Shares in Dean Foods plunged to their lowest in a decade after the dairy group warned over a "highly challenging" fresh milk market, which dragged earnings below Wall Street forecasts and had dashed hopes of cutting debt.

The company, America's largest dairy group, said it may bring forward a debt refinancing after its declining performance left it within sight of triggering penalty clauses on its borrowings.

"Given the continuing challenges in the business, we are not on pace against our goals of deleveraging the balance sheet," Jack Callahan, Dean's chief financial officer, said, noting a target of cutting debt to 3.5 times earnings before interest, tax, depreciation and amortisation (ebitda) by mid-2011.

The ratio was 4.43 times ebitda at the end of March, the close of the group's first quarter, compared with a ceiling of 4.5 times, as of the end of the year, before loan convenants are breached.

'Beyond sustainable levels'

Dean revealed it was being caught in a market squeeze, with firmer dairy commodity markets raising milk costs at a time when the prices of its products were being undermined by rivalry with supermarket's heavily discounted own brands.

"The fluid milk category continues to be highly challenging as retail pricing for [supermarket] milk remains well below historical levels," the company said, adding that the gap between Dean's milk and retailer's own-brand products had gone "beyond sustainable levels".

For the group's Fresh Dairy Direct-Morningstar business, its biggest division, "the road ahead appears rocky, with a retail price environment that appears unsustainable, but has not yet abated".

Targets dropped

The group also added 350-400 jobs to the 150 it is already cutting in an effort to lower costs, which Dean said it expected to be pressured by continuing rises in dairy commodity prices.

However, Dean shied away from making a full-year forecast for its own profits, predicting results only for the current quarter.

"While we hope to see a more positive environment in the back half of the year, the uncertainty surrounding whether or when that will occur leads us to suspend our full year guidance for the present time," Gregg Engles, the Dean chairman and chief executive, said.

For the April-to-June period, Dean forecast earnings of $0.23-0.28 a share, well below the $0.41-a-share figure that Wall Street has been expecting.

Stock plunges 

In the first three months of the year, Dean's revenues rose by 10.0% to $2.97bn, boosted by acquisitions, while earnings slumped by 43% to $43.2m.

The earnings figure was equivalent to $0.23 a share excluding one-off items, lower than the $0.28 a share that analysts had forecast.