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Rail Paul

Dean Foods to spin off organic and soy milk businesses

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Selling milk is a brutal, low-growth business. Unless you're selling organic.


Shares in Dean Foods Inc. DF +28.87% rose 41% Wednesday after the company detailed long-awaited plans to spin off the largest U.S. dairy producer's WhiteWave-Alpro business, which includes the Horizon Organic dairy brand and higher-margin Silk soy products.


It was Dean's highest-closing price in two years, and a sign of deep shifts in the marketplace, where consumers are willing to pay much higher prices for products that they perceive to be more healthy.


The profit margins on soy milk, for instance, well outpace the margins for both standard and organic cow's milk products. WhiteWave annual sales have climbed 64% over the past five years to reach $2.1 billion in 2011, while its larger fresh milk nonorganic business has risen 24% over the same period.


The buzz isn't lost on Gregg Engles, Dean's chief executive.


Mr. Engles has spent 18 years building Dallas-based Dean Foods into the U.S. market leader, and though he plans to stay on as chairman of the parent, he will become CEO of WhiteWave Foods Co., which accounts for less than a fifth of group sales, but 40% of operating profits.


WhiteWave-Alpro has long been considered the most valuable part of Dean Foods. The company's standard dairy products and vast private-label business are more vulnerable to volatility in commodity prices and a long-running slowdown in consumers' appetites for standard dairy products.


Mr. Engles said on a post-earnings call that domestic demand for fresh milk remained "tepid." Volumes have been falling by between 1% and 2% over the past five quarters.


By contrast, demand in the $1 billion a year U.S. organic market has been growing at 8% a year.


Consumers continue to show a willingness to pay higher prices for organic dairy products: A half-gallon of organic milk at the grocery store currently costs about $3.27, or about $1 more than standard milk, according to the U.S. Department of Agriculture.


Still, expanding the organic-milk supply has been a big challenge for Mr. Engles and the soon-to-be-independent WhiteWave division. That is because persistently tight supplies have led to higher prices that Dean Foods has struggled to pass onto customers.


Profit margins are much better among dairy alternatives such as soy milk and the company's Pure almond-milk brand, thanks to far lower input costs.


Supplies have expanded slowly as organic dairy farmers cope with higher costs for start-up and production.


"If you are producing organic dairy products, you must have organic feed," said Ed Jesse, a retired professor of agriculture and economics at the University of Wisconsin-Madison.


He said organic dairy cows also produce less milk because farmers aren't allowed to use antibiotics. Organic cows must also graze on grass 120 days a year rather than munch year-round on higher-energy feed made from corn and soy, which boosts per-cow yields.


Organic dairy farms are spread throughout the U.S., but are particularly concentrated in California, New York and Wisconsin, said George Siemon, chief executive of a Wisconsin-based cooperative which developed the Organic Valley brand name and represents farmers in 31 states.


"They tend not to be in the areas that have been most affected by the drought this year," Mr. Engles said.


Dean Foods said Wednesday it has hiked the prices it pays farmers for their raw organic milk in order to encourage them to keep expanding supplies, particularly as the worst U.S. drought in 50 years has sparked a jarring rise in feed costs.


Farmers who turn out conventional milk have been sending thousands of their cows to slaughter in order to limit their need for corn-rich feed rations.


"To take advantage of relatively high milk prices, they have to avoid killing their cows," Mr. Engles told investors.



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