Falling Milk Prices May Provide Comfort To Food Companies
January 12 2009 - 11:29AM
Dow Jones News
Milk prices have headed south as the global economy has
weakened, offering some relief for food companies struggling with
dairy costs.
Potential beneficiaries of the trend could range from
manufacturers like Kraft Foods Inc. (KFT) to cheese users like
Domino's Pizza Inc. (DPZ), although packaged food companies like
Kraft may simultaneously feel pressure from retailers to cut prices
for some of their own branded products.
A confluence of factors have helped push milk costs lower - most
notably weakening economic conditions worldwide have prompted lower
demand for U.S. milk exports while the high prices of recent years
have ensured healthy dairy supply.
"We are going to be in a period where [milk] prices are quite
low," says Stifel Nicolaus analyst Chris Growe.
Milk prices were over $20 per hundredweight, or per hundred
pounds, at the start of 2008 and finished the year flirting with
the $10 level, the Western Milling Weekly Feed and Dairy Newsletter
recently noted. A variety of other indicators of dairy prices are
also pointing downward. In an early January note, Growe noted that
cheese prices had also moved lower for 17 straight trading
sessions.
Growe sees Dean Foods Co. (DF), which sells Horizon Organic milk
and other dairy products, as one of the main beneficiaries of the
downward trend in dairy costs. Growe recently raised his 2009
earnings estimates for Dean by 8 cents a share to $1.50. He said
history has shown that periods with lower-than-average milk prices
tend to boost volume growth for dairy processors like Dean.
Kraft Foods, which sells its namesake cheese singles, is another
potential gainer. Growe cautions that Kraft is facing very
difficult private label competition in the cheese category. As
dairy costs fall, private label or store brands, will cut their
costs. "And Kraft will have to follow," Growe said. This could mean
that there may not be huge benefit to Kraft's margins, although the
lower prices will translate into higher volumes for the
cheesemaker, he said.
Kraft said it does not comment on future price increases or
cuts. A spokesman said that its cheese business has recently
changed its pricing approach in order to respond more quickly to
swings in commodity prices. The company raised prices on its cheese
products for the first half of 2008, but made some price cuts in
the third quarter.
Coffee seller Starbucks Corp. (SBUX) is another dairy user, and
in a recent conference call the company said it expects higher
costs for coffee to be offset by favorable dairy prices in its
fiscal 2009.
"Coffee beans are the most important commodity they buy and
coffee bean [prices] have been going higher," said Jack Russo, an
analyst at Edward Jones. "Dairy will offset a little bit the effect
of the coffee bean surge. Given how weak their sales are and all
the cost pressure, they'll take any help they can get."
Ultimately, the benefits of falling milk prices could trickle
down to other businesses.
"Cheese is the largest component of the pizza and when cheese
prices come down that is a positive for our business," said Lynn
Liddle, a spokeswoman for Domino's Pizza (DPZ). Liddle said that
the ultimate impact will depend on whether dairy prices sustain
their recent declines. "What we hope for is a sustained
moderation," she said. But Liddle also pointed out that the vast
majority of Domino's stores are franchised. Although the company's
reported financials may not show a direct change, its franchisees
will benefit from lower dairy costs, she said.
Other companies that use milk in some form include chocolate
maker Hershey Co. (HSY) and General Mills (GIS), which has a yogurt
business. But Growe said that there may not be a meaningful
financial impact to either Hershey or General Mill's financials
from dairy costs in 2009.
Hershey, General Mills and Dean didn't comment and a Starbucks
representative could be reached.
-By Anjali Cordeiro, Dow Jones Newswires; 201-938-2408;
anjali.cordeiro@dowjones.com
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