Chronic Overproduction : For Dairy Farms, Knudsen Is Only the Latest Problem

The Knudsen milk tanker lumbered up to the Koopman’s dairy farm in San Bernardino County on Wednesday and siphoned more than two tons of fresh milk from waiting storage tanks. Koopman had turned the tanker away empty the day before, but now he is again doing business with Knudsen--as long as he gets paid.

That scene was repeated Wednesday throughout the Chino Valley--where suburban sprawl gives way to the flat pastures and occasional grain silos of Southern California’s dairy industry.

Suppliers of Knudsen, the largest dairy in the West, are facing the latest problem in an industry that has seen some troublesome times lately. On Monday, financially troubled Knudsen failed to make a total of $18 million in payments to the hundreds of dairy farmers who supply the milk for its Foremost and Knudsen brands of milk, ice cream and cottage cheese.

For Koopman, who owns the 740-head farm with his father and brother, Monday’s missing $170,000 is a worry--but not the biggest one the family has faced. “At least we can go out and borrow and cover it,” he said, recalling a time when his family didn’t have that borrowing power. “Some can’t.”

Dairy farmers in California, as in the rest of the nation, have suffered recently from an oversupply of milk that has driven down the price they get for milk and has made it difficult in some cases to find a buyer for milk.

During the late summer, when cows produce their most milk, some dairy farmers ship their milk as far away as Idaho in an effort to find a market.

In California, milk consumption dropped for seven straight years before showing a slight increase in 1985. Meanwhile, in that eight-year period, milk production has grown steadily.

That problem may be alleviated, at least for now, by the federal government’s controversial program in which farmers are being paid to slaughter dairy cows. The herd reduction program will eventually reduce to 2% the state’s milk surplus from about 10%, according to the state Farm Bureau.

Knudsen presented a new problem. The company, which buys 20% of the raw milk in California, has promised to pay its dairy farmers on a cash-on-delivery basis for seven days while working out an agreement with its lenders that will allow it to remain in business.

At the same time, Knudsen has said it would try to sell some or all of its dairy operations. The company has also warned that it may not be successful and might have to file for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code.

Knudsen officials say they are concerned about the dairy farmers. “Utmost on our minds are our 5,000 employees and 400 milk producers,” said Ted D. Nelson, chairman of Winn Enterprises, Knudsen’s parent. “We must stabilize this situation for their benefit.”

Knudsen’s financial troubles upset California dairy farmers long before Knudsen missed Monday’s check. Rumors of financial difficulty at the 67-year-old dairy firm led 22 farmers in January to quit the Los Angeles Mutual Dairymen, a cooperative that is a major Knudsen supplier.

More recently, concern over Knudsen’s troubles caused dissention among members of Hi-Grade Milk Producers Assn., a Chino cooperative that some dairy farmer members say didn’t press Knudsen hard enough and soon enough to guarantee milk payments.

“If we knew in December what we know now about Knudsen, no one would be in Hi-Grade,” said Koopman, a Hi-Grade member.

“It’s a dark day in the dairy business,” said Lisa Simoes-Correia, a dairy farmer in Merced County. She said her family had never failed to receive a milk payment during the 35 years that it has been in the dairy business. “It’ll go down as Black Monday,” she said. “We have enough money to pay our workers, but some don’t.”

Knudsen’s troubles touch not just dairy farmers but other businessmen as well. “I think just about everyone who depends on dairy farmers for a living, the grain and hay suppliers and equipment suppliers, will feel the effects of this,” said one Chino Valley businessman.

Ted Miller, owner of Miller’s Hay in Chino, said several dairy farmers have already told him that they can’t pay for hay purchased on credit as a result of Knudsen’s missed milk check. “They have already borrowed all they can from the banks,” Miller said. “What can you do?” Miller estimated that his loss would be in the “tens of thousands of dollars.”

Mary-Ann Warmerdam, a dairy industry analyst with the California Farm Bureau, said the effects of Knudsen’s problems are just beginning to develop. She estimated that 30% to 40% of Knudsen’s milk suppliers would soon face “serious, serious problems” and that some would eventually fail. “Many dairy farmers are right at the brink, and this is just the thing to push them over,” she said.

Maybe the government herd reduction program is coming just in time, Warmerdam said. Tighter milk supplies would make it easier for dairy farmers to find another buyer for milk, she said.

Some dairy farmers went looking for another buyer Wednesday despite a pledge by Citicorp, Knudsen’s banker, to guarantee milk payments for another seven days. “Everyone is leaving like rats from a sinking ship,” said Carl Barros, a dairy farmer in the San Joaquin Valley who was among the Knudsen suppliers looking for another milk buyer.

Barros and other dairy farmers said several creameries offered to buy their milk but at prices well below market. Other creameries reported that they didn’t have the capacity to process more milk. “We’ve gotten a lot of calls. Everyone around the whole state has gotten a lot of calls. But we’re not taking any new members right now,” said John Alberts, manager of the San Joaquin Valley Dairymen, a cooperative that makes and sells its own dairy products.