'High' milk prices squeeze Dairy Crest margins

Shares in Dairy Crest fell back to close to 15-month lows after the group said that profits at its core dairy division had "remained under pressure" although the warm UK summer may bode well for margins.

The UK-based milk processor said that, while sales growth in its key cheese and spreads brands, such as Cathedral City cheddar, in the April-to-June period had come in at 4%, high milk prices paid to farmers had undermined efforts to boost its dairies business,

"Profits in our dairies product group have remained under pressure, as we maintained high milk prices during the quarter despite lower cream revenues," Dairy Crest said.

Takings on cream skimmed from milk, besides the relationship between the price Dairy Crest pays farmers for milk and what it receives from supermarkets, are a big determinant of margins.

'Cream prices picked up strongly'

However, the operating performance in dairies, termed "worse than expected" by broker Numis, looks set to improve thanks in part to a reduction in the price Dairy Crest pays for milk, with a cut of 1.25p per litre kicking in as the start of the month.

"We have now reduced the price we pay for milk," Dairy Crest said.

Many processors have cut their milk prices thanks to a weak performance by global dairy commodities since February, with Arla lowering UK payouts by 1.23p per litre as of last week, and Muller Wiseman and First Milk announcing reductions for the start of August.

Meanwhile, the cream market has staged a recovery, with prices up 8.4% last month according to the DairyCo bureau, encouraged by the impact of a better UK summer weather in boosting consumption of fruit such as strawberries.

"Cream prices picked up strongly through the month as demand increased seasonally due to the soft fruit season and there appearing to be little surplus cream available," DairyCo said.

Market reaction

Dairy Crest said that, nonetheless, profits from its dairies division for the full year, to March, would rely on property sales to an unusually large extent. Profits from selling off mothballed distribution depots will hit £10m-15m, up from the £5m-10m previously expected.

And while the group said that its expectations for its full-year performance were "unchanged", the statement failed to reassure investors, who sent Dairy Crest shares down 1.9% to 430p in morning deals in London.

"The 4.9% yield is the main attraction of the shares," Charles Pick, at Numis, said.

Milk price cuts to come?

Mr Pick also pondered where a further cut in milk prices was on the way saying that "one detects an expectation" that values may fall further.

The latest price cut "was worth £10m a year to Dairy Crest", assuming it applies to the 800m litres of the group's volumes which are not subject to pass-through arrangements shifting volatility risk to customers.

The industry average milk price has fallen to 32.55p a litre, as of May, below the 36p reached in February, according to DairyCo.

Even so, that figure, up 8.6%, is at the top end of payout rates for recent years.

Separately, flour-to-engineering group Carr's Milling Industries revealed a "significant uplift in demand" for its AminoMax feed additive from dairy customers attempting to maximise milk output and exploit elevated prices.

"This increase in sales supports the group's ambition of becoming the UK leader in dairy nutrition," Carr's Milling Industries added.

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