Forgotten Fiscal Cliff Victims: Milk Products and Dairy Stocks (DF, LWAY & TOF)

While most attention over the fallout from the fiscal cliff has focused the various tax rises and cuts to defense and entitlements, the dairy industry and dairy stocks like Dean Foods Company (NYSE: DF) plus small cap stocks Lifeway Foods (NASDAQ: LWAY) and Tofutti Brands (NYSEAMEX: TOF) could actually bear the brunt of the impact first. That’s because the lack of a new farm bill will set the clock back on the country’s farm policies to 1949 and force the government to purchase milk at much higher rates. In other words, the laws of supply and demand go out the window and prices would be effectively set by the government at a level that’s more than double the retail price of milk – meaning the price of butter could double while a gallon of milk will shoot up to $6 or more. It should be mentioned that it would take a few weeks before the Secretary of Agriculture can complete the logistical headaches of getting the government back into the business of buying vast amounts of milk and there might still be a fiscal cliff compromise. If not or if there is no farm bill, there could be a massive consume backlash against dairy products early next year.

With that in mind, Dean Foods Company would be in the immediate crosshairs. Dean Foods Company operates over 120 plants in 38 US states, Puerto Rico and Spain that produce a full line of company-branded and private label dairy and dairy-related products such as milk and milk-based beverages, ice cream, coffee creamers, half and half, whipping cream, whipped toppings, sour cream, cottage cheese, yogurt, dips, dressings and soy milk. Dean Foods Company's Fresh Dairy Direct segment is also one of the largest processors and direct-to-store distributors of fluid milk in the US which is then marketed under more than 50 local and regional dairy brands and private labels. On Wednesday, fell 1.05% to $16.02 for a market cap of $2.97 billion. Dean Foods Company is also up 43% since the start of the year and down 39.7% over the past five years.

Meanwhile, Lifeway Foods is involved in the manufacturing of probiotic, cultured, functional dairy and non-dairy health food products and it calls itself America’s leading supplier of the cultured dairy products known as kefir and organic kefir which are prepared by inoculating cow, goat or sheep's milk with kefir grains. On Wednesday, Lifeway Foods fell 2.54% to $8.05 for a market cap of $131.69 million. Lifeway Foods is down 16.5% since the start of the year and down 31.6% over the past five years. However, it should be noted that for last quarter, Lifeway Foods reported a 16% rise in gross sales to $22.5 million thanks to increased sales and awareness of the company’s kefir products like ProBugs® Organic Kefir for kids and BioKefir while total net income came in at $1.4 million verses $1.0 million for the same period last year. Lifeway Foods also noted that it strengthened its balance sheet and increased cash flows during the quarter. With that in mind and the fact that kefir sounds like something that the moneyed Whole Foods crowd would buy, it may not be that negatively impacted the lack of a farm bill.

Finally, Tofutti Brands could come out a potential winner if dairy and milk prices shoot higher. Tofutti Brands is involved in the development, production and marketing of the Tofutti brand nondairy frozen desserts and other food products that are nondairy, soy-based products containing no butterfat, cholesterol or lactose. On Wednesday, fell 3.06% to $1.23 for a market cap of $6.35 million, but it should be noted that less than 4,000 shares trade per day. Tofutti Brands is down 27.6% since the start of the year and down 53.5% over the past five years. It should also be noted that last quarter, Tofutti Brands reported a 3% sales fall to $3,498,000 and a net loss of $217,000 verses net income of $34,000. Tofutti Brands’ CEO noted that results for the first nine months of the year reflect the loss of Trader Joe’s as a customer. Apparently, Trader Joe's is a notoriously tough customer to deal with and has a bad reputation for driving a hard bargain along with a willingness to discontinue products when suppliers insist that costs must rise. And since everything's branded Trader Joe's, the store’s customers don't know what their alternatives are from other stores plus they have such a strong relationship with customers that they are able to discontinue even popular products over a small price increase as the customers will keep on shopping it their stores. For its part, Tofutti Brands’ CEO says that they are working to replace lost sales and he believes both sales and margins will improve during the remainder of the fiscal year thanks to new products and price increases. So perhaps Tofutti Brands is better off for the long-term without Trader Joe's as its biggest customer.

The Bottom Line. Given the uncertainty over the fiscal cliff and the lack of a new farm bill, investors and traders alike will want to be watching dairy related stocks like Dean Foods Company, Lifeway Foods and Tofutti Brands.