The deal, first announced last month, will see First Milk, , take a minority stake in one of its major customers for £28.3 million. Some 40 per cent of the milk processed by Wiseman is supplied by First Milk's 4,000 farmers, whose total annual output is around 2.6 billion litres.
Consolidation of the liquid milk processing sector into fewer and larger groups - and the move of co-operatives such as First Milk into processing as well as supplying milk - has made the market increasingly difficult, according to Wiseman.
The major supermarket chains, whose own labels account for the majority of the liquid milk sold in the UK, have added to the pressure by demanding ever lower prices, forcing processors such as Wiseman to cut the price they pay to suppliers or take a margin hit.
In a report published earlier this year, the government's Environment, Food and Rural Affairs Committee recommended that more vertical integration was needed to ensure the survival of the industry, highlighting in particular the conflict between suppliers and processors over prices. By giving First Milk a say in the running of the firm - it will have the power to nominate a director to company's board, for example - Wiseman is hoping that such conflicts will be reduced - if not avoided altogether - in the future.
And that future is looking increasingly uncertain, Wiseman said yesterday, not least because of the loss of a major contract to supply the Asda supermarket chain as of January 2005. Although new deals with Tesco and Sainsbury were confirmed during the first half, they will not take effect until well after the Asda contract lapses, leaving the company with a shortfall of between three and six months, which will inevitably take a toll on profits.
The takeover of the Safeway chain by Morrisons earlier this year has also left Wiseman uncertain over the future of its supply agreements. Wiseman is the leading milk supplier to the many Scottish Safeway stores, and has begun negotiating with the chain's new owners to secure the business in the future - important for the future of the company's Scottish operations which will be the hardest hit by the loss of the Asda contract.
Despite the uncertainty over the second half, Wiseman's first half performance was good, with volumes up 7.4 per cent to 607 million litres and turnover ahead 10 per cent at £245.3 million. The 3 per cent difference between volume and value growth reflects a rise in raw milk prices over the last year, the company said. Wiseman claims to offer the highest prices to suppliers for their milk in the entire UK supply chain, but recent reductions by its competitors mean that this is likely to change as of 1 December 2004.
Operating profit was 3.7 per cent higher at £15 million, but profit per litre dropped from 2.56 pence to 2.47 pence, reflecting the impact of higher packaging and fuel costs compared to the previous year. There have been steep increases in the cost of HDPE, the raw material used for plastic containers, in particular - over the last two months alone the cost has risen by 14 per cent, Wiseman said, which is expected to add an additional cost of £1 million in the second half.
Controlling costs at the company's dairies will be the main challenge in the first few months of second half, as many will run at significantly less than their capacity during the period between the loss of the Asda contract and the start of the new arrangements with Tesco and Sainsbury.
The company's English dairies will be running close to capacity from April 2005, however, bringing improved operational efficiencies, and Wiseman is clearly confident of further growth as it is investigating means of increasing it capacity further in both England and Wales.