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Irish milk output surge could weigh on UK prices

The ramp-up Ireland is planning in its milk output could weigh on prices in the UK, processor Dairy Crest said, as it unveiled a 31% jump in profits, but highlighted headwinds facing its spreads and dairy businesses.

Milk production in the UK itself "is unlikely to be affected" by the ditching in April next year of European Union production quotas, Mark Allen, the Dairy Crest chief executive, said.

UK output has remained below the quota level for more than a decade.

However, production in Europe overall is "likely to increase", including in Ireland, which is planning to raise its output by 50%, or 2.75bn litres, by 2020 to exploit its relatively warm and wet climate, favourable for pasture growth, and with much land ill-suited to arable farming.

It is "unlikely" that this extra output will spur UK liquid milk imports, Mr Allen said, citing "consumer preferences and the economics of milk transportation".

But the extra volumes could weigh on prices, through their effect on other dairy markets.

'Downward pressure on prices'

"It is possible that some additional cheese produced in Ireland, for example, may be exported to the UK," he said.

"If more cheese was to be imported into the UK it could put downward pressure on commodity cheese prices and farmgate milk prices."

Mr Allen added that Ireland may well find "other global markets" more attractive for its dairy exports, and forecast that Dairy Crest's own Cathedral City cheddar brand, a major earner for the group, would "continue to perform strongly".

'Momentous phase'

Ireland is already producing more than its quota allows, with output for 2013-14, which ended in March, reaching 5.4bn litres, 0.94% over quota.

The country was fined E16m for overshooting its quota by 1.05% in 2011-12.

And Irish agriculture minister Simon Coveney has forecast a "momentous phase" for the country's farm sector after quotas as removed.

"This time next year the Irish dairy sector will be unbound by quota restrictions and can begin to realise its vast potential and make an even greater contribution to our national economy," he said last month.

'Very dependent on price'

At INTL FCStone's Dublin office, dairy analyst John Lancaster said that it was entirely possible that Irish farmers could meet the country's milk production target.

"There is a big appetite for expansion" among producers, who are already investing heavily in new facilities, he told Agrimoney.com.

"However, where we end up will be very dependent on price. With prices where we are at the moment, I could easily see a 50% rise in production.

"But if prices go back to highs 20s or low 30s (euro cents per litre) that would be less favourable."

It was a little early to forecast the impact of Irish milk output growth on the UK, he said, while pointing out that Ireland already exports 85-90% of its production.

Profits rise

Mr Allen's comments came as Dairy Crest unveiled a 31% rise to 65.3m in pre-tax profits, excluding one-off charges, for the year to the end of March, on revenues up 0.7% at 1.39bn.

The cheese division raised earnings by 18.7% to 39.3m, as the Cathedral City brand "strongly outperformed" the market, raising to 11%, from 10%, its share of UK retail cheese sales.

However, profits in spreads dropped 34% to 16.8m, reflecting a shrinking UK market, and although profits in dairies jumped 92% to 18.8m, the increase was largely down to unusually large takings from the company's property disposal programme.

In dairy, the group said that supermarkets' continued focus on milk as a weapon in price wars had made it difficult to pass on higher prices paid to farmers, which increased Dairy Crest's raw materials bill by 40m over the year.

'Struggle to get excited'

Although the results were broadly in-line with market expectations, Dairy Crest shares dropped 429.3p in morning deals in London, down 6.4% and the lowest in a year.

Panmure Gordon cut to 470p, from 550p, its target price for the shares, on which it kept a "hold" rating.

"We acknowledge the company's yield attraction but we struggle to get excited over the medium-term prospects of the business given the challenging conditions which face both the spreads and dairies division," Panmure analyst Damian McNeela said.

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