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Dean Foods shares plunge, as it warns of 'accelerated dairy inflation'

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Shares in Dean Foods plunged by more than one-third after the dairy group unveiled a far bigger than expected loss, blaming rising dairy inflation, which it said would “significantly increase” through 2019.

 

The caution - which sent Dean Foods stock tumbling 35% in early deals in New York - came even as the latest GlobalDairyTrade auction, largely of Oceania dairy products, renewed its decline, falling for the fifth time in six events.

 

The drop in Dean Foods’s share price, which stood down 24% at $1.27 in late-morning trading, offered a difficult baptism for Eric Beringause, unveiling his first results for the dairy group, which he joined as chief executive at the start of last week.

 

Mr Beringause - formerly chief executive of dairy drinks business Gehl Foods, and whose career also includes spells at ConAgra, Nabisco Brands and Nestle – told investors that “Dean is a great, big, beautiful business operating in a very challenging environment”.

 

Matching a historic low’

 

The group unveiled a widening of 61% to $64.47m in after-tax losses for the April-to-June quarter, equivalent to a loss of $0.70 per share.

 

Wall Street had expected a loss of a more modest $0.13 per share.

 

Revenues fell by 5.5% to $1.84bn, reflecting the loss of some contract business last year, and an “accelerating” decline in the fluid milk market.

 

The impact on profits of the weaker sales was exaggerated by higher commodity milk costs, with the group saying that the Class 1 raw milk price “is the highest it’s been since the beginning of 2015”, at a time when a supermarket promotions are keep a lid on retail prices.

 

“As retailers continue to invest in private-label milk to drive foot traffic, the retailer margin-private label margin over milk has contracted to $1.26 [per hundredweight] in June, matching a historic low,” set in September 2017, said Jody Macedonio, the Dean Foods chief financial officer.

 

This margin reached a recent high, above $1.70 per hundredweight, in February 2015.

 

Prices vs costs

Ms Macedonio forecast that supermarkets would retreat from their strategy of “very low price points” on milk, given that it is “draining their own profitability”, and leaving them with “unsustainable” margins.

 

History suggested that there is a cycle of retailers focusing on, and retreating from, using cheap milk as a promotion tool, she said, although adding that she could not comment on when the latest trend would break.

 

However, Dean Foods warned that the “accelerated dairy commodity inflation” also pressuring its margins, with Class 1 milk prices up 19% year on year at $17.67 per hundredweight, looked likely to speed up further.

 

The group, saying it expected “higher dairy commodity inflation… to significantly increase throughout the remainder of 2019”.

 

‘Herd is still shrinking’

US milk prices have been buoyed by dents to production from weather setbacks, and from poor recent margins reflected in a pace of dairy cow slaughter which the Milk Producers Council said “is running 4.6% ahead of the 2018 pace and is likely to reach the highest annual total since 1986”.

 

“The dairy herd is still shrinking, setting the stage for a further setback in milk production,” after output fell by 0.3% to 18.2bn pounds in June, the industry group said.

 

“Springer prices are stagnant, evidencing little appetite for expansion. Dispersals continue.

 

“Eventually, higher milk prices will prompt more milk production, but that seems a long way off.”

 

‘Good pasture cover’

By contrast, in New Zealand, a key dairy exporter, milk production soared by 13.9% year on year in June – albeit a period of seasonally low volumes – with the gain attributed by Fonterra, the country’s top processor, to “better weather conditions this season than last season”.

 

“The start to the [2019-20] season across both [North and South] islands has been led by a relatively mild winter so far and good pasture cover for this time of year,” said Fonterra, which owns the GlobalDairyTrade (GDT) auction platform.

 

“Cow condition is also good across the country.”

 

Prices fell by 2.6% at Tuesday’s GlobalDairyTrade event, reversing headway of the last session, amid volumes up 40% at 34,969 tonnes – the highest of 2019.

 

Forex factor

Currency market moves were seen boding ill for prices at the latest event, with a weaker New Zealand dollar undermining the value of the country’s exports, in US dollar terms.

 

Weakness in the renminbi, which on Monday fell beyond 7 per $1 for the first time in 11 years, has reduced the affordability of imports for Chinese purchasers, the top dairy buyers.

 

“The drop in the New Zealand dollar and renminbi over the past week or so has created some room for lower prices at auction,” Tobin Gorey at Commonwealth Bank of Australia said ahead of Tuesday’s GDT.

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