Dean Foods Is Running Out Of Milk Money

| About: Dean Foods (DF)


Dean Foods reported a wider than expected quarterly loss on Monday.

A rise in milk prices was to blame for higher costs.

The future remains uncertain, but the CEO believes international milk prices will drop soon.

Dean Foods (NYSE:DF), the nation's largest milk processor and distributor, reported a wider than expected quarterly loss on Monday, saying, "the balance of the year appears rocky." In the second quarter, Dean Foods lost $0.14 per share, excluding certain items, compared to expectations for a loss of $0.06. Meanwhile, Revenue in the quarter totaled $2.39 billion, better than the $2.32 billion expected by analysts.

"The second quarter was even more challenging than we had originally anticipated. This is by far the most difficult operating environment in the history of the company, reinforcing the importance of the initiatives we have underway," Gregg Tanner, Chief Executive Officer of Dean Foods, said in a press release. One of the main difficulties facing Dean Foods is the steep prices rise in the raw cost of milk over the past year. Dean Foods said that the cost of milk in the second quarter was the highest in U.S. dairy industry history. In the second quarter, the average Class I Mover, a measure of raw milk costs, was $23.66 per hundred-weight, up 31% from last year and up 6% from the first quarter.

Class III Milk, which is used to make cheese, butter and dried milk, is shown below. The futures contract, one of the few actively traded for milk, shows just how rapid an expansion milk prices have seen since bottoming in 2009.

Chart provided by:

A lot of the milk demand has come from China, as well as other Southeast Asian and Latin American "emerging markets" over the past year. Burgeoning middle classes in those regions are upgrading their palates to more expensive meats and milk products. Among the top export markets for milk, Southeast Asia bought 39% more American milk through April than a year ago. Similarly, Chinese imports alone were up 91%, according to the US Dairy Export Council.

Likewise, the USDA said last month that the June price for Class I skim milk, the closest approximation to what you get at the grocery store, would be up 20% from a year ago. Farmers, however, only see a small fraction of the higher prices. In reality, only about a third of the retail price is the "farm share," or the portion going to farmers. That's significantly down from the 50% they used to get in the 1980.

Although Dean Foods still sees uncertainty in the volatile and unpredictable dairy commodity environment, Tanner believes commodity costs will eventually come down. Tanner cited a potential export slowdown could weigh on international milk prices. International dairy prices have been weakened by a rise in milk production, which reached 4.9% in the top seven dairy exporters in the first half of 2014, at a time when buyers in major importing countries, including China, have already stocked up.

"China bought more than expected in the first five months of this year, however, it now appears as though they've bought more than they needed given the apparent stabilization of their domestic supply and slowing of local demand growth." Tanner claimed.

While Dean Foods hopes milk prices will drop so they can cut costs, the company admits it may not be out of the woods until next year. "While we hope to see a more positive environment later in the year, the uncertainty surrounding whether or when that will occur leads us to withdraw our full year guidance for the present time," Tanner added.

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