UPDATE 1-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 athird of its fresh milk supply contract with WM MorrisonSupermarkets Plc, Britain's No. 4 grocer, even as itexits its money-losing milk business.

Dairy Crest is in the midst of selling its dairiesoperations to a unit of German food group Müller as it battleslow milk prices and shifts its focus to cheese and spreads.

"... If they sell the business, then it's irrelevant forfuture 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 CountryLife butter, said on Tuesday it secured a three-year extensionfrom Morrisons to provide fresh milk, but supply would bereduced by about a third from March.

The company added that it did not expect the lower volumesto materially affect results for its fiscal year ending March31.

Peel Hunt analyst Charles Hall said the lost businessequalled about 70 million litres, or 10 percent, of DairyCrest's supply to retailers.

"The normal rule of thumb is that volume reduction in liquidmilk impacts by (about) 5 pence per litre, which would equate to3.5 million pounds impact on profits in a full year. This may beon the high side as the Morrisons' contract was already highlycompetitive on price," Hall wrote in a note.

Dairy farmers across the UK have been under pressure due toa glut in domestic milk supply, which has resulted in average UKfarmgate 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 fromFeb. 1. Scotland-based dairy cooperative First Milk also cutprices by 2.43 pence per litre earlier this month.

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

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

The Esher, Surrey-based company has been trying to increaseprofits by cutting distribution costs, improving its brandingand selling property.

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