A DEFRA report could open the doors to faster consolidation of the UK dairy sector if the Office of Fair Trading accepts its conclusions.

The Potential for GB-European Trade in Liquid Milk, written by AgraCEAS consulting, said there was significant evidence that the British liquid milk market should not be treated as an isolated and insulated market.

Tom Hind, chief NFU dairy adviser, said this was significant because it challenged previous assumptions made by the OFT that the fresh milk market was a geographically distinct and separate market.

‘Well integrated’

Because of this the OFT has been accused by some of standing in the way of much-need consolidation.

“This DEFRA-funded study is the first piece of academic research we have seen that takes on the notion that the British liquid milk market is set apart from the wider EU dairy market,” said Mr Hind.

“The report confirms that the British milk market is well integrated into that of neighbouring states. It sends a clear signal to competition authorities that the wider EU dairy market must be taken as the reference when considering mergers and acquisitions between dairy companies in this country.

‘Desirable step’

“While we recognise the OFT will consider any merger or acquisition proposal on its own merits, it is important that it takes account of this report and its findings.

Further consolidation of the British dairy industry is a necessary and desirable step to ensuring we have the most competitive milk processing sector in the UK,” he added.

Jim Begg, director general of industry body Dairy UK, was more downbeat about the potential impact of the report. “It is a useful in so far as it confirms what we know already.

‘Uneconomic imports’

“First, trade in raw or processed liquid milk doesn’t take place because the transport costs are too high, which means that liquid milk imports are uneconomic and unlikely to occur.
 
“Second, despite the absence of trade UK prices for liquid milk are driven by the commodity price mechanism, consequently these markets are integrated into the wider EU single market.

‘Further consolidation’
 
“As the report only describes the market place, it doesn’t fundamentally alter the competition policy landscape. Nevertheless, we fully expect to see further consolidation and rationalisation within the industry,” said Mr Begg.

A spokesman for dairy co-op First Milk said: “It has long been our view that greater consolidation is needed and this report adds credence to that view.”