Bottling up profits proves challenging for the milk industry

Pre-tax profits at the half-way stage rose to �38.8m ($72m), just topping market expectations.

But it warned again that profits for the year to March 2006 would be hit by the loss three months ago of fresh milk supply contracts to Tesco and Asda.

However, it continues to hold talks with alternative customers.

The loss of its deal with Tesco - worth �60m - was part of a shake-up in the milk sector this summer that also saw rival Arla Foods lose its own supply contract with Sainsbury.

Fairer deal

Surrey-based Dairy Crest, which employs around 7,000 people, said its share of the UK milk market, worth around �2.5bn a year, was set to fall to 18% by early next year from around 26% at present.

And its shares have underperformed the food production sector by 20% this year.

"We are continuing to invest in developing the business at the same time as taking action to address the ongoing profitability of the fresh milk business," said chief executive Drummond Hall.

Partly offsetting the impact of the loss of the Tesco deal was the announcement in August of a long-term supply deal with Sainsbury's aimed at offering a fairer deal for dairy farmers.

Dairy Crest will take milk from co-operative First Milk - set up to ensure a better deal for producers who complained that they were being squeezed by the major supermarkets.