US milk prices to fall, Dean CEO predicts. Again

Milk prices in the US appear poised their resilience, Dean Foods chief executive Gregg Tanner said, citing the potential for an export slowdown – although he acknowledged that his previous forecasts for drop in values had gone unfulfilled.

International dairy prices have been weakened by a rise in milk production, which reached 4.9% in the top seven dairy exporters in the first half of 2014, at a time when buyers in major importing countries, including China, have already stocked up.

"China bought more than expected in the first five months of this year," Mr Tanner said.

"However, it now appears as though they've bought more than they needed given the apparent stabilisation of their domestic supply and slowing of local demand growth."

While this has opened the door to lower prices for other importers, "their appetite appears to have ultimately been dampened by lower sales… and the depreciation of many of their currencies".

The dislocation of supply and demand has mean that "several export regions appeared to have above-normal stock levels to work through", Mr Tanner told investors after Dean Foods' release of results which sent its shares tumbling.

'Downward price pressure'

While US milk prices have remained close to May's record highs, when Dean Foods paid an average for the month of $23.64 per hundredweight for Class 1 mover milk, that resilience looks likely to come under threat from reduced export competitiveness.

While the raised shipments by 22% in the first half of 2014, the country "is now price disadvantaged vis-a-vis the world markets, which would put considerable pressure on second-half export activities," Mr Tanner said.

"Any slowing of export activity would coincide with an expectation of increased second-half US milk production," seen rising 3% in the July-to-December half.

A softer export performance "should allow for stock rebuilding and a higher likelihood of downward pressure on the prices".

Prediction record

However, Mr Tanner acknowledged that he had forecast a drop in milk prices before, only for values to remain stubbornly high.

"I have been saying for almost 18 months that here is what is going to happen in the dairy Class I commodity and I have missed every one of them," he said.

"Trying to prognosticate Class I at this point… all the data shows you that it should start to come down. All the fundamentals of the market say it should start come down.

"But those fundamentals [have been] in place now for probably five to six months and we have not seen it come down."

He added, explaining the company's decision to withdraw a forecast for 2014 earnings: "Do I think the Class I should come down? Yes, I do, but I can't predict that at this point.

"That's why we basically said it wouldn't be responsible for us to even try and project forward because we have been so far off on this."

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