Falling Milk Prices May Provide Comfort To Food Companies

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; [e-mail]

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