Dairy Crest revealed a £40m expansion into the booming baby food ingredients sector as it revealed that elevated dairy prices had helped its milk processing division, unusually, outshone its cheese and spreads operations.
The UK's largest independent dairy group, which In February revealed it was investigating methods of obtaining more value for the whey thrown off during cheese production, said it was "now clear" that it would opt for making demineralised whey, a base ingredient for baby food.
"We are currently finalising the necessary investment required to move this forward and are talking to several prospective partners," Dairy Crest said, flagging the "significant potential" for the baby food market.
This is being boosted in particular by Chinese demand, given growing rates of a bottle feeding and a preference for foreign products after a series of food safety scares over of domestic dairy supplies.
The project will "generate attractive returns for shareholders", said the group, which confirmed to Agrimoney.com that it is considering a £40m investment with a payback of eight years.
The announcement came as Dairy Crest signalled that its dairies business, had in continuing to "improve towards" a target of a 3% return on sales, outshone the cheddar and spreads business, owner of brands such as Cathedral City cheddar and Country Life butter.
Sales of the key brands - which also include Clover spreads, and have been the group's growth engine during a difficult period for UK dairy processors - fell 4%.
The diverging performances of the two divisions represented the double-edged sword of a jump of some 70% year on year to about £1,700 a tonne in the price Dairy Crest receives for its cream.
For butter, this represents a headwind, in raising production costs, and the group said that sales of its Country Life blocks "were significantly lower as we chose to promote less following recent cream price increases".
However, the price increase has brought "higher returns" from cream for the dairy division, which Mark Allen, the Dairy Crest chief executive, said was "improving".
Nonetheless, Dairy Crest shares, which have risen nearly twice as fast as the average London stock so far this year, eased 0.8% to 492.4p in morning deals in London, amid some disappointment over the performance in branded goods.
Panmure Gordon kept a "hold" rating on the stock, with a price target of 500p.
While the shares were, at 6.7 times earnings before interest, tax, depreciation and amortisation (ebitda), trading at a discount to peer, which were valued at 7.2 times, this discount "is warranted given the variability of returns from the dairies division", Panmure analyst Damien McNeela said.
The jump in UK cream prices is a reflection of disappointing milk production both globally - in the likes of top exporter New Zealand, where early-2013 drought hurt output – as well as domestically.
UK milk output was, at 1.17bn litres in June, down 1.1% year on year, albeit a reduced rate of decline from the 7.7% hit in April, when the cold spring stemmed pasture growth and cow productivity.
The UK's DairyCo bureau said that while there is "potential for the dairy herd to increase milk production compared to last summer", recent hot and dry weather means that "grass growth has begun to ease".
"The continued pressure on milk supplies to fulfil domestic demand is currently keeping upward pressure on UK wholesale [dairy] prices."