Pressure is mounting for further milk price rises following the release today of a report highlighting the continued fragility of the dairy sector.

Despite recent price increases, the confidence level on dairy farms was still "fragile", said [Kite Consulting's] Neil Blackburn at an industry briefing this morning.

"There only needs to be one or more negative factors occurring for there to be a significant exodus of dairy farmers," he said.

Industry "extremely finely balanced"

Mr Blackburn predicted the drop in milk production would slow because of more favourable conditions, but warned the industry was "extremely finely balanced."

"A change to one or more of the factors involved in dairying could easily change this position and trigger an exodus," he warned.

Those factors included milk prices, increased costs of production, relative profitability of alternative enterprises, NVZ rule changes and disease threats.

"A fall in milk price now would cause a new wave of farmers to lose confidence in the industry and give up milk," he said.

"Farmers now have more profitable alternatives that did not exist before, like arable. Higher stock prices will also tempt farmers into quitting," said Mr Blackburn.

Report

The Kite study follows on the heels of a report released by consultant Promar International last week, which was commissioned by co-op First Milk.

It said farmers needed to be paid at least 30p/litre to cover increasing costs, pay family labour and have enough to reinvest in their businesses.

Both reports have been welcomed by farming unions because they come at a critical time when milk buyers are starting to renegotiate contracts with their suppliers.

All eyes will be on the UK's largest retailer Tesco which reviews its prices every six months and is set to finalise its latest price discusions by the end of the month.

Promar also provides the figures for Tesco so farmers will be hoping the supermarket giant, which currently pays 27.5p/litre, will move towards 30p/litre.

Kite Consulting’s John Allen said the timing of his firm’s report was not coincidental.

“For better or worse the reviews of the Tesco contract are likely to become two important times of the year and could set the tone for 50% of the market.

“What Tesco agrees on  we all know the rest of the big supermarkets will follow, and that’s 20% of the market. The pressure then mounts on the middle ground,” he said.