Dairy Crest not sour after Morrisons skims supply agreement

20th Jan 2015 14:50

Milk products producer Dairy Crest Group has lost a third of its fresh milk supply contract with WM Morrison Supermarkets as the deal was extended for a further three years.The firm, which owns Country Life butter and Cathedral City cheese, said it had agreed a three-year extension with Morrison to provide fresh milk to Britain's fourth biggest retailer, though it added it would reduce supply by a third from March.Despite the reduced supply, Dairy Crest said it did not expect results for its financial year ending 31 March to be affected.In a bid to fight low milk prices and shift its attention on spreads and cheese, the firm is in the process of selling its diaries business to a division of German food giant Muller."That disposal by Dairy Crest, which we warmly welcome, is subject to regulatory approval at the moment," said Clive Black, analyst at Shorecap."We do not believe that this contract update from Dairy Crest threatens the basic deal from a fundamental commercial perspective, although there may be a little tweaking of the terms around the edges."In December, Dairy Crest cut prices by 1.2p per litre for farmers on its standard liquid and Davidstow contracts starting from 1 February, while sector peer First Milk cut prices by 2.43p per litre earlier in January.Investec Securities reiterated its 'hold' rating on the stock, saying Dairy Crest's announcement further highlighted the competitive nature of the market."The news could have been worse, such as a total loss of the contract, but this just underpins the highly competitive nature of liquid milk, and why it is important that the deal to sell to Muller gets past the competition authorities unscathed," said analyst Nicola Mallard."Losing 70m litres in theory could hit earnings before interest and taxes by £3.5m, although this will be one of several moving parts in the outcome for the financial year2016."Dairy Crest shares were up 0.89% to 475.00p at 15:11 on Tuesday.