Milk prices face 'noticeable drop' as output gains

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 hopes.

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, Chinese population.

"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 2013.

"We continue to believe solid global supply growth will lead to moderating raw milk prices in the second half of 2014," Mr Tanner told investors.

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%.

Cheddar retreats

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."

Shares fall

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%.

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