Milk prices face a "rather dramatic" rally in the first few months of the year, America's biggest dairy group has said, even as values at a benchmark auction hit their highest level since it was launched in 2008.
Dean Foods, which in November forecast that milk prices would fall in the first half of 2011, said that weather setbacks which had held back production growth in Australia and New Zealand, at a time of buoyant demand, had transformed the outlook.
"We now expect dairy commodity prices to climb throughout the first half, before flatting out or declining slightly in the third and fourth quarters," Gregg Engles, the Dean chairman and chief executive, said.
"We expect a rather dramatic move up in dairy prices during the first quarter and early second quarter," he added, terming the rally an "unexpected spike".
Prices rise again The comments followed a 3.8% rise to 1,339 in a dairy index compiled by Fonterra, the world's biggest milk exporter, after its latest globalDairyTrade internet auction – surpassing the event's opening reading, in July 2008, which had been its highest.
Whole milk powder saw the biggest increase, up 7.9% since the last session two weeks ago, and taking its price rise over the last year to one-third.
The latest uplift - which took to four months the period since the globalDairyTrade index last fell - followed talk that demand for dairy products was to be boosted by orders from Algeria and India, on top of strong and persistent demand from China.
'Clearly a drag'
Dean Foods added that the "spiking commodities", and a declining trend sales of fluid milk, left the outlook for early 2011 looking "particularly difficult".
"The… commodity outlook will clearly present a drag on first and second quarter earnings, and will push earnings out of the first half and into the back half, compared to our thinking last fall," Mr Engles said.
However, investors took support from a forecast that the US fluid milk industry was stabilising, albeit at depressed levels of profitability, with Dean Foods' own sector participant, the Fresh Dairy Direct-Morningstar division, see operating income fall 20% to $114m in the October-to-December quarter.
Besides a 3.2% decline in volumes, the business suffered a 30% jump in its benchmark milk price, the Class 1 Mover.
Furthermore, Dean's underlying earnings for the quarter, equivalent to $0.15 a share, beat Wall Street expectations by 1 cent a share.
Dean Food stock jumped 6.2% to $10.40 in morning trade in New York
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