Dairy Crest lifted its payout to farmers for milk, flagging "expectations of improving returns from commodity markets" even as it cautioned over the "significant pressures" on the group, which it expected to continue.

Dairy Crest - the UK's last listed dairy company, and "the only major processor in British ownership" after Robert Wiseman Dairies and Milk Link takeouts earlier this year – said that it was lifting to 29p per litre prices for milk on many of its producers.

Farmers on non-aligned contracts, had been receiving prices of 26.6p per litre, with those on a Davidstow cheese deal also included getting 28.2p per litre.

Price recovery

The increases, which follow an upgrade to prices by rival First Milk, "reflect the expectations of improving returns from commodity markets", and expectations of higher product selling prices achieved from customers such as supermarkets, Dairy Crest said.

Global dairy prices have shown a sharp recovery over the last two months, boosted by waning hopes for production both in the UK, where poor summer weather forced many farmers to move cows indoors, and in major exporting nations such as the US and New Zealand.

The increases also follow UK farmer unease over farmgate milk prices which spilled over into protests in the summer, forcing Dairy Crest and competitor dairies to ditch plans for price cuts from August.

This move "had a small adverse effects on profits" in the April-to-September half, the company said, a negative effect estimated by Shore Capital analysts at about £1m.

'Unprecedented market conditions'

Indeed, Dairy Crest chief executive Mark Allen acknowledged "significant pressures on our business", which has been caught between resilient prices for milk and an inability to pass these pressures on in full to supermarket customers, which have used milk as a key weapon in price wars to lure consumers.

These pressures would "continue into the second half" of the group's financial year, which runs from April to March.

The group has added a spreads factory in Shropshire in western England to the list of sites for closure, to allow its operations to be consolidated further north in Merseyside, with 23 depots supporting its home delivery rounds ditched too.

"Our dairies business has been facing unprecedented market conditions," Dairy Crest said.

Nonetheless, the group stood by profit forecasts for its full-year, flagging "strong momentum" in its key brands, which include Cathedral City cheddar and Country Life butter, backed by a ramped up advertising campaign.

The group also confirmed it had received E430m proceeds from the sale of the French-based St Hubert business, and restated its appetite for using the cash to support acquisitions.

Market reaction

The statement was well-received by Panmure Gordon analysts, who restated a "buy" recommendation on Dairy Crest shares, with a price target of 385p.

In key brands, "we understand that both volumes and value increased by double digits which we view as encouraging," Panmure analyst Damian McNeela said.

However, Shore Capital cut its rating on the stock to "hold" from "buy", citing the costs and uncertainties involved with Dairy Crest's dairy division shake-up.

"With visibility on the diary recovery materially reduced, and with the stock trading 16% higher than when we turned positive [on the shares] in April, we expect the stock to pause for breath ahead of potential corporate activity with the St Hubert proceed," the broker said.

The shares closed 0.6% higher at 340p in London.