Dairy company Arla Foods has reported a fall in profits for the year ended 30 September 2005, mainly because of the impact of EU farm reforms, it said.

Arla Foods' result for 2004/05 totalled DKK801m (US$126m), better than the expected DKK722m, but down on the 2003/2004 result of DKK1.019bn.

The improvement on the company's expectation derived in particular from certain export markets which have seen earnings as well as volume increases for speciality cheese and milk powder. Implemented efficiency measures under the group's structural programme have also contributed to lower costs and thus to the result for the year.

The fall compared to last year was mainly due to the impact of the second phase of the EU's agricultural reforms, Arla said. Falling foreign exchange rates also had a negative impact, particularly at the beginning of the year.

Arla Foods recorded a decline in turnover from DKK 47.3bn in 2003/04 to DKK46.4 bn in 2004/05.

The fall in turnover is largely due to two factors: The disposal of a number of non-core businesses such as Cremo, AM Foods and Danapak, and the general price fall in the international food industry and the European dairy sector as a result of Europe's agricultural reforms.

Over the coming years, the reforms will transform the EU's agricultural subsidies, including a tapered reduction of export subsidies to dairies, which will partly be compensated for by direct subsidies to farmers. A knock-on effect of this is that price competition will harden across all EU markets.

Arla Foods' Chairman Knud Erik Jensen was confident that the Arla Group is well placed for future competition in the market place.

"In recent years we have undertaken a number of long-term investments as a result of which we are now a healthy business," he said.

Knud Erik Jensen, however, is well aware that the Arla Group must deliver a strong performance in order to maintain the milk price at its current level in the next financial year.

"The supervisory board will support the management in its efforts to maintain the current level for the milk price," he said.

"We are a market and consumer-oriented business and we're obviously satisfied with a result which is 10% above our expectations," said managing director Peder Tuborgh. "In order to secure an unchanged milk price in 2006, we must continue to strengthen our product development and our brands through tighter operational controls and focus on costs."