Robert Wiseman Dairies delivered a 22 per cent fall in half-year profits yesterday and said tough trading conditions would force it to review milk prices in the coming months.
Glasgow-based Wiseman said it was selling its milk at a "significant premium" over its major rivals after guaranteeing its price until January 2006.
It said: " Given the competitive market place in which we operate, the current level of premium cannot be maintained and we will be seeking to narrow the gap in early 2006."
The company gave no indication of what this might mean for its farmers, who are currently paid more than some rival firms.
It came as the group, which employs 500 people at a dairy at Droitwich, said pretax profits fell to £12.1 million in the six months to October 1 following higher fuel and raw material costs.
The group said the outlook for the rest of the financial year would be influenced by the cost of oil, energy and plastic for bottling milk.
Chairman Alan Wiseman said: "Our target is to rebuild margins in the period ahead, but higher costs clearly make this difficult."
However, he added that the business was in good shape and he remained confident about long-term prospects.
Robert Wiseman has about a fifth of the British market, supplying some 1.3 billion litres of milk a year.
New supply contracts with supermarket giants Sainsbury's and Tesco drove a 13.2 per cent hike in milk volumes to 687 million litres, more than offsetting the loss of a deal with Asda.
A contract to supply own-label milk to Morrisons also finished at the end of last month, as expected. Robert Wiseman said it believed there were unlikely to be any significant changes in major supermarket contracts in the short term.
Turnover rose by 14.7 per cent to £281.3 million during the period.
Sales of extended shelf life milk Pure to Tesco continued to progress "steadily". Talks over ESL own-label milk for other retailers were at an advanced level, and the group also said it was considering a Wiseman brand ESL milk.