Milk prices ‘to start going up’ – but not by much

(Agrimoney) – Milk prices are to “start going up” – but not significantly, at least for the first half of the year, US dairy giant Dean Foods said, although the outlook failed to prevent a sharp drop in its shares.

Gregg Tanner, the chief executive at the biggest US dairy processor, said that the milk price – as measured by the Class 1 Mover benchmark for liquid milk – “is going to start going up, obviously, from where it’s at now.

“But we don’t see [the rise] being significant

“What we’re seeing here is that through the first half of the year we expect [milk prices] to be relatively benign.”

‘China seems well supplied’

Mr Tanner flagged the dent to prices from resilient production, at a time of curtailed purchases by Russia, which has imposed sanctions against many Western exporting nations, and China.

“China seems to remain well supplied, as its greater-than-2%, year-over-year milk supply growth stabilises and demand holds against the backdrop of lacklustre economic performance,” Mr Tanner told investors.

Meanwhile, output volumes are being supported by the rise in European Union production, running at some 5% year on year, following the removal in April of output quotas.

“This is meaningful when one considers that the overall size of the European dairy production is over 1.5 times larger than that of the US and approximately seven times larger than that of New Zealand,” the top milk-exporting country.

“These supply-and-demand factors should contribute to a relatively benign dairy commodity environment over the short term,” from a milk buyer’s perspective.

‘Slow recovery in prices’

The comments tally with the consensus that a notable recovery in dairy prices is unlikely until at least 2016.

Separately on Monday, National Australia Bank said that “looking to the coming year, we see a slow recovery in global prices, with moderately higher Chinese demand but continued strength in global supply”.

And they came as Dean Foods unveiled a more than tripling in earnings for the October-to-December quarter, to $18.84m, from $5.28m a year before.

While revenues fell by 15.5% to $2.02bn, a reflection of weaker retail milk prices, the impact was cushioned by the lower raw material costs.

Ahead of forecasts

On an underlying basis, earnings came in at $0.36 a share, a little ahead of the $0.34-a-share result expected by analysts, according to FactSet.

And the group forecast earnings hitting $0.32-0.42 a share in the current, January-to-March quarter, at least matching the market consensus, and potentially improving on the underling result of $0.33 a share reported for the same period last year.

“With the continuation of commercial and brand initiatives, diligent cost focus, and an overall favourable commodity environment, we expect our operating and financial momentum to continue,” Mr Tanner said.

Margin pressure

Nonetheless, Dean Foods shares tumbled 7.9% to $18.89 in midday deals in New York.

The group acknowledged pressure on its margins, as retail prices fell at a “heightened rate” compared with milk costs.

“The margin over milk decreased from $1.54 per gallon in the July-to-September quarter to $1.48 per gallon in the October-to-December quarter,” Mr Tanner said.

“We recognise these levels of margin over milk have not been seen since 2014.

“However, we do not believe this is indicative of material pricing tensions within the marketplace,” he added.