Rationalisation of the dairy processing sector would help farmers, but not affect consumers, according to a high-powered report released today, which also confirms the power of the supermarkets.

The findings are contained in The Milk Supply Chain Project 150-page document written over two years by two Oxford University economics experts, and commissioned by the Milk Development Council and DEFRA.

MDC head of market information, Huw Thomas, said the report provided evidence that reducing the number of processors in the liquid milk market would result in an increased share of profits being returned to processors to be shared between themselves and farmers.

“Because it also shows that retail prices will not be affected it is a very powerful argument that can be put to the competition authorities in the event of any future mergers. These would be a positive step for the industry, partly because, as the report shows, farmers have the poorest bargaining position in the supply chain,” he said.

According to John Thanassoulis, the report’s lead author, only 5p/litre of the 15p/litre potential profit in the dairy chain was available for negotiation by the supermarkets.

This was because large retailers could dictate what the upper price limit should be as they had the option of obtaining cheaper milk from abroad, said Prof Thanassoulis.

Supermarkets were able to secure 3.2p/litre of this 5p/litre profit margin and therefore nearly 90% of the total supply chain profits, he added. Farmers were only left with about 0.5p/litre once the processors had taken their 1.3p/litre share of the profits.

“The findings prove what farmers have been saying for many years – they just don’t have the bargaining power to ensure they can run profitable businesses,” said Mr Thomas. “This has led to the low levels of investment on British dairy farms that have the potential to be some of the most highly efficient in the world.”

Tom Hind, NFU senior dairy adviser, said the report’s findings were very powerful and vindicate the union’s view that it was the retailers who “held all the cards” when negotiating milk prices.

However, he said changes had already been made since the period studied by the report that made the supply chain more equitable. These included a move towards longer-term contracts, the creation of more dedicated supply relationships with supermarkets and a new pricing structure from Tesco, the UK’s largest retailer.

Dairy UK Director General Jim Begg said: “Dairy UK has long held the view that consolidation is positive and necessary in the UK dairy industry, and welcomes the report’s comments in this direction.

“However, relations within the dairy supply chain have been radically transformed over the last few years. Supermarkets are now proactively engaged in working to secure the sustainability of their suppliers through integrated supply chains, and are working directly with farmers.”

To see the full report go to the MDC website.