Dean Foods (NYSE: DF) ended 2007 with a noticeable white moustache.

Passing higher milk costs to consumers has accelerated sales growth nicely, with fourth-quarter sales up 24.6%, capping off a full-year sales acceleration of 17%. Fluid milk volume -- factoring out pricing changes -- was flat for the quarter.

Unfortunately, price increases have covered only a portion of underlying cost increases, with fourth-quarter raw milk costs surging 69% over the same period last year. Ouch.

This is the same effect that has dumped earnings at other food producers, such as Kraft (NYSE: KFT) and Kellogg (NYSE: K). But the problem is magnified at Dean Foods because the company is heavy exposed to dairy costs. Dean was struggling with rising costs of commodities throughout 2007.

Dean also sells soy products through its Whitewave foods segment, which represent about 12% of consolidated revenue. But the company is feeling the effects of a double-whammy as a "severe oversupply of organic milk ... drove down realized prices and increased competitive intensity in the industry," said Dean's CEO, Gregg Engles.  

Adding to this, the company also completed a recapitalization last year that added about $2 billion in long-term debt while paying a $15 per-share special dividend. Although the dividend was a healthy sip for investors, the additional interest expense sank Q4 earnings per share from continuing operations to $0.25, a 54.5% year-over-year decline.

In light of near-record worldwide milk prices, it's not surprising that management takes a particularly cautious view of 2008. On the earnings call, Engles estimated Q1 EPS will be $0.15 to $0.20, well below consensus-average analyst estimates of $0.25.

Management expects share prices in 2008 to be "at least $1.20," up from $0.95 in 2007. In this uncertain environment, Dean Foods is in for a wild ride -- not exactly what investors in food companies crave.

Fellow Fool Tim Hanson suggested a few weeks ago that investors seeking to cash in on surging dairy prices might consider Monsanto (NYSE: MON), Archer Daniels Midland (NYSE: ADM), or a Chinese dairy play named, oddly enough, American Dairy (NYSE: ADY).  

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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He doesn't own shares of any companies mentioned in this article, and he welcomes comments and questions. Kraft is an Income Investor recommendation. The Fool has a disclosure policy.