There are many things that we take for granted in this country. WiFi connectivity, water, streets and roads are some, as is milk. Yep, that whitish fluid that you put into your cereal, morning coffee, pancake mix and so on. What you may not realize is that milk prices, just like those for beef, pork, shrimp and others, have jumped significantly. Year over year, during the June quarter, raw milk costs increased 31% and rose 6% from the March quarter to an all-time high.
Dairy company Dean Foods (DF) shared that figure when it issued its most recent quarterly earnings results. That’s a huge increase, and I’m sure you can imagine the impact it has had on the profits and share price for Dean Foods. This milk price climb has been fueled by increased international demand for U.S. dairy products (milk, cheese, butter, creamers, cottage cheese and so on) amid lower production in major dairy lands outside the United States. On the one hand, you would think that rising international demand would be a good thing. Normally, that would be the case, but when there is a supply-demand imbalance, the end result tends to be higher prices.
The problem with higher prices is that past a certain point, it becomes difficult to pass along higher costs to consumers. According to the United States Department of Agriculture (USDA), across the country the average price for a gallon of milk on Aug. 7 was $3.06, up 14% from a year ago.
Yeah… there’s no inflation; be sure to tell that to the Fed!
At some point, you and I look for alternatives, and, yes, that’s been happening when it comes to milk. Soy milk, almond milk and coconut milk are three of the competing products that are taking up more and more shelf space in your dairy cooler case. I know you’ve seen them, and I know more and more people that are shifting over to them. One company that is benefitting from the shift toward these non-dairy milks is The WhiteWave Foods Company (WWAV), the company behind Silk®, Horizon®, International Delight®, Earthbound Farm® and Alpro® products, among others. During the last four quarters, WhiteWave handily beat Wall Street expectations.
Now, many would simply stop there and say, “rising milk costs are bad for Dean Foods and I should avoid the shares.” I can’t argue with the down and dirty analysis, but one way to take it a step further would be to examine other industries that are impacted by milk usage.
Probably one of the clearest examples is cereals, and that means companies like Post Holdings (POST), which owns the Honey Bunches of Oats, Pebbles, Great Grains, Post Shredded Wheat, Post Raisin Bran, Grape-Nuts and Honeycomb cereals, as well as several natural and organic brands. According to data from Nielsen (NLSN), cereal consumption fell dramatically during the June quarter — U.S. RTE cereal category dollars were down 6.1% and category pounds declined 5.1% for the 13 weeks ended June 28, 2014, compared to the prior-year period. How many people do you know that will eat cereal without milk?
I’m not going to call the rise of milk prices and the subsequent impact a PowerTrend, but it’s a great example of how I analyze the changes that are occurring around us each and every day. There are many examples to be had, but this one shows how one company’s rising costs (Dean Foods) can spell trouble for another (Post and other cereal companies), as well as opportunity for another (WhiteWave Foods). If you’re not following the ripples of change all the way through, it means you’re leaving money on the table.
Why would you want to do that?
In case you missed it, I encourage you to read my e-letter column from last week about how you could be making the most of the recent sell-off. I also invite you to comment in the space provided below.