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Dean Foods stokes doubts over milk price recovery

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Dean Foods undermined expectations for a revival in world dairy prices, citing a persistent milk production surplus, as it unveiled results which beat Wall Street hopes, and forecast further expectation-beat profits.

Gregg Tanner, the chief executive of Dean Foods, forecast that global sector fundamentals would "continue to be overall supportive to our business" which, as the top US dairy processor, is a major milk buyer.

The group cited world milk output which "continues to outpace relatively modest demand", highlighting in particular a rise of more than 2.5% year on year in the European Union, where volumes have been spurred by the ending of production quotas.

"This is particularly meaningful when one considers that the overall size of the European dairy production is approximately seven times larger than that of New Zealand," the top milk exporter, Mr Tanner said.

Chinese dynamics

He also raised doubts over the likelihood of prices being buoyed by a recovery in demand from China, whose hefty imports sent world prices soaring last year.

"We see China's milk supply expanding faster than their weaker consumption," he told investors.

And in the US itself, he flagged "ongoing domestic supply momentum, due to a slightly larger herd and productivity growth more than offsetting the impact of the continued drought in California".

"These supply-and-demand factors should contribute to a relatively benign dairy environment over the short term."

Price drop

Indeed, Dean Foods forecast prices of benchmark Class 1 Mover milk, used in fluid milk products, returning to decline after some buoyancy in both July and September.

Values in the October-to-December period will, at a forecast $16.22 per hundredweight, average 31% lower than those a year ago, and down 1.0% quarter on quarter.

The decline will extend a retreat in US milk prices which set in late last year, after values had hit a monthly average peak of $24.47 per hundredweight in May 2014, and remained close to this level until December.

Wider margins

However, Dean Foods chose not to pass on to retailers all the drop in its milk costs, allowing its margins to recover from a low of about $1.10 per hundredweight in November 2014 to more than $1.70 per hundredweight in February, before a retreat to $1.53 a hundredweight in September.

By volume, the strategy has cost Dean Foods some market share earlier in 2015, although there were signs that this was being recouped in the July-to-September period.

Certainly, it helped the group bounce back to earnings of $20.23m for the quarter, compared with a loss of $15.97m in the same period of last year, and despite a drop of 14.3% to $2.03bn in revenues, a reflection of lower prices.

The earnings equated to $0.30 per share, excluding one-time effects, ahead of market expectations of a $0.24-per-share result.

Shares soar

And Dean Foods forecast earnings of $0.28-0.38 per share for the October-to-December quarter, ahead of Wall Street expectations of a $0.24-per-share figure.

Shares in the Dallas-based group soared 8% to $19.41 in early deals in New York before easing back to $18.975, a gain of 5.8%.


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