Glanbia's sales dipped a little more than €3m to €922.8m in the six months ended 1 July, while operating profits slipped five per cent to €36.4m.
The group said it was hit hard at home in Ireland by the European Commission's ongoing Common Agricultural Policy reform, which has led to price cuts on dairy commodities and fewer subsidies for EU dairy exports.
"The combined effects of lower world dairy markets and reduced EU dairy supports significantlyreduced product selling prices, and a time lag in adjusting milk prices resulted in lower margins," Glanbia said.
The squeeze means Glanbia has made among the biggest cuts to farmgate milk prices in Europe over the last year, putting itself in line for fierce criticism from farmers' associations.
The average price paid to producers across the European Union for their milk fell below €26 per 100kg in May this year, continuing a steady drop in prices across the bloc, according the UK's Milk Development Council (MDC).
Some Irish milk producers have accused Glanbia of acting unfairly. Richard Kennedy, chairman of the National Dairy Committee at the Irish Farmers' Association, said recently a 70-cow herd producing 25 litres of milk per cow per day stood to lose €693 in June if supplying Glanbia.
Glanbia was earlier this year investigating a small number of its suppliers over suspicions that they tampered with their milk. The firm said "stringent penalties" would follow if this was proved, but it was unclear whether the alleged action was intended as a protest against price cuts.
Dairy firms across Europe have argued that margin pressure from EU support cuts, soaring input costs and rising retailer power have forced them cut farmgate milk prices.
Glanbia said a combination of recent farmgate price cuts and increased competitiveness meant second half results in 2006 should match last year's performance.
The firm said it would continue to invest in brands in an attempt to capture more added value markets.
Glanbia Cheese, a joint venture with Leprino Foods and producing mozzarella for the European market, is expected to increase profits and margins this year. Growing cheese markets should also help Glanbia's ingredients division in the US in 2006, it said.