Feb. 13 (Bloomberg) -- Dean Foods Co., the biggest U.S. dairy producer, said fourth-quarter profit tumbled 55 percent because of surging raw-milk costs and a glut of organic milk. The shares fell the most in five months.

Net income fell to $32.6 million, or 24 cents a share, from $73 million, or 53 cents, Dallas-based Dean Foods said today in a statement. It was the company's third consecutive quarterly profit decline, and Dean also forecast profits this year below analysts' estimates.

During the quarter, earnings from dairy operations fell 13 percent to $150.9 million as raw-milk prices increased, Dean Foods said. Milk futures in Chicago during the quarter averaged 47 percent higher than a year earlier, with demand for U.S. dairy, especially from China and Latin America, outpacing production.

``There is more volatility associated with operating in what is now a more global dairy market than has been historically,'' Credit Suisse Group analysts including P.I. Aquino said in a report to clients today.

In tandem with higher raw-milk prices, oversupply in the organic milk market pulled down profits for Dean Foods' Horizon brand as the company cut prices and raised spending on advertising.

Chief Executive Officer Gregg Engles said in the statement that 2007 was ``the most challenging year in the history of Dean.''

`Potential Volatility'

Dean Foods fell $1.70, or 6.3 percent, to $25.23 at 4:19 p.m. in New York Stock Exchange composite trading, the biggest drop since Aug. 7. Dean fell 39 percent in 2007 as the company cut its full-year earnings forecast three times.

Excluding one-time items, the company earned 27 cents a share in the fourth quarter, trailing the 30-cent average estimate of 10 analysts surveyed by Bloomberg and the company's expectations. Sales rose 25 percent to $3.23 billion.

The company said first-quarter profit will be 15 cents to 20 cents a share. Analysts expected 26 cents, the average of eight estimates in a Bloomberg survey. Dean Foods said full-year profit will be at least $1.20, trailing the $1.43 average estimate of 10 analysts.

The company's guidance for both the first quarter of 2008 and the full year is below analysts' consensus, and that is more important than the disappointing fourth quarter, Aquino said in the Credit Suisse note.

``We don't yet believe that investors fully appreciate the potential volatility here and the uncertainty of dairy economists' forecasts beyond the next few months,'' Aquino said.

Organic Milk Glut

Milk exports rose 23 percent to 2.5 million metric tons in the first 11 months of 2007 from the same period the year before, the U.S. Department of Agriculture said last month.

The USDA on Feb. 8 forecast 2008 milk production of 190.6 billion pounds, up from a January estimate of 190 billion.

Excluding one-time items, Dean Foods' per-share profit for 2007 was $1.20. The company forecast profit of as much as $2.38 in February of that year, then trimmed the figure three times, to $1.25 in October.

On Aug. 7, the stock fell 6.3 percent after Chief Financial Officer Jack Callahan said 2007 earnings might reach the low end of the company's June forecast of $1.52 to $1.58 a share.

WhiteWave Profit

Profit in Dean's WhiteWave Foods unit, which includes flavored Hershey Milks, fell 20 percent in the fourth quarter to $36.6 million as the company cut prices of Horizon brand organic milk and increased spending to promote the brand during a market glut.

The oversupply was driven by rule changes that encouraged farmers to move to organic milk more quickly, heightened interest from competitors and an unusually high gap between conventional and organic milk prices, said Dean Foods spokeswoman Marguerite Copel.

``We are pleased with the results we've seen from our strategy to invest aggressively behind the Horizon Organic brand through this period of industry oversupply,'' Engles said in the statement. ``We've successfully defended our market share during this period of rapid industry growth.''

Rising costs, mainly for feed, and high conventional milk prices are discouraging farmers from converting to organic farming, Engles said on a conference call with analysts.

``The organic milk oversupply situation that has challenged the industry for most of 2007 is swinging to undersupply,'' Engles said. ``Supplies are tightening, and we are starting to increase our pricing to better match supply and demand.''

Rising raw-milk costs also have created opportunities for acquisitions, Engles said.

``We are seeing a definite uptick in the pipeline of potential acquisition opportunities,'' Engles said. ``We may choose to selectively make additional small acquisitions if attractively valued and strategically desirable opportunities continue to present themselves.''

To contact the reporter on this story: Choy Leng Yeong in Seattle at clyeong@bloomberg.net

Last Updated: February 13, 2008 16:56 EST