Dairy co-operative Murray Goulburn expects an ongoing oversupply of milk will keep prices for global dairy commodities low in the near to medium term.
But the company expects its shift towards supplying more profitable ready-to-consume dairy food products, rather than bulk ingredients, to markets such as China will offset some of the impact of weak commodity prices.
Dairy food products include consumer milk powders, cheese, dairy beverages, and infant formula.
Murray Goulburn, whose flagship brand is Devondale, will launch its Devondale Natra Start infant formula in Australia in March, shortly followed by China.
Murray Goulburn said on Monday that lower dairy prices were mainly responsible for a 34 per cent fall in net profit to $10 million for the six months to December 31.
China imported less dairy ingredients, Russia still had an embargo on dairy imports, and Europe, New Zealand and the United States were producing too much milk, resulting in global oversupply.
Consequently, prices for dairy commodities - whole milk powder and skim milk powder - were around 40 per cent lower than the 10-year average.
"They stayed lower than anyone expected, and longer than anyone expected," Murray Goulburn managing director Gary Helou said.
"This ongoing weakness I expect to continue for the short to medium term because China's appetite for commodities is going to be down."
But although China was buying less bulk-commodity ingredients, Chinese consumers were looking to buy more ready-to-consume infant formula, milk powder and long-life milk from places like Australia.
"Ideally, they'll want it from first countries, where it's made from, from the country where the cow delivered the product," Mr Helou said.
He said that for the full year, the weakness in dairy commodities would materially impact Murray Goulburn's ingredients business, which comprises around 20 per cent of the co-operative's total business.
The growth of the dairy foods segment would offset that weakness a great deal, but not totally.
Mr Helou said Murray Goulburn's assets, large milk pool, portfolio of branded products, strong balance sheet, and broad area of geographical operation, positioned it well to deliver growth.
Units in the MG Unit Trust, Murray Goulburn's listed funding vehicle, fell 22 cents, or 10.5 per cent, to close at $1.88.
WEAK DAIRY PRICES HURT MURRAY GOULBURN PROFIT
* First half net profit down 34.1pct to $10m
* Revenue up 3.7pct to $1.38b
* Distribution per unit of 3.5 cents
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