'Heavy' Chinese buying to keep milk prices high

Milk prices will remain "elevated" this year, supported by "heavy" buying by China, the boss of Dean Foods said, warning of a potential fall into the red which sent shares in the top US dairy processor to an 18-month low.

Gregg Tanner, the Dean Foods chief executive, warned of an "increasingly challenging and unprecedented dairy commodity landscape" thanks to soaring demand from China, which is witnessing strong consumption growth at a time of "significant constriction" on its own milk output.

Since the melamine crisis in 2008, when child deaths from tainted milk tarnished the reputation of domestic supplies, "China has struggled to achieve desired growth in its own milk supply", Mr Tanner said.

Last year, "weather, disease, and regulatory changes conspired to create a full-blown supply challenge.

"Industry analysts have estimated Chinese milk production to be down anywhere from 5-15% compared to year-ago levels."

'Heavy buyer'

And China's milk production "is not expected to fully recover" in 2014, with the setbacks to output down to "issues that cannot be quickly reversed", the dynamics which raised prices last year will continue, Mr Tanner said.

"We expect China to remain a heavy buyer of imported dairy commodity products in 2014,"

This demand will keep "global raw milk prices elevated… especially in the first half" of the year, with a "significant supply response" from major producers needed to cool the market in the second half.

"At current and expected imported demand levels, we would need to see US milk production growth at 2-3%, coupled with supply growth in the European Union, New Zealand, and Australia in order for a milk prices to begin to moderate in the back half of 2014," he told investors.

The US Department of Agriculture is forecasting an acceleration to 2.1% in US milk production growth this year, from 0.7% in 2013, with EU output seen rising by 1% and Australian volumes by 3%, with production from New Zealand, the top exporter, viewed increasing by 5%.

More record highs ahead

The comments came as Dean Foods warned that it could fall into a loss of $0.03 per share in the first three months of 2014, with at best a profit of $0.03 per share.

Wall Street had been expecting the group, which reported earnings of $0.32 a share in the first quarter of 2013, to achieve $0.28 a share in the January-to-March period this year.

"The consensus view of the dairy commodity outlook for 2014 appears to be more challenging than previously expected as current dairy commodity prices have moved near or beyond all-time highs," Mr Tanner said.

He forecast the price of US Class I milk, which has already risen 8% this year to a record high of $22.02 per hundredweight, extending its rally to $24 per hundredweight next month.

Market reaction

For the October-to-December period, Dean Foods unveiled a loss of $37.7m, compared with a $28.1m profit a year before, on revenues down 6.6% at $2.30bn.

However, the slide to a loss included a raft of one-off items, including $63m in losses on the early retirement of debt, without which the group would have achieved a profit of $0.18 per share, in line with investors' expectations.

Dean Food shares fell more than 10% in early deals in New York to $13.59, their lowest since August 2012, before recovering some ground to stand at $14.05 in afternoon trading, down 7.6% on the day.

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