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Submitted by: Boston Common Asset Management
Posted: May 18, 2007 – 12:00 AM EST
DALLAS, TX - May 18, 2007 - Socially concerned investors, who filed a shareholder proposal with Dean Foods, today again questioned the company's management at its Annual Meeting of Stockholders in Dallas as its marquee organic brand faces increasing competitive pressures and a consumer backlash over its reliance on factory-farm milk production. Investors believe the large-scale dairy operations are damaging the image of Dean's Horizon Organic brand and watering down shareholder value.
This controversy is coming to a head at the same time Dean has warned shareholders and analysts that profits will be significantly impacted by marketplace challenges, in part with organics, through the end of the year. Dean Foods' stock has been in a freefall, losing significant value, since the company released their first quarter financial report on May 3.
"We warned the company's management that their corporate-owned factory-scale organic dairies are harming public perception of their Horizon Organic brand," said Steven Heim, Director of Social Research of Boston Common Asset Management and a representative of institutional shareholders in Dean stock. "Organic consumers feel violated when they discover that the premium prices they are paying is for milk that is coming not from family farms, but from huge confinement operations with little to no pasture for their dairy herds," Heim added.
Sales growth of the Horizon brand has suffered significantly while the sales of organic dairy competitors have grown two to three times faster over the past year.
Adding to Dean Foods' organic dairy woes is a forecasted surge of 40 to 60% in the organic milk supply this year-causing a surplus in the sector for the first time and placing Dean's Horizon Organic brand under intense competitive pressure. Dean's share price has slumped by more than 12% since the company indicated during a May 3 conference call with financial analysts that its earnings would be squeezed by the oversupply. Several analysts have now downgraded the company's stock.
"Dean's management has to shoulder the blame for helping create the supply imbalance," said Mark Kastel, Senior Farm Policy Analyst for The Cornucopia Institute, which is also a shareholder in Dean Foods. "They have turned a deaf ear to repeated calls to shed their two factory-farms-a move that would have won them consumer praise and support. Instead, they have helped legitimize organic factory dairies (some milking as many as 10,000 cows), and now other competitors are using this same approach and flooding the market with private-label organic milk, cheaper than what Dean can sell," Kastel said.
Last June both Kastel and Heim, at Dean's invitation, toured Dean's Idaho farm with 8,000 head of cattle. "I told them consumers would still perceive it as a factory farm, despite Dean's plans to expand its nearly nonexistent pasture," Heim added.
(A photo gallery containing images from the Dean Foods organic factory farms can be found on The Cornucopia Institute web site at http://cornucopia.org/index.php/horizon-factory-farm-photo-gallery)
An active boycott of Dean's Horizon Organic brand by the 700,000-member Organic Consumers Association, due to the company's reliance on factory farms, has resulted in scores of natural foods retailers around the country dropping all or part of the Horizon product line and eroding sales growth.
Earlier this year, institutional investors led by Boston Common Asset Management sought to bring a shareholder resolution to a vote at Dean Foods’ 2007 annual shareholders meeting. Their shareholder proposal requested that an independent committee of Dean's board review its policies and procedures for sourcing raw milk for its organic dairy products, and asked whether their current business practices are protecting the reputation of Dean's organic brand with organic food consumers. The investors also wanted to know how the company intends to respond to increasing consumer and media criticism.
But Dean's management successfully blocked publishing the proposal in the proxy statement and from receiving a shareholders vote by challenging it with a legal action at the U.S. Securities and Exchange Commission, arguing that these issues were solely the purview of management.
"We are concerned that Dean Foods' lack of transparency to its shareholders betrays a similar attitude toward its core consumers," said Daniel Stranahan of the Needmor Fund, another investor-sponsor of the resolution. "Factory farms are antithetical to the concept of organic farming, which supports family-scale production with sound environmental policies."
The debate over factory farms in organic dairying has been raging in the organic sector for seven years. It is the contention of a growing number of public interest, environmental, and farming groups that these farms, some milking as many as 2,000 to 10,000 cows each, are violating current USDA regulations by labeling their products as organic.
In 2005 and 2006, The Cornucopia Institute filed formal legal complaints with the USDA requesting an investigation into livestock management practices on six mega-farms for allegedly confining their cattle to feedlots and sheds rather than pasturing their herds as the federal organic regulations require. Two of the farms, currently under active investigation by the USDA, include the industrial-scale dairies owned by Dean Foods in Idaho and Maryland.
Leslie Lowe, Director of the Energy and Environment program at the Interfaith Center on Corporate Responsibility in New York, said, "Dean Foods has an excellent opportunity to return value to its shareholders through its investments in the organic industry. But they must respect the ethical beliefs of their organic customers, a very loyal and sophisticated market segment. Otherwise these investments may damage their brand, as we are seeing, and cost investors dearly."
EDITOR'S NOTE: A representative of the shareholders' groups will be in Dallas for the Dean Foods Annual Meeting of Stockholders being held Friday May 18th at the Dallas Museum of Art, located at 1717 North Harwood. Steven Heim is available for interviews before and after the meeting and can be reached at 617-720-5557 or 802-223-4627. Mark Kastel, who will be attending Friday's shareholders' meeting, can be contacted at 608-625-2042.
Dean Food' core business has been somewhat stagnant in recent years and has been touting its investments in its organic milk labels and the country's leading soy milk brand, Silk, as vehicles to make its stock more attractive on Wall Street. Dean CEO Gregg Engles told investors during a May 3 conference call that retail competition will turn "aggressive" in the short term, as companies engage in marketing and expanded distribution to sell off the excess milk, which he estimated at 25 million gallons. He suggested that profits would be significantly impacted as a result.
Links to several news stories assessing Dean Foods' financial challenges:
To hear an archived conference call discussing Dean Foods' first quarter 2007 earnings, go to: http://biz.yahoo.com/cc/6/80326.html