a manufacturing plant expansion, an Environment and Climate Change ministry requirement to install a water treatment plant and continued challenges to reducing the company’s fixed overhead costs to adjust to current sales volumes and profit margins, the documents say.

In 2014, the company lost a contract with a key customer that typically generated $10 million a year in sales, the documents say. The company’s unaudited financial information on the trustee’s website says Silani had sales of $34 million in 2014, compared to $44 million in 2013.

In 2014, the company’s operating loss was $315,115, while in 2013 Silani finished the year with operating income of $355,766.

Silani tried to improve its financial situation by pursuing a number of avenues, including reducing its workforce, renegotiating its obligations, hiring a qualified consultant to act as interim chief financial officer and developing a business plan outlining strategies to increase efficiencies, margins and market share.

Despite these restructuring efforts, the company’s debt load “has proven to be a burden” and that caused Silani to file for creditor protection, the documents say.

Silani’s assets were valued at about $13.8 million, including $5 to $7 million for its plant supply quota.

In October, the Ontario Superior Court of Justice, bankruptcy and insolvency section, approved Silani’s proposal after a majority of unsecured creditors accepted it at a meeting in September.

Both Mussell and University of Guelph Prof. Alfons Weersink of the food, agriculture and resource economics department say the dairy processing sector in Canada is strong. Major processors that are national in scope, such as Saputo, Agropur and Parmalat, are doing very well, they say.

Lloyd agrees that the sector is robust, saying “the industry continues to grow and processors continue to be successful. We’re confident that the industry is strong and vibrant with increased demand.”

Weersink says it’s challenging for smaller dairy processors to serve the big retail chains when those customers prefer to deal with “a couple of large processors to supply their milk and cheese.”

In addition, Mussell says retailers are looking to their suppliers to provide a number of different products and not just, for example, yogurt.

That puts pressure on companies “to have a complete line of products,” he notes.

Weersink says that two dairy processors filed for creditor protection this year “reflects the difficulty of being a smaller dairy processor and finding your niche in the market, particularly in the grocery/retail sector where the Loblaws and such would rather deal with somebody who can supply all their stores.” BF