FDIC frets about welfare of dairy herd

EATON — The health and welfare of 13,000 dairy cows in Weld County is a growing concern for the Federal Deposit Insurance Corp.

The FDIC has an interest in the herd as the receiver for the now-defunct New Frontier Bank in Greeley. New Frontier was closed by the Colorado Division of Banking in April. One of its biggest borrowers, Johnson Dairy near Eaton, had filed for Chapter 11 bankruptcy in January. As NFB’s successor-in-interest, the FDIC holds claims of approximately $50 million from local businesses that provided feed and other services to the dairy.

Since the bankruptcy filing, the dairy has been under strict court-ordered financial constraints regarding the care and feeding of the herd. At the same time low milk prices have hampered its key source of income for maintaining operations.

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And that has the FDIC alarmed. “We are concerned about the health and safety of the herd, and obviously the bankruptcy does complicate matters in relation to that,´ said David Barr, FDIC spokesman. “You want to make sure the herd is healthy and well cared for. We are doing what we can to do that.”

The only way Johnson Dairy can successfully restructure itself through bankruptcy is to have a healthy dairy herd producing milk to pay off its debts. If it can’t restructure, a healthy herd is equally important as an asset to sell and at least partly reimburse its creditors.

In May, at the request of the receiver, U.S. Bankruptcy Judge Sidney Brooks appointed H. Raymond Hunter to examine how the dairy was being managed. John Johnson, Johnson Dairy’s owner and founder, is still managing the dairy on a daily basis.

Hunter, a dairy owner in Schaumberg, Ill., assessed the operation in mid-May. In his report to the court, Hunter said a budget produced by Johnson was “weak in substance and does not reflect changes in herd value.”

The report further noted that the dairy is purchasing its feed, bedding, medicines and supplies “largely on a just-in-time basis” and that the “continued low milk price is a concern.”

“Lower new season feed costs will help, but current estimates are for a combined negative cash flow of over $300,000 between May and July, after which time milk volume and prices are expected to improve,” the report said.

Major asset

Because the herd consumes more than 4,000 tons of feed each week at a cost of about $250,000, Hunter’s report notes that more frequent and better summarized reports of its health and supplies should be made to the court.

“The livestock herd is a major asset of the business,” the report states. “Its worth is in the same order of magnitude as the real estate but it is a biological population subject to the quality of herd management and with the potential for large changes in fundamental value.”

The report also recommends that the dairy continue to sell low-yielding cows and either buy replacement animals to continue producing milk or put the money from the culled cows into a reserve fund to help pay for ongoing expenses, because “the dairy has a high risk of running out of cash between now and late July.”

The FDIC has been critical of the operation of Johnson Dairy both before and after it declared bankruptcy. In a motion to the court filed April 16, the regulator noted that the dairy lost about $20 million of its assets between June 30, 2008, and the time it filed for bankruptcy on Jan. 8.

That situation has continued under bankruptcy protection, the FDIC motion said. “The Corporate Debtor’s financial deterioration is continuing, and the Corporate Debtor will not have the financial ability to care and feed the dairy cows and heifers, which will inevitably jeopardize their health, safety and welfare, causing significant harm to the secured creditors.”

The motion asked the court to make sure the herd is protected so the asset can be preserved to pay off creditors. “Proper feed, care and shelter of the dairy herd is of paramount interest …,” the motion states. “Besides the obvious humanitarian reasons, proper care of the cows and heifers is also essential to preserve their value. Failure to feed and/or milk the cows for just two days could irreparably destroy their ability to be milk cows and thereby diminish their value by 50 percent or more. Because Corporate Debtor is now operating on the edge, (the receiver’s) interests in the estate’s assets are being placed at great and unnecessary risk.”

In an e-mailed response to a request for comment, Patrick Vellone, attorney for John Johnson, wrote on June 29: “In this unprecedented time for dairies, John Johnson and his son, Rod, have done all within their power to maintain the dairy’s business and herd healthy (sic) in spite of the FDIC’s interference. Today’s low feed and commodity prices, coupled with its relatively young herd, have helped Johnson Dairy to continue to maintain its herd and pay its vendors up to this point. A court-appointed examiner, requested by the FDIC, recently found Johnson Dairy to be well-managed and its herd well-maintained.”

In a filing on June 23, the FDIC noted that the dairy had 855 fewer cows than when the bankruptcy was filed more than six months ago and asserted that its interests were still not being adequately protected.

A final hearing in the case was set for July 2, after this story went to press.