Dairy farmers face an uncertain 2006 milk year as farm-gate prices are torn between looming intervention price cuts and the ongoing dip in production.

Milk output was about 2.5% below quota last milk year and Nick Holt-Martyn, director of consultant The Dairy Group, said cold spring weather meant that trend was unlikely to reverse in the short term.

“With milk supplies reaching a five-year low, the scene is set for a more competitive raw milk market, which in the past would have led to increases in milk prices.”

Mr Holt-Martyn said weakening commodity values meant that was unlikely to happen, but the improved balance between supply and demand meant there should be a period of firm prices, despite planned July intervention cuts of 8% for butter and 5.5% for skimmed milk powder.

“Commodities are being squeezed out of the UK product mix. In reality only a fraction of the butterfat produced is surplus.

Provided the cheese market can hold firm, the prospects are for a relatively stable farm-gate price to continue.”

But independent consultant Mike Bessey was more circumspect.

He reckoned that the impact of the next round of intervention cuts would be felt more quickly than in previous years.

“EU exports are diabolical, the EU Commission seems more determined that prices should come down and it is certainly not helping to support prices now.”

Butter prices at £1750/t were almost 10% lower than 12 months ago, he said, and the intervention ceiling of 50,000t could be reached as early as late May.

Predicting the SMP market – which rose 11% over intervention values at the end of winter, but had since fallen back by 4% – was slightly harder.

Mr Bessey said prices were totally uncompetitive on the world market and could become even more so if the EU commission continued to cut export refunds and animal feed aid payments.

Cheese prices remained reasonably firm, although mild Cheddar had slipped recently by £50 to £2050/t.

Mr Bessey did not agree with Arla Foods’ chief executive Tim Smith, talking at the launch of the firm’s new Lockerbie dairy this week, that cutting 1bn litres from UK production would help boost prices. “I don’t buy that at all.”

For a drop in production to have a real impact it would have to happen on an EU-wide basis and that was unlikely, said Mr Bessey.

“Supermarkets wouldn’t want to import liquid milk, but they will find a way if they are driven to it.”

March’s Milk Price Review includes five cuts – Wiseman’s base price by 0.65p/litre, Golden Vale by 0.5p/litre and Dairy Crest’s Manufacturing Agreement by the same amount (base price), as well as Meadow Foods (0.44p/litre off butterfat values) and Paynes Dairies (0.35p/litre off base price).

Arla raised its Asda milk price premium by 0.5p/litre.

andrew.shirley@rbi.co.uk