Intense competition in the dairy sector has not stopped Arla Foods UK from chalking up bigger profits this year than last, becoming the only one of the big three dairy processors to buck the declining trend.

Chief executive Tim Smith said Arla’s 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% after record sales of 1.32bn, boosted by new fresh milk business with Asda, the company said.

A third of that income came from growth in key imported brands, such as Anchor and Lurpak spreads, and in Arla’s extended-life milk, Cravendale.

This brand has benefited from a 75m investment at the Stourton dairy in Leeds.

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 UK.

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.