Dean Foods predicts milk prices will top $15 a hundredweight

By MATEUSZ PERKOWSKI
Capital Press

A major U.S. dairy manufacturer is betting that steadily climbing milk prices will help the company outmaneuver smaller competitors.

Dean Foods, a Texas-based processor and distributor, expects milk prices will top $15 per hundredweight in 2010, up from about $13 at the end of 2009, according to a recent conference call with investors.

"We expect dairy prices will continue a general upward trend through next year and are building our forward plans accordingly," said Gregg Engles, Dean Foods' CEO, said during the call.

As a company with about 80 manufacturing facilities in the U.S., Dean Foods has a greater opportunity for internal consolidation and cost-cutting, which will benefit the company under a higher milk price scenario, Engles said.

"Frankly, we do not believe there is anybody in the industry that is attacking their cost structure with the same level of investment, intensity and vigor that we are," he said.

Low dairy prices have contributed to strong profit growth for Dean Foods so far this year, according to financial documents filed with the U.S. Securities and Exchange Commission.

The firm's total sales fell by 13 percent so far this year, to about $8.15 billion, but its raw material costs dropped about 19 percent, to about $5.85 billion, according to SEC filings.

So, despite weaker revenues and increased administrative expenses, Dean Foods managed to substantially boost its profits in 2009. At about $185 million, the company's net income is up 57 percent compared with this time in 2008.

"The business continues to generate a strong cash flow," said Jack Callahan, the firm's chief financial officer.

Considering that U.S. milk sales have stayed relatively flat for the past three decades, market share in the industry is essentially a "zero sum game," Engles said.

Based on industry statistics submitted to the USDA, Dean Foods believes the firm has "disproportionately larger margins" than smaller, privately held dairy manufacturers, whose profit margins are "closer to break-even," he said.

Dean Foods is well situated to weather a rise in raw material costs, but less profitable manufacturers may drop out of the industry and leave the door open for the company to further increase its market share, Engles said.

"You can only fund losses for so long," he said.

As smaller players exit the industry and sell off their facilities and equipment, Dean Foods expects that a rival manufacturer will also subsume some of those assets, he said.

"Inevitably, another consolidator will arrive on the scene," Engles said.

The company is also looking to expand its presence in the non-dairy market, said Callahan.

For example, as people have changed their coffee-drinking habits due to the recession, they've increased their consumption of Dean Foods' non-dairy creamers, which "allow consumers to bring the coffeehouse to their home," he said.

The firm has also expanded its reach into the European soy beverage market, taking over the Alpro soy division from a Belgian food company earlier this year for about $439 million.

"These innovations are proving quite successful so far," Callahan said.