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Cheese demand to prop up US milk prices

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The Texas-based food group, Dean Foods expects domestic US milk prices to recover slightly in coming months, but to remain well below 2014 levels.

High demand for cheese was seen continuing to lend support to US prices, which Dean Foods sees rising by around 4% over the three months to September 30.

This would still see US milk prices down 30% year-on-year.

'Limited potential'

Speaking to investors, Dean Foods chief executive Dave Tanner said "in the near term we see US raw milk prices continuing to trade in a relatively tight band, with limited potential for price escalation".

"From a nearing quarter perspective, we expect that raw milk costs will continue to be significantly lower than prior-year levels and will remain relatively stable," he added.

The group took a cautious position on global commodity milk prices, as "supply growth will continue to outpace demand".

Last week global dairy prices hit a new 13-year low.

Cheese demand

US dairy prices have proved more resilient that global commodity milk prices over the last year, sustained by a strong domestic demand for cheese.

Mr Tanner said that Dean Foods expected to see cheese prices "continuing to be the driver" of drinking milk costs in the US.

However, Mr Tanner warned that "the current large cost differentials between US and international dairy products," as well as the price gap between milk suitable for cheese making and milk for producing commodity milk powder, means "the market seems somewhat unsettled and subject to volatility".

Slow increase

Dean Foods saw raw milk in the three months to June 30, averaging $15.82 a hundredweight (100 pounds), down 6% from the previous three months, and down 33% from an average of $23.67 a hundredweight over the same period last year.

However, prices "increased gradually" through the three months to June 30, ending the period at a higher level than they started.

"July's per-hundredweight raw milk costs of $16.53 marked a third consecutive month with a $0.03 per gallon increase, but August's announced price of $16.28 per hundredweight represents about a $0.02 per gallon decrease sequentially, and we expect per-gallon prices to increase about $0.005 per gallon in September," Mr Tanner said.

Consumers benefit

However profit margins have begun to be squeezed, and retailers pass on the low price of milk to their customers.

Dean Foods noted that recent months had seen the margin over milk decline, "as retailers began passing back to consumers some of the cost declines that they had retained in January and February".

Dean Foods saw the "margin over milk," or the price spread between commodity drinking milk and retail milk prices was down in the three months to June 30 to $1.60 a gallon, from $1.70 a gallon in the first three months of the year.

"We're beginning to see a lower commodity environment translate into an increased competitive environment," said Mr Tanner.

Mixed results

Dean Foods' shares took a tumble on Monday, after the group announced the unexpected departure of group chairman Tom Davis, as well as some mixed company results.

Mr Tanner told investors: "We expect that the Board will be very ready to announce succession plans in the regular course."

The group saw revenues fall 16% in the three months to June 30, behind analyst expectations, although improved profit margins helped earnings rise to $26.5m, compared with losses of $645,000 last year, exceeding expectations.

By Agrimoney.com

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