An ongoing drought in Australia has swollen current cash prices for wheat by more than 40 per cent compared with last year while in New Zealand wheat prices are also at 10-year highs. The impact on flour supply and pricing will be a significant challenge for the firm that is trying to grow its bakery business.

Chief executive Peter Margin said however that he expects the business to achieve its targeted A$223.9 million (€133.5m) pro forma net profit in 2006/07, up from $194.9 million in the current year.

To safeguard margins in the coming months the firm has moved to lock in wheat supply and pricing by taking rolling 12 month cover at competitive pricing, chairman Max Ould explained yesterday, at the group's first AGM since it listed on the Australian stock exchange in December last year.

"We have locked in more than 70 per cent of our requirements in both Australia and New Zealand," he told shareholders.

It will also pass on higher costs for both wheat and canola, a key ingredient in the firm's spreads. The producer of Meadow Lea said canola prices have already risen by more than 30 per cent as a result of the drought's impact on east coast crops, although it has secured supply until the end of the year.

It will in addition look at developing alternative oil blends, said Margin, and new product initiatives in the bakery sector to shift consumers 'up the value chain' to higher-margin, higher-grain breads.

Cost increases will also be offset through "operational savings". Goodman Fielder announced on Tuesday that it would shut plants in Wollongong and Dubbo, in New South Wales, and more factories are expected to close over the next couple of years.

Goodman Fielder is also experiencing difficult trading conditions in New Zealand where it is the country's biggest food company. The entry of grocery giant Woolworths has changed the retail environment, and caused the price of milk to fall by about 25 cents a litre following the retailer's introduction of a lower-priced private label product.