National Foods in Australia is moving into higher-margin dairy products as it struggles with the low price of milk sold to supermarkets.

The company revealed a net profit of A$25.1m (US$13.12m) for the first half of 2001-2, up 12.5% but below expectations. This prompted a drop in its share price of 6% from A$3.20 to A$3 in one day. The price has since rebounded to A$3.26.

National Foods supplies about 30% of the milk that goes to Australia's two largest supermarkets Woolworths and Coles Myer. But the company says at current price levels a quarter of this business is produced at either break even or less than the cost of production.

The company's rival Dairy Farmers launched a price war in 2000 that cut prices significantly and they have yet to recover.

National Foods wants to move out of this volume market and plans instead to concentrate on higher value goods like its Big M flavoured milk, Farmers Union cheese and Yoplait yoghurt.

By David Robertson, correspondent