Donegal Creameries reported a 2 per cent rise in pre-tax profits last year despite recording a slight drop in turnover, due mainly to continued difficult trading conditions at its mushroom joint venture.

Sales at the food group were down 0.5 per cent to €134.7 million while operating profit was down 1 per cent at €5.1 million.

However, the company realised €1.1 million from the sale of peripheral sites at its An Grianan estate which helped it to offset the €446,000 loss it incurred from its joint ventures and report a profit before tax of €5.9 million, up on €5.8 million in 2002.

The company is paying a dividend of 6.75 cents per share, bringing its full-year payout to 12 cents compared with 11.4 cents in 2002.

The difficulties in its mushroom business during the year stemmed from the strength of the euro, problems with compost quality and pricing pressure from the major UK supermarkets.

Donegal managing director Mr John Keon said that talks were ongoing between its Carbury Mushrooms operation and rival Monaghan Mushrooms regarding a merger.

Market sources said an announcement of a link-up between the two groups, which would see Donegal retaining 23 per cent of the combined business, was expected by early May.

A merger would result in significant savings in logistics at the two companies, helping them to cope with the difficult trading conditions they have encountered in recent years.

The company was cautious about the outlook, saying trading conditions had been difficult in some of its businesses, particularly dairy and its retail stores, in the first quarter. It also noted that the full impact of EU changes in agricultural policy were difficult to assess at this stage but it expected its performance in the current fiscal year to be "satisfactory".

Meanwhile, the company continues to develop its property business as an alternative "plank" to its food operations. Donegal's Section 50 student rental accommodation development in Letterkenny should be completed by mid-summer, Mr Keon said.