May 8, 2014 / 3:56 PM / 4 years ago

Dean Foods cuts 2014 profit forecast as raw milk costs soar

(Reuters) - Dean Foods Co (DF.N), the largest U.S. milk processor, cut its full-year adjusted profit forecast after posting a surprise loss for the first quarter, as milk costs reached an all-time high and a severe winter hurt supply.

Shares of the company, which sells Meadow Gold and Dean’s milk, fell as much as 6 percent on Thursday.

Dean Foods has been struggling to boost volumes amid tough competition and volatile commodity costs after it lost a contract with Wal-Mart Stores Inc (WMT.N) last year.

“Due to the previously disclosed loss of business from a large retailer, Dean Foods’ unadjusted fluid milk volumes declined 6.7 percent (in the first quarter),” the company said in a statement.

Dean Foods is facing headwinds due to high raw milk costs and the loss of the private-label milk contract, Chief Executive Gregg Tanner said on a post-earnings conference call.

Milk prices have been rising in the United States since 2008, when China started sourcing foreign-made milk powder and infant formula after six babies died and over 300,000 children fell ill due to local milk products contaminated with melamine.

Dean Foods said raw milk prices rose 22 percent in the first quarter ended March 31. Prices continue to rise, increasing 4 percent between March and May, the company said.

High milk prices have been hurting the margins of U.S. companies that buy raw milk, such as sandwich chain Potbelly Corp (PBPB.O) and organic food maker Annie’s Inc BNNY.N.

Dallas-based Dean Foods said a “significant” rise in raw milk supply from the United States and Europe was needed to arrest the spike in prices.

U.S. milk production rose just 1 percent in January-March, according to the U.S. Department of Agriculture.

Dean Foods said in October that it would close 8-12, or about 15 percent, of its factories by the middle of this year to focus on its milk business.

The company cut its adjusted earnings forecast for the year ending December to at least 60 cents per share from 73-86 cents.

Dean Foods forecast an adjusted loss of 2-8 cents per share for the second quarter ending June 30.

The company posted a surprise loss for the first quarter as its raw milk costs rose and a severe winter hurt its school milk business.

Net loss attributable to the company was $9 million, or 9 cents per share, compared with a profit of $493 million, or $5.30 per share, a year earlier.

Excluding items, the loss was 5 cents per share.

Dean Foods said weather-related disruptions increased its costs by about $4 million, or 3 cents per share.

Revenue fell about 2 percent to $2.34 billion.

Analysts on average had expected a profit of 1 cent per share on revenue of $2.27 billion, according to Thomson Reuters I/B/E/S.

Dean Foods shares were down 4.9 percent at $14.60 in late morning trading on the New York Stock Exchange. The stock has fallen about 11 percent so far this year.

Editing by Kirti Pandey and Savio D'Souza

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