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UPDATE 2-Dean Foods withdraws 2014 forecast as milk prices stay volatile
August 11, 2014 / 1:25 PM / 3 years ago

UPDATE 2-Dean Foods withdraws 2014 forecast as milk prices stay volatile

(Adds details, CEO and analyst comments; updates shares)

By Sruthi Ramakrishnan

Aug 11 (Reuters) - Dean Foods Co, the largest U.S. milk processor, withdrew its full-year profit forecast, saying raw milk prices remained "unpredictable and volatile."

Shares of the maker of Meadow Gold and Dean's Milk fell as much as 10 percent after it also posted a bigger-than-expected second-quarter loss.

In the quarter, U.S. raw milk prices rose 6 percent from the first quarter and 31 percent from a year earlier to a record high of $23.66 per hundred-weight.

Milk sales remained weak in the second quarter, Chief Executive Gregg Tanner said on a conference call. There was also margin pressure in products such as ice creams and cottage cheese as prices of butterfat, a key ingredient, jumped 32 percent.

"This is by far the most difficult operating environment in the history of the company," Tanner said in a statement.

U.S. milk prices have been rising since 2008, when China started sourcing foreign-made milk powder and infant formula after several children fell ill due to local milk products contaminated with melamine.

Years of drought in parts of the United States have also shrunk cattle herds to the lowest level in more than six decades.

"Industry (milk) volumes trends continue to deteriorate more than we expected and lately a mix shift in favor of private label milk is also hurting profitability," KeyBanc Capital Markets analyst Akshay Jagdale wrote in a note.

Private label brands usually sell at lower prices than national brands.

Dean Foods has been struggling to boost volumes amid tough competition and volatile commodity prices after losing a private label contract with Wal-Mart Stores Inc last year.

The milk processor has been trying to lower costs by closing factories and cutting jobs. In May, it cut its 2014 adjusted profit forecast.

Dean Foods forecast an adjusted loss of 5-15 cents per share for the third quarter ending September.

Tanner, however, said there were "meaningful signs" that raw milk prices could fall later this year and early 2015 as U.S. production is expected to rise about 3 percent in the second half, helped by lower cow feed prices.

Dean Foods' net loss narrowed to $1 million, or 1 cent per share, in the second quarter ended June 30 from $57 million, or 61 cents per share, a year earlier, when the company posted a big loss from discounted operations after selling its Morningstar division to Canada's Saputo Inc.

Excluding items, Dean Foods reported a loss of 14 cents per share.

Net sales rose 7 percent to $2.39 billion.

Analysts on average had expected a loss of 6 cents per share on revenue of $2.32 billion, according to Thomson Reuters I/B/E/S.

Dean Foods' shares were down 6.5 percent at $14.79 on the New York Stock Exchange. The stock has fallen 23 percent in the 12 months to Friday's close. (Additional reporting by Siddharth Cavale in Bangalore; Editing by Sriraj Kalluvila and Kirti Pandey)

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