Investors Continue to Challenge Dean Food

Business Law

[##_1L|1206532251.jpg|width="90" height="119" alt=""|_##]Socially concerned investors for the second year in a row have filed a shareholder proposal asking Dean Foods Co. (NYSE: DF) to report to shareholders how it is responding to widespread concern that industrial-scale organic dairies, supplying milk for its Horizon Organic brand, violate consumer trust, seriously jeopardizing share value.

The shareholder proposal is a by-product of a seven-year debate in the organic industry over the introduction of large-scale factory-farms, milking as many as 2,000-10,000 cows each. It is the contention of a growing number of public interest, environmental, and farming groups that some of these farms are violating current USDA regulations by labeling their products as organic.

In 2005 and 2006, The Cornucopia Institute, a Wisconsin-based farm policy group, filed formal complaints with the USDA against a number of industrial dairies, including allegations that these mega-farms, mostly in the arid West, were violating the law by confining their cattle to feedlots and sheds rather than grazing as the federal organic regulations require. The dairy farms in question include two owned by Dean Foods in Idaho and Maryland and another California farm shipping milk for distribution under Dean’s Horizon Organic label. Because of inaction by the USDA the Institute is now preparing to seek court intervention in order to compel the agency to investigate the alleged improprieties.

“When consumers pay a premium for organic milk, they generally have the expectation that cows have access to pasture and gain a sizable percentage of their nutrients from grass,” said Steven Heim, director of social research with Boston Common Asset Management, lead investor-sponsor of the resolution representing institutional shareholders in the resolution process. “Besides complying with the law itself, we question whether Dean’s procurement of milk from factory-farms violates consumer trust and jeopardizes the value of its organic brands,” Heim added. Dean Foods, the nation’s largest milk processor, also became the largest U.S. marketer of organic dairy products when it acquired the Horizon Organic, Alta Dena, and Organic Cow of Vermont brands.

In June 2006 Heim and Mark Kastel, The Cornucopia Institute’s senior farm policy analyst, toured Dean’s Idaho farm at Dean’s invitation. “Although the company is making a $10 million investment in additional facilities in the desert-like conditions, and is attempting to paint their facility ‘green’, serious questions remain as to the legitimacy of milking thousands of cows in these conditions,” Kastel said.

The shareholder proposal asks an independent committee of Dean’s board to review Dean’s policies and procedures for its organic dairy products, and report to shareholders on their adequacy to protect Dean’s organic dairy brands and its reputation with organic food consumers. The investor groups also want to know how the company intends to respond to increasing consumer and media criticism.

“Even though the proposal is only asking the company, currently engaged in a nationwide advertising campaign touting the greenness of their organic milk business, to report to shareholders concerning this controversy, Dean has opted to ‘lawyer-up’ and aggressively fight the proposal at the U.S. Securities and Exchange Commission” (SEC), added Sister Linda Hayes of the Springfield Dominicans, an investor-sponsor of the resolution. “This is not the kind of transparency that consumers have expected in the organic food industry.”

Unfortunately, it appears that their PR campaign has so far backfired. An active boycott by the 700,000-member Organic Consumers Association has resulted in scores of natural foods retailers around the country dropping all or part of the Horizon Organic product line.

The negative press has already led to a growing legion of loyal organic consumers looking for alternative brands. “It is very unfortunate that instead of addressing the central concerns articulated in this shareholder proposal, that the company has instead decided to invest its resources in legal maneuvers to prevent its investors from voting on this resolution,” said Daniel Stranahan of the Needmor Fund, another investor-sponsor of the proposal.

Stranahan likewise mentioned the issue of transparency. “We are concerned that Dean Foods’ lack of transparency to its shareholders betrays a similar attitude toward its core consumers.” He added, “Factory farms are antithetical to the concept of organic farming, which supports family-scale production with sound environmental policies.”

Dean Foods appeal to the SEC for the authority to prevent its shareholders from voting on the proposal may prove successful. It appears that government regulators are likely to side with the $10 billion corporation.

Dean Foods’ primary business has been somewhat stagnant in recent years, so it has been touting its investments in the organic milk labels and the country’s leading soy milk brand, Silk, as vehicles to make its stock more attractive on Wall Street.

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