Dairy Crest loses a third of Morrisons milk contract

(Adds details, analyst comments, background)

By Aastha Agnihotri

Jan 20 (Reuters) - Dairy Crest Group Plc lost a third of its fresh milk supply contract with WM Morrison Supermarkets Plc, Britain's No. 4 grocer, even as it exits its money-losing milk business.

Dairy Crest (LSE: DCG.L - news) is in the midst of selling its dairies operations to a unit of German food group Müller as it battles low milk prices and shifts its focus to cheese and spreads.

"... If they sell the business, then it's irrelevant for future profit. What's happening now will be Müller's problem," analyst Nicola Mallard of Investec Securities told Reuters.

Dairy Crest, the owner of Cathedral City cheese and Country Life butter, said on Tuesday it secured a three-year extension from Morrisons to provide fresh milk, but supply would be reduced by about a third from March.

The company added that it did not expect the lower volumes to materially affect results for its fiscal year ending March 31.

Peel Hunt analyst Charles Hall said the lost business equalled about 70 million litres, or 10 percent, of Dairy Crest (BSE: CREST.BO - news) 's supply to retailers.

"The normal rule of thumb is that volume reduction in liquid milk impacts by (about) 5 pence per litre, which would equate to 3.5 million pounds impact on profits in a full year. This may be on the high side as the Morrisons' contract was already highly competitive on price," Hall wrote in a note.

Dairy farmers across the UK have been under pressure due to a glut in domestic milk supply, which has resulted in average UK farmgate milk price dropping every month since February 2014.

Dairy Crest cut prices by 1.2 pence per litre late December for farmers on its standard liquid and Davidstow contracts from Feb. 1. Scotland-based dairy cooperative First Milk also cut prices by 2.43 pence per litre earlier this month.

British lawmakers have also called for better protection for dairy farmers from the decline in milk prices.

Dairy Crest buys milk from around 1,100 dairy farmers and also delivers to supermarkets run by Waitrose, J. Sainsbury and Marks & Spencer.

The Esher, Surrey-based company has been trying to increase profits by cutting distribution costs, improving its branding and selling property.

Dairy Crest shares were up marginally at 471.3 pence at 1023 GMT on the London Stock Exchange. (Additional reporting by Roshni Menon in Bengaluru; Editing by Gopakumar Warrier and Saumyadeb Chakrabarty)