UPDATE 2-Dean profit misses on higher costs for organic milk

* Adjusted EPS $0.28, below Wall St view $0.31

* Sales up 3 pct to $3.2 billion

* Sees mid-teens 2009 EPS increase

* Shares fall 21 percent (Recasts; adds company comment, byline; updates shares)

By Brad Dorfman

CHICAGO, Nov 4 (Reuters) - Dean Foods Co (DF.N), the largest U.S. dairy company, posted a third-quarter profit that missed Wall Street forecasts due to increased costs and marketing for its Horizon Organic dairy business.

Dean also forecast full-year earnings below analysts' estimates and issued a 2009 outlook that could trail expectations, sending its shares down 21 percent and erasing gains made in the last week.

The organic dairy business was hit by rising costs for organic milk as well as spending on marketing to stave off competition.

Dean's price increases on Horizon Organic milk are double the increases seen from private-label rivals, pushing its price gap to the upper limit of what it sees as an acceptable range. The higher the price gap, the more likely it is that consumers will trade down to private-label products in a tough economy.

The company also expects organic milk supply to decline significantly over the next six months, which would further increase prices.

"It remains unclear when our pricing actions and the rest of the competition's will catch up with the cost of organic milk," Chief Financial Officer Jack Callahan said in a conference call with analysts. "For now, Horizon Organic remains unprofitable."

BUTTERFAT COSTS

Dean was also hit by higher butterfat prices along with the issues at Horizon, cutting profit by 4.2 percent in its WhiteWave-Morningstar segment. Profit rose 21 percent in its traditional dairy business.

Net profit rose to $37.8 million, or 24 cents a share, in the third quarter from $6.5 million, or 5 cents a share, a year earlier.

Excluding reorganization and other costs, the company earned 28 cents a share, missing the analysts' average forecast of 31 cents, according to Reuters Estimates.

Sales rose 3 percent to $3.2 billion, helped by acquisition-aided volume growth in the traditional dairy segment. The company said it had passed lower conventional milk costs on to consumers, as typically happens in the dairy business.