Big Oil Knows Which Cow To Milk

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This headline caught my eye.

Dean Foods cuts forecast as milk prices soar

I became suspicious after reading this and thought how come we never saw the headline, “Exxon cuts forecast as oil prices soar.”

Dean Foods Co., the biggest U.S. milk processor, cut its profit forecast for the second time this year because of soaring raw-milk costs and lower prices for organic dairy products. The shares fell the most in a month.

High costs never stopped Big Oil from turning in record profits. Ok, besides milk being a perishable, there are other differences between the two industries but, high raw material costs are high raw material costs no matter what you're trying to sell.

Throughout the article, I substituted the word “milk” with “oil” and “diary” with “refinery” and wa-la. For some reason, the milk industry and the oil industry seem to work off of two completely different business theories. Sure, I know this sounds elementary but in one industry, high raw material costs lead to losses, while in the other, high raw material costs lead to record profits.

"Supplies are going to be tighter because when the weather heats up you don't get as much production from your cows," said Peter Turk, a dairy trader with Rice Dairy LLC in Chicago. "The market is going to be higher."

When Big Oil blamed the weather (hurricanes) or shortfalls in production (pipelines bombed or refineries shutdown), not only did the price of gasoline skyrocket, but so did the profits. Why should Big Milk be any different?

"It has become increasingly likely that conventional raw-milk prices will reach all-time highs by the third quarter," Engles said in today's statement. "We expect this steep rise in dairy costs to put pressure on Dairy Group profit growth, especially in the second and third quarters." Prices already are at or near records.

High raw material costs along with higher distribution costs coupled with inflation usually lead to fewer profits – unless - you’re Big Oil.

Big Milk should deal with higher raw material costs like corporations deal with taxes on profits – just pass them onto the consumer. Expect milk prices to reach record levels.