Schools, Markets Seek New Source of Milk as Knudsen Faces Demise

Schools and supermarket chains searched for new sources of milk and other dairy products Friday as they faced the prospect that Knudsen, the West’s largest dairy, could go out of business within days.

But state dairy officials said there will be plenty of milk available for consumers.

Meanwhile, representatives of the financially crippled dairy company and its chief lender Citicorp were locked in daylong negotiations Friday, reportedly trying to work out the details of what may be the final days of the 67-year-old dairy.

Burdened by mounting debts, the dairy filed for bankruptcy law protection Wednesday. On Thursday, Knudsen Chief Executive John P. Brincko testified in Bankruptcy Court that the ailing dairy did not have enough money to continue operating beyond Friday night. Workers were paid on schedule Friday, the company said.

Major Customers

Knudsen also told some major customers, including the Los Angeles Unified School District and Stater Bros. grocery store chain, that it will stop delivering milk and other products by the weekend or early next week. On Thursday, many of the state’s dairy farmers stopped shipping milk to Knudsen after the company said it could not pay them.

Bruce Brady, director of food services for the school district, said he received a telephone call from Knudsen late Thursday afternoon notifying him that Knudsen would stop providing milk, chocolate milk and orange juice on Monday.

Knudsen had been supplying milk in half-pint and one-third-quart sizes to 248 schools, which represent about one-third of the district’s milk purchases. The school district is negotiating with other dairies to fill the void, Brady said.

“From all indications we get from other dairies, we will be able to provide milk to every student on Monday morning,” Brady said.

Private Label

Knudsen also notified Stater Bros., one of its largest remaining accounts, that it will no longer ship private label milk and Knudsen brand dairy products to the Colton-based supermarket chain after Friday.

Jack E. Brown, head of Stater Bros., said the chain will begin accepting milk from another dairy beginning today.

“I personally talked to one of the owners yesterday about 4:30 to advise them that we stuck by Knudsen as long as we could,” Brown said Friday. “I said Knudsen had a responsibility to help themselves, and the milk producers had the right to a guarantee of payment.”

He added: “It is my understanding that no milk producer is supplying them (Knudsen), so they are basically out of the milk business.”

Contacts Competitor

Separately, Knudsen contacted Jerseymaid, its competitor based in Vernon, according to Jerseymaid President Ben Harrington. Knudsen said it would cease shipping milk as of today and halt deliveries of processed Knudsen products, such as cottage cheese and sour cream, on Tuesday, he said. Jerseymaid distributes Knudsen products to Von’s, The Pantry and Smart & Final chains.

Von’s will eventually substitute Jerseymaid products for Knudsen. Starting today, consumers will find small signs posted near Knudsen products explaining that the brand may be in short supply due to “circumstances beyond our control,” according to Bill Gensemer, Von’s vice president of dairy-deli products.

Two other chains, Safeway and Ralphs, which each carry only a limited amount of Knudsen products, said they had not received any word from the dairy company.

Production Monitored

The state Department of Food and Agriculture, which monitors milk production, does not expect a milk shortage.

“This was not an unforeseen eventuality,” said Glenn Gleason, chief of the department’s milk-pooling branch. “They (Knudsen) have been in trouble for the last year, and most suppliers have developed contingency plans and have options available to them.

“Obviously, there is a displacement from normal distribution patterns and some change in customer alignments, and it should take a few days to work through this alignment.”

Knudsen’s latest crisis came after Bankruptcy Judge Barry Russell denied Knudsen permission late Thursday to take a $5-million loan from Los Angeles-based Foothill Capital, which would have been paid before Knudsen’s other creditors under the terms of the loan. Citicorp, which is owed $155 million and has been keeping Knudsen operating with weekly cash infusions, objected to the loan.

Employee Costs

Knudsen spokesman Simon Barker-Benfield said Friday that there was no announcement about the company’s future but noted that Citicorp’s lawyers said in court that money would be available for all employee costs related to a shutdown of Knudsen.

In its bankruptcy filing, Knudsen listed liabilities of $601.3 million and assets of $422 million. Brincko testified that Knudsen, which has been losing $500,000 a week, is worth $200 million as an operating company but less than $80 million if it is closed and liquidated.

Staff writers Bruce Keppel, Jube Shiver Jr. and Nancy Yoshihara contributed to this report.