Australian dairy Warrnambool Cheese and Butter Factory said it expects an 80% drop in its annual profits amid “subdued” commodity costs and a high Australian dollar.

In a trading update today (18 April), the company said the outlook for the rest of its financial year, which runs until 30 June, remains “challenging”.

Warrnambool said high feed costs and low milk prices had squeezed margins and that the drought had affected operations in Australia and New Zealand.

“[This is] due to subdued international commodity prices, the continuing high Australian dollar and ongoing competition in the raw milk market keeping upward pressure on prices paid to milk suppliers”, it said.

However, WCB said its contracts to supply ingredients in the first half of its 2013/14 financial year contained “significant price uplifts”. It added: “This provides further confidence for an improved trading performance for FY2014.”

The update came as dairy co-operative Murray Goulburn lifted its shareholding in the fellow dairy producer from 12% to 14.5%, buying 1.2m shares.

Murray Goulburn chief executive Gary Helou described the purchase as a “strategic investment”.

“There is no current intention to make a takeover offer for WCB, nor do we currently intend to seek board representation,” he said.

WCB said it was not aware of Murray Goulburn’s intentions other than those set out in today’s announcement.