Arla Foods has chalked up profits growth this year despite falling farm-gate milk values – the only one of the big three dairy processors to do so,

Chief executive Tim Smith said the rise in underlying pre-tax profits to £44.5m in the year to October was the pay-off from its merger with Express Dairies.

The dividend to shareholders was up 7% on record sales of £1.32bn, boosted by new fresh milk business with Asda, the company said.

Key growth has come in imported spreads, like Anchor and Lurpak, and in Arla’s extended-life milk, Cravendale, which accounted for a third of UK turnover.

Record milk volumes were underpinned by the growth of Arla Foods Milk Partnership, its dedicated farmer supply base and itself a major shareholder in Arla Foods.

Its 1600 members now supply more than 70% of Arla’s milk and are on target to supply 80% by April 2006.

But the outlook for raw milk suppliers is still bleak, with Mr Smith warning of further downward price pressure.

He blamed CAP reform uncertainty, and said farmers had to consider dairy premium payments as milk income.

He also warned that rising costs from oil price inflation could have an impact on profitability next year unless talks with the retailers on price rises bear fruit.

He expected a decision imminently on a 1.5p/litre rise, which could temporarily take the pressure off farmgate prices.