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This Company's Prospects Are Starting to Spoil

Jacob Roche
December 22, 2012

According to a recent Wall Street Journal article, the milk industry sees itself in a crisis, beset on all sides by rising costs, various fad diets, and the rise of alternative milks like soy milk. Per capita milk consumption has been falling for decades, while other dairy products like eggs and butter have mostly held steady.

At the center of the sectoral decline is Dean Foods (NYSE: DF), which I've touched on in other recent articles. Dean is the biggest dairy company in the United States and is at least partially responsible for the problems currently facing the industry. The company has made a number of moves over the years that have changed the face of the industry and dashed some opportunities for investors while creating new ones.

Sour cream
Many of these problems that exist for milk also exist for other dairy products. Butter and eggs are about as tied to the cost of grain for feed as milk is, and have both been vilified at one time or another for their fat and cholesterol content. But while milk consumption fell 30% from 1975 to 2005, egg consumption fell just 7%, and butter consumption only 3%.

That's not to say that close-to-zero growth over 30 years is a good thing -- none of these industries is brimming with opportunities for investors. But milk is in a particularly bad situation. The egg industry, for example, isn't growing much at all, but it's also highly fragmented. Cal-Maine Foods (NASDAQ: CALM) is the industry's biggest player, but the company only controls about 19%  of the market. That leaves a lot of room for shareholders to profit as the company grows through acquisitions.

Dean Foods, on the other hand, already controls nearly half the milk market. It accomplished much of the industry's consolidation in the late 1990s, when Suiza Foods acquired 40 smaller dairies  to become the largest operator, and then merged with Dean, its nearest competitor, taking Dean's name in the marriage. Sales nearly tripled  in the short time between the Suiza IPO in 1997 and the Dean merger in 2001, but they have barely doubled  in the decade since. Growth from acquisit