Dairy Crest celebrates milk contract extension

Dairy Crest is to continue supplying milk to Sainsbury’s after extending its contract with the supermarket giant for another three years.

The terms have not been disclosed but Dairy Crest said it expects the change in the contract terms from next year will be offset by ongoing cost savings.

The maker of Cathedral City, Country Life, Clover and Frijj was one of the firms targeted by farmers in blockades last summer until it increased the amount it pays for milk by around 3p a litre.

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The company, which is served by 1,300 dairy farmers, has held the Sainsbury’s contract since 2004, accounting for around a third of its liquid milk production. It also has deals with Morrisons, Waitrose and Marks & Spencer.

Its dairies business saw profits slump by more than half to £2.1m in the six months to September 30, but the company said yesterday’s contract kept it on course to meet its medium-term target of a 3 per cent return on sales. Chief executive Mark Allen said he was “delighted” with the contract renewal, which he believes will allow the company to supply customers with competitively priced milk, as well as pay farmers “a fair price”.

Analysts expect the new contract will put pressure on prices and margins but that this will be offset by ongoing cost-savings initiatives.

Dairy Crest recently closed sites in Liverpool and Fenstanton, Cambridgeshire and pledged to create an efficient network of dairies supplying milk to customers who are prepared to pay fair prices.

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Damian McNeela, an analyst at Panmure Gordon stockbrokers, said: “Retention of the Sainsbury’s business is a good result for Dairy Crest and in our view removes a key risk to its plan to return the dairies business to an acceptable level of profitability.”

Meanwhile, Dairy Crest announced it will consolidate the business into a single structure, with an integrated supply chain.