Dean Foods chief executive Gregg Engles has warned the “fundamental challenges” hitting profits at the US dairy giant’s liquid milk business remain despite the company reporting narrowing losses today (15 February).

The company saw its share price jump more than 13% in morning trade, after it reported it had succeeded in reducing its losses during the fourth quarter of 2011. In the three months to the end of December, net losses totalled US$9.9m, or five cents a share, compared with a loss of $20.7m, or 11 cents a share, a year earlier.

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However, speaking during a conference call with analysts, Engles remained cautious about the outlook for the group, highlighting the challenges faced by its liquid milk unit. “I’m not declaring victory. 2012 is going to be better… but fundamentally there is still way too much capacity in the [liquid milk] market,” he insisted.

The over-capacity is likely to have a negative impact on margins in the medium-term because it will force selling prices down, Engles continued.

However, he added Dean Foods expects to “keep its margin going” throughout 2012 because it anticipates the competitive environment in liquid milk to favour rationalisation “rather than chasing the lower commodity, lower cost environment down”.

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In liquid milk, Dean Foods’ management also acknowledged that the company is struggling to convince consumers of the value of its branded products, meaning that sales are increasingly weighted towards the lower-margin private label products that it produces for its retail customers.

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“Our mix is looking more towards private label. That is a headwind,” Engles conceded. Nonetheless, he added: “It will be less of a headwind in 2012 than it was in 2011.”