Stainless steel tanks for processing milk© Dairy Crest

The UK average farmgate price could reach 30p/litre by April in the face of lower global supply and high commodity prices, said Dairy Group principal consultant, Nick Holt-Martyn.

The latest Defra figures show the UK average farmgate price reached a 20-month high for November, at 25.62p/litre.

Annual production had fallen across the EU and in New Zealand by about 850m litres and 350m litres on the year, respectively.

“With global supply falling, markets should continue to improve as supply is the key determinant of market tone,” Mr Holt-Martyn said.

“At the farm gate these improved market returns will continue to deliver higher prices, with strong cheese returns dragging the liquid market up to a better level.”

See also: Outlook 2017 – volatility likely to remain for dairy sector

But UK milk production has begun to rise again, with Defra’s latest provisional data putting it back in line with 2014/15 levels.

Milk production in November 2016 was 7% down on the previous year at 1,079m litres, but the gap closed to just 5% lower than December 2015 at 1,150m litres.

Analysts at AHDB Dairy emphasised that it was too soon to attribute this ramp up in production to a farmer reaction to higher milk prices, and said that in the past five years the average change between November and December production was 2%.

AHDB Dairy senior analyst Luke Crossman said: “I don’t see any incentive for farmgate prices to drop before the spring flush, with some processors already offering 30p/litre plus.  There’s no reason the January farmgate average can’t hit 27-28p/litre.”

He added: “Production will be the crucial factor in determining future price rises.

“Although it is rising at the moment, UK production is still 6% lower than this time last year, so as long as EU production doesn’t boom during the flush, it should be a good year for dairy farmers.”