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