Milk prices impact on Lifeway Foods' bottom line

Related tags Milk

A 30 to 35 percent increase in milk prices caused Lifeway Foods'
operating profit to dip more than $0.5 million for full year 2004
on the previous year, despite a 9.7 percent increase in sales of
its probiotic dairy drinks, known as kefirs.

Sales of $16.32 million and income from operations of $2.95 million, compared with $3.48m in 2003, prompted CEO Julie Smolyanski to say the company was "pleased, but by no means satisfied"​ with its full year results.

Milk is the main component in the Illinois company's​ probiotic products. Prices increased more than 100 percent in 2Q 2004, causing Lifeway's net income for the quarter to fall to $432,109, or $0.05 per share, from $691,082, or $0.08 per share, in 2003.

At the time the company said that increased cost of its main raw material was likely to be temporary and that it did not expect the negative impact to continue into 3Q.

But although milk prices did drop, they did not regain previous levels. In 3Q 2004 Lifeway's net income was $515,109, or $0.06 per share, compared to $709,196, or $0.08 per share, for the prior year period.

Smolyanski said the company could not justify passing on the entire price increase to consumers, although the cost of goods sold did go up 15 percent.

Nonetheless, Lifeway's sales roll is continuing in 2005, with sales of $4.65 million in the first quarter, an 18 percent increase on Q1 2003, signaling the start of what Smolyanski thinks could be a "record year".

"We believe our new packaging has improved our point-of-sale education,"​ she said, "as well as heightened the products' visibility amongst mainstream customers."

Mainstream customers became a new challenge for the company in July 2004, when it acquired gourmet cheese company Ilya Farms. As well as growing the line in the Chicago and Tri-State area, Lifeway expects the acquisition to have a "significant impact"​ on its East Coast growth plans for its kefirs.

According to the Michigan Farm Bureau, the US milk cow population reached a low of 8.99 million in March 2004 but rebounded to 9.03 million in August and ended the year at 9.01 million.

The border with Canada has been closed since May 2003, when the first Canadian case of BSE was diagnosed. Since then, herd growth had to come from within the United States. Some have also attributed last year's cattle shortage to the popularity of low carb diets, which encouraged farmers to slaughter dairy cattle in order to cash in on the booming beef trade.

Inelasticity between supply and demand means that small fluctuations in cattle quantity have a larger knock on effect on prices.

Lifeway Foods markets 12 flavors of kefirs. In June 2004 it expanded its offering with a new line of no-added-sugar dairy drinks aimed at low carb-conscious consumers. It also has organic offerings called Lifeway Organic, Organic Kefir and Kefir Cheese and a soy kefir called SoyTreat.

Last year the company entered the Fortune Small Business 100, where it is currently ranked 47th. It has also been named as Chicago's 25th fastest growing public firm by Crain's Chicago Business.

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