Volatile Milk Prices Force Dean Foods Co (NYSE:DF) To Withdraw Its Profit Outlook For 2014

By Mark Michaels on August 12, 2014 Consumer Staples

The largest milk processor of United States, Dean Foods Co (NYSE:DF), withdrew its profit outlook for the fiscal year 2014 on the basis that the prices of raw milk remain volatile and unpredictable for the current year. The producer of Dean’s Milk and Meadow Gold saw a reduction of 10 percent in its stock prices when the company reported bad figures for its second quarter, missing the estimates significantly- with a large profit gap.

During the second quarter, the prices of raw milk increased by 6 percent when compared with the prices in the prior quarter; similarly, the prices rose by 31 percent, on yearly basis. Price of raw milk has reached $23.66/hundred weight, a record high.

Gregg Tanner, the chief executive of Dean Foods Co (NYSE:DF), on an earnings call, said that the prices of milk remained volatile during the second quarter and chances are that they would remain this way for the whole year. He further commented that some of company’s products, such as cottage cheese and ice creams, faced margin pressures as the price of its key ingredient, butterfat, also increased by 32 percent over the second quarter.

Gregg Tanner further said that the current year is the most difficult of environments that the company has faced in its long history.

The milk prices in United States are on a rise since 2008, when the country of China, upon finding melamine contaminations in its domestic products, started sourcing international companies for infant formulas and milk powders. Moreover, United States has seen some severe droughts in its long history, which have shrunken the sizes of cattle herds.

Akshay Jagdale, an analyst at KeyBanc Capital Markets, in a research note, said that the milk industry has been seeing deteriorating quantities of raw milk lately. The analyst further stated that the shift towards private tagged milk was also damaging the profitability of Dean Foods Co (NYSE:DF) as the private tagged products were available at lower rates than the national label products.

Ever since Dean Foods Co (NYSE:DF) lost one of its private tagged contacts with Wal-Mart Stores last year, the company has been struggling to boost its sales. The company has been attempting to reduce its costs by cutting back on laborers and closing down the factories. Furthermore, in May, the company also reduced its adjusted outlook for the year.Dean Foods Co (NYSE:DF) predicts a loss of $0.05 to $0.15 for the third quarter of the fiscal year 2014.

The chief executive of the company, Gregg Tanner, was confident that Dean Foods Co (NYSE:DF) will get back to its feet by the end of the year as the prices of raw milk are expected to fall in the latter part of the year for the cow food prices have decreased significantly and the U.S. production is anticipated to rise by 3 percent.

During the second quarter, the net loss of Dean Foods Co (NYSE:DF) was recorded to be at $1 million: 1 cents for each share. It is pertinent to note here that, last year, the company reported a loss of $57 million. However, the company’s loss after adjustments comes to a total of 14 cents for each share. Net sales of the company increased by 7 percent and reached to $2.39 billion.