Dairy Crest losses highlight earnings problem

Dairy Crest said pre-tax profits tumbled to £17m from £32.5m in the same period last year.

The shock had been anticipated. The group's shares took a nose-dive through most of October after it forecast "significantly lower"​ profits in its first half compared to last year. These have recovered slightly, but still sat way below September levels last Thursday.

The group's dairies division has struggled after losing a 170m-litre milk supply contract with Tesco and a 40m-litre contract with Asda last year, despite picking up deals with Sainsbury's and Morrison's for a combined 100m litres.

Dairy Crest said the division's operating profit and margin was only a quarter of last year's first half-year figures.

Rising energy and raw materials costs, especially for plastic, have hit hard too.

These were also principally to blame for a 22 per cent fall in first-half profits at Dairy Crest rival Robert Wiseman, announced earlier this week. One industry analyst said the constant rise in energy and plastics costs would inevitably have to lead to price rises for consumers.

The two groups' results, although expected, have blackened the cloud hanging over the UK dairy sector in a week where campaign group Farmers For Action announced it would launch a new week-long strike before Christmas to protest at low farmgate prices, especially for milk.

In a sense, however, dairy farmer protests and processor profit warnings are two sides of the same coin. Both have revealed how serious the problem of low earnings in the sector has become.

Both Dairy Crest and Wiseman managed sales rises, but were unable to earn enough from these to hold up profits.

Now, under the squeeze, Wiseman said it would have to cut milk prices paid to producers early next year. Dairy Crest has guaranteed its current prices until March next year, but has cut prices in recent months.

It is true that retailers have increased profits from liquid milk by a quarter in the last decade, and more rapidly since 2003, but results show that processors and producers need to be proactive in responding to the challenge.

Both the Milk Development Council and the National Farmers' Union (NFU) have recently warned that current investment in dairy research and development is far too low, leaving Britain's dairy sector lagging behind European and world competitors.

The NFU recently called for a new industry body that helps the industry to pool information on consumer trends and jointly funded 'school of excellence' to aid product development.

Investment has increased in recent months, with Arla, Dairy Crest and Wiseman all upgrading or building new facilities. Branded milk sales are rising, and Dairy Crest has spearheaded efforts to develop functional dairy products.

The group is set to launch an omega-3 spread under its St Ivel Gold brand in January, and has already put omega-3 milk St Ivel Advance on the market this year as it tries to improve its added value range.

These are encouraging signs, but the depth and scope of the earnings problem that has been revealed in recent months points to the need for more long-term planning, and even more industry co-operation, on how to invest and improve value in Britain's dairy sector.