EXPENSIVE CHEESE

Anyone else see this? The high dairy prices are effecting more than just the protein powder prices...

Kraft profit hit by dairy prices

By Brad Dorfman
Wed Oct 31, 11:32 AM ET

Kraft Foods Inc (KFT.N) posted a 20 percent drop in quarterly profit on Wednesday, hit by soaring dairy costs.

SAY, CHEESE?

Dairy costs were up about 40 percent, leading to a 30.8 percent drop in profit in the company's North American cheese and food service unit, Kraft said.

Dairy prices have remained high as the weakened dollar makes U.S. dairy exports attractive, while a drought in Australia and global demand for milk powders has also kept prices unusually high, Kraft said.

While the company has increased prices to cover costs, some consumers are moving to lower-priced store brands, the company said.

Kraft said it expects margins in the cheese and foodservice business to be under pressure for the rest of 2007 and into early next year. Overall, the company still expects margins to increase in 2008, despite higher input costs, Rosenfeld said.

Kraft has sold off some businesses, including the Veryfine juice brand, that it felt did not fit its portfolio and will consider other divestitures, Rosenfeld said.

But Rosenfeld sees growth opportunities in cheese, saying global consumers are eating more cheese.

The company hopes new products like LiveActive cheeses that contain cultures to help regulate digestion will help grow the business and give consumers a reason to pay more for cheese.

"I think the key in cheese -- as it is within all our other categories -- is to rebuild our brand equity to enable us to have the appropriate pricing power to address input costs, no matter what they are," Rosenfeld said during an interview with Reuters.

The company also said it repurchased 30.2 million shares in the quarter for a total of $1 billion. As of September 30, $3 billion had been spent under the company's $5 billion share repurchase plan, Kraft said.

Kraft shares rose 64 cents, or 2 percent, to $33.24 in morning New York Stock Exchange trading.

At Tuesday's close, the stock traded at about 16.8 times estimated 2008 earnings, toward the middle of the Standard & Poor's packaged foods index (.15GSPFOOD).