Dairy farmers have sent a clear signal to processors that a 4p/litre reduction in prices could cause more than two-thirds of producers to leave the industry.

The signal came in a report on a survey conducted by levy board sector company Dairy Co

The report paints a harsh picture of a sector where increased optimism at last year’s milk price recovery is tempered by farm businesses facing steep jumps in fixed and variable costs.

Nearly 40% of dairy farmers questioned said they planned to expand their milk production, compared with 20% in 2007. Similarly, the number of farmers preparing to get out of milk fell by 10% to 7%.

But these encouraging figures will not be enough to halt the decline in milk production, as those farmers expanding their herds will fail to offset the output lost from herds that are sold.

Dairy Co’s head of market information Huw Thomas said the industry should also recognise that for the first time in several years, milk producers had been more upbeat about the outlook for the dairy sector.

“It’s a lot more positive and more farmers are prepared to increase production. But there’s a caveat – the situation is very fragile. Suppliers are clearly concerned about any possible drop in milk prices.”

The survey suggested dairy farmers were expecting prices to rise by more than 2p/litre in the next two years.

“When we asked farmers their intentions, 37% said they intended to increase milk production and 7% said they intended to leave. 

“But when we asked their intentions if farmgate prices rose by 2p/litre, only 31% intended to up production and 8% said they would leave.”

Mr Thomas said he detected a change in tone among processors. “I think some are really concerned now. They have to tell their retailer customers that if they want the product, they have to be prepared to pay for it.”

Commodity price indexes, traditionally used to make the case for price cuts, were losing influence, he said.

Jonathan Ovens, chairman of the Arla Foods Milk Partnership, said he recognised the sentiment behind farmers’ responses. “It shows how fragile the new-found confidence is. I think processors – Arla certainly – are aware of it. But price cuts are not on the radar.”

Jim Begg, director general of Dairy UK, said: “Producers can be reassured that UK fresh milk and dairy products are just too important to the UK consumer for the market to be unable to adequately reward UK farmers.”