Dean Foods Co. DF -0.64% shares took a beating early Tuesday, falling nearly 10% on a rough fourth-quarter report. Not that the country’s biggest milk processor and distributor didn’t hit Wall Street’s numbers. It did.
What hurt Dean Foods’ share price was the company’s warning that the milk industry faces a “very challenging environment” in the first half of 2014, and those challenges are going to be felt all along the food chain.
During the fourth quarter, Dean Foods, whose brands include Berkeley Farms, Dean’s and Tuscan, said its share of the nation’s milk market grew to 35.7% from 34.9% a year ago. But company and USDA estimates show milk sales fell 2.2% industry-wide over the same period.
So why are prices up if demand is down? Dean Foods cites a couple of reasons.
One is the rising cost of raw milk. In its quarterly update, Dean Foods, which buys its milk from dairies, said raw milk prices are hitting all-time highs despite strong global production growth. That’s because supplies simply are not keeping pace with global demand, and that’s pushing up prices.
“We now expect Class I dairy commodity prices to climb throughout the majority of the first half, before flattening and declining moderately in the second half of 2014,” CEO Gregg Tanner said in his report to shareholders. (Class I milk refers to Grade A milk that can be used in all beverage milks.)
A severe drought across the western states isn’t helping. It’s a huge driver behind soaring Class III (cheese, powdered milk) milk futures DAG4 +0.17% , which are trading near six-year highs.
At the same time, Tanner said he’s concerned about Washington tampering with the federal food stamps program. “We continue to keep a watchful eye on…the recent reduction in Supplemental Nutrition Assistance Program, or SNAP benefits.”
Funding to the SNAP program just took an $8 billion hit as part of the farm bill cutbacks signed on Friday by President Barack Obama. For the program’s 47 million participants, that means fewer trips to the grocery store. Many of those collecting food stamps are households with small children and rank among the milk industry’s top consumers.
With sales under pressure at home, it makes sense for dairies to turn their milk into products with longer shelf lives, such as cheese or powdered milk. These can then be shipped to markets outside the United States, where they fetch a higher price.
The net result? Higher prices at home and tighter operating margins for milk companies like Dean Foods.
Source: Market Wach
