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."
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
"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
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.
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%
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
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.