Supermarkets are being hit by food deflation. We may be at the point where delivery boys are squeezed, too.
Shares of Dean Foods (DF) , the world's largest direct-to-store distributor of milk and dairy products, among other food staples, are flat this year. As for its customers, supermarkets Kroger (KR) and SuperValu (SVU) are down 23% and 20%, respectively, while Whole Foods (WFM) is about 9% lower.
Instinctively, you'd expect food suppliers to benefit from lower input prices. But there are also the perils of falling prices, especially milk prices, as the company notes that, on a monthly basis, its prices are adjusted to reflect the costs of raw materials.
Wholesale butterfat milk prices are down about 14% on the year to about $2.49 a pound, based on data compiled by Bloomberg, and prices of corn are down about 11% over the period.
Dean's been building up its inventory and the shares have hardly reflected any of the turbulence hammering its customers.
Now, there are many Dean's customers with more diverse business models that haven't taken on the burden of falling prices. Walmart (WMT) and subsidiaries, including member-only discount retailer Sam's Club, made up about 16% of Dean's net sales in both 2015 and 2014 and shares of the retail giant are up 16% year to date.
But investors should be aware of how volatile prices are a key danger to Dean.
"Our results of operations and financial condition depend heavily on the cost and supply of raw materials and other inputs including conventional raw milk, butterfat, cream and other dairy commodities, many of which are determined by constantly changing market forces of supply and demand over which we have limited or no control," Dean Foods noted in its annual filing with the Securities and Exchange Commission.
Let's say prices spike back up. The company acknowledges that it may be unwilling or unable to quickly boost prices to realize a gain in profit margin.
As far as the analyst community is concerned, the majority are still bullish, one citing Dean's ability to manage commodity-price shifts better than competitors. But the managing shifts can only go so far if your thesis is for continued price volatility. Dean Foods missed profit expectations in its latest quarter.