Milk prices are poised for a retreat of some 15% by the end
of the year, undermined by a "significant supply response" to high values, Dean
Foods said, even as it blamed record raw material prices for a cut to profit
The group, the biggest US dairy processor, cut to "at least"
$0.60 per share, from $0.73-0.86 per share, its forecast for full year
earnings, blaming elevated milk prices, which Gregg Tanner the Dean Foods chief
executive, termed "an undeniable headwind for our business".
Prices of benchmark Class 1 milk hit a record high of $24.47
per hundredweight this month, up 38% year on year, lifted by strong global
demand for dairy products, largely from the increasingly large, and wealthy,
"Domestic raw milk prices continue to be meaningfully
impacted by global developments," Mr Tanner said, adding that the rise in
values so far this year was "ahead of our prior expectations".
Milk production hopes
However, the group said that the conditions for a "noticeable
decline" in milk prices in the second half of the year were in place, in terms
of a "significant supply response" from producers.
"To date, global supplies appear to be meeting those expectations,"
Mr Tanner said, pegging the rise in European output at 4-5% year on year so far
in 2014, and with full-year growth expected at 2-3%, "which will be the biggest
advance in at least five years".
Production in New Zealand, the top milk exporting country, "has
also been relatively strong, with full-season production, which ends in May,
expected to increase 5-7% against last year's weak comparatives".
Dean Foods said it was working on prices falling back to
$20-21 per hundredweight at the end of the year, a drop of 14-18% from current
levels, and a price in line with the $20.37 per hundredweight at the end of
"We continue to believe solid global supply growth will lead
to moderating raw milk prices in the second half of 2014," Mr Tanner told
Falling auction prices
The comments come two days after values at New Zealand-based
GlobalDairyTrade auction, a world benchmark for physical product, fell for a sixth
successive event, the longest losing streak
in more than three years.
Over this period, the auction's price index has tumbled by
21% to a 14-month low, a decline attributed to rising production balancing out
flagging demand at higher values, although the pace of decline has decelerated
to 1.1% at the latest event.
Milk fat prices have fared particularly badly during the
correction, falling by 25%, with skim milk powder, in demand in China for
infant formula, dropping by 20%.
However, at the latest event it was skim milk powder which
fared worst, with prices dropping by 2.3%, undermined in particular by product
for short-term delivery, while cheddar prices fell by 1.8%.
Mr Tanner also flagged a drop in cheddar prices in the US
from a record top in late March – a factor which had in part fed through into
the elevated milk prices so far this month.
"Weak cheese production, a 37% year-over-year increase in
March US cheese exports, and depressed cheese stocks, continued to provide
price support to this market," he said.
"However, since this all-time high, the spot cheddar markets
have moderated 14-16%, with the expectation of additional declines."
Dean Foods unveiled a loss of $8.96m for the
January-to-March period, compared with earnings of $492.6m a year before,
although this figure was swollen by one-off gains.
On an underlying basis, the group reported a loss of $0.05,
a closer comparison with earnings of $0.31 a year before.
Wall Street had, nonetheless, expected the group to remain,
just, in the black, by $0.01 per share.
Dean Foods shares 4.9% lower at $14.60 in lunchtime deals in
New York, having touched $14.43 earlier, a drop of 6.0%.