Turnover at Donegal Creameries rose by 13.5 per cent in the first half of the year, but profit fell as its dairy unit struggled to recover cost increases in a very competitive market.

The company said turnover rose to €68.7 million from €60.6 million a year earlier, with increases recorded across all divisions of the group.

Dairy turnover rose by 12.2 per cent, while agricultural inputs were 11.9 per cent higher and produce turnover gained 21.6 per cent due to export shipments carried over from December 2010

Group operating profit, before net finance costs, changes in fair value of investment properties, contribution from associates and tax, fell by 38.6 per cent to €900,000, and pre-tax profit was more than €3.2 million lower than in 2010 at €805,000.

In the agri-inputs sector, operating profit rose by 91.1 per cent €1.1 million. Produce recorded a 50.9 per cent rise to €600,000, but the dairy division saw operating profit slump to a loss of €980,000, from a profit of €350,000 a year earlier.

"Despite growth in volumes from new customer accounts our dairy division's liquid milk business operated in a challenging environment during the first half of 2011 in terms of recovering cost increases in the market and in particular from the competitive retail sector," Donegal Creameries said in a statement.

"Progress has now been made in this area, albeit later than anticipated, and with increased volumes the liquid milk business is positioned to benefit from the lag in recovery of cost increases through increased selling prices, typically associated with this business."

The dairy unit has been the subject of speculation in recent days, with reports that Donegal Creameries may sell off the unit to Connacht Gold. Donegal Creameries today refused to comment on the reports, saying it was the company's policy not to comment on market rumours or speculation.

Looking ahead, the company said it expects a good full year performance from its produce and agri-inputs businesses