Dairy Crest flagged the role of higher cream prices in allowing it to balance out higher payouts to farmers as it confirmed its entrance into the higher-value whey market, with a higher price tag than initially signalled.
The UK dairy group said that its dairies business, responsible for the bulk of revenues, "continues to improve" to a target of a 3% return on sales despite paying more for milk.
Dairy Crest has, like other dairies, increased prices paid to farmers for milk this year, most lately through a rise of 1p per litre to 32.25p per litre from July in payments to producers supplying to its Davidstow cheese operation.
However, the raised payments come against a background of higher prices for dairy commodities, with Dairy Crest highlighting the boost to its own results from higher prices of bulk cream, which averaged £1,720 a tonne last month, up £30 from July.
A year before, it was priced below £1,200 a tonne, data from the DairyCo bureau show, before being lifted by the rally in dairy prices, which remain elevated.
'Improved underlying performance'
"Higher returns from cream have contributed to the improved underlying performance" in the April-to-September half, Dairy Crest said.
"They have also enabled us to pay farmers more for their milk across all our milk purchasing contracts."
The comments came as First Milk continued the round of milk price increases, raising its price by 1p per litre by up to 32p per litre, and citing its spread into international markets.
"The team now regularly host visitors from around the world, with guests from India with us last week," First Milk chairman Bill Mustoe said.
Other dairies announcing increase increases include Muller Wiseman, which has raised prices to up to 34.55p from next month, and Sainsbury's, which is lifting its price by 1.97p to 34.15p per litre.
Dairy Crest also confirmed its entrance into the higher-value whey market, saying it would in the first half of 2015 begin production of demineralised whey powder, a key ingredient of infant formula, which is proving one of the fastest-growing markets in world dairy thanks to booming Chinese demand.
The move, which Dairy Crest hinted at in July, will allow the group to reap far bigger gains from the whey produced as a byproduct of cheese manufacture, with the product currently, with its minerals included, used for the lower-value purpose of a food ingredient.
And it is a well-worn path for dairy groups. Arla Foods, the Nordic-based dairy giant, earlier this year announced the construction of a plant to turn whey-based lactose, which it had sold as pig feed, into an infant formula ingredient.
Dairy Crest said it had "committed to" investing about £45m into its whey business, higher than the £40m initially signalled.
Nonetheless, the initiative is expected to raise annual earnings before interest, taxation, depreciation and amortisation (ebitda) of £9m a year, meaning a return on profits, at this level, of five years.
The group also flagged a mixed performance in its key cheese and spreads brands.
While sales and profits from butter and spreads had fallen, thanks to a "difficult" market, Cathedral City cheddar had "outperformed the market".
The trading statement received an ambivalent reception from analysts, with JP Morgan trimming its price target on Dairy Crest shares by 2p to 543p, and Shore Capital saying it saw "little in today's update to provide upward momentum to Dairy Crest's stock".
Numis raised its rating on the shares to "hold" from "reduce", with a 472p price target, despite analyst Charles Pick saying that there is "little here to excite in our view.
"It is just as well that the cheese operations remain so strong," he added.
The shares stood up 1.0% at 476.1p in morning deals in London.