Glanbia flagged the bonus of grass-fed milk production, over the feed-based systems sustaining a jump in grain prices, as it raised its profits outlook and unveiled agreement on a long-held deal to loosen ties to its Irish roots.

The cheese and nutritional products group, revealing a plan to dispose to its majority shareholder a stake in its historic Irish dairy processing business, flagged the prospects for the country's dairy business once production limits are removed in 2015.

Irish dairy producers, blessed by pastures refreshed by steady rains and a climate kept relatively warm by the Atlantic gulf stream, are expected to ramp up output after the European Union quotas are removed.

Farmers' "opportunity to expand milk production is underpinned by a positive long-term outlook for global dairy markets, and the comparative advantage that Ireland enjoys as a grass-based system", Glanbia said.

Grain hit

The experience of Irish farmers contrasted with the hardship facing largely grain-feeding peers in the US, where production growth has continued to slow, to 0.7% in July from 4.4% in February.

"Recent drought conditions in the US have resulted in a sharp rise in feed prices which has already started to impact milk production levels, reducing milk supply," the group said.

The comments follow a forecast by Rabobank that producers raising beef cattle on pasture, in countries such as Argentina, Australia and Brazil, have an advantage too over corn-feeding peers common in the US.

Earnings upgrade

Glanbia foresaw some benefit to its own US cheese operations from dairy production dynamics, with the output slowdown set to boost cheese prices, and support a "satisfactory" outlook for the rest of 2012, after a first half in which lower prices left the unit swallowing a decline in revenues.

In the global nutritionals business, the boost from switch in consumer eating habits towards healthier foods helped a "strong" performance in the January-to-June period, with expectations of this continuing for the rest of the year.

Indeed, despite a mixed outlook for the Irish dairy business, the group lifted to 8-10%, from 5-7%, its forecast for full year earnings per share, as reported on an underlying basis, adjusted for currency movements.

On this basis, earnings per share rose 1.3% to 27.63 euro cents in the first half, on revenues up 1.6% at E1.36bn.

Dairy disposal

Glanbia also unveiled a long-awaited agreement on a fresh deal with its top shareholder, the Glanbia Co-operative Society, on the disposal of the Irish dairy operations around which the group was formed before its expansion down the food chain.

This E200m deal, which follows a failed disposal attempt two years ago, will see the organisations form a joint venture in which Glanbia will hold 40% of the dairy business and the co-operative 60%, with an option to raise its stake to 100% within six years.

The co-operative will pay for its stake by selling Glanbia shares, a process which, coupled with a distribution to members, will cut its majority holding in the corporation to 41.4% - assuming society members agree the proposals at two votes.

The co-operative's members stymied the 2010 deal.

Glanbia, which will gain a much-needed E132.7m from the latest proposal in released working capital and payment for fixed assets, termed it "compelling", in boosting prospects for the Irish dairy business, while freeing-up cash for its own investment plans.

Market reaction

In Dublin, Davy Stockbrokers analyst John O'Reilly said that "the transaction, if concluded, will release funds for Glanbia to singularly pursue its development objectives in nutritionals, an activity with strong growth potential".

The group's results were "very strong", he added, restating an "outperform" rating on Glanbia shares.

At NCB, Darren Greenfield said that "on the face of it, the proposed joint venture transaction appears to strike a balance between the co-operative and independent shareholders".

He added that the "trading results are better than expected" and that "Glanbia's exposure to the high-growth and fragmented nutritionals sector will lead to a rerating of the stock over time".

The shares closed 6.3% higher at E6.38, their highest finish in at least two years.