The uncertainty facing some of the main players in the UK dairy industry has been reinforced in a new report from a City stockbroker.

The report, written by food industry analyst Richard Workman of Oriel Securities, looks at the prospects for all of the main PLC milk processors and dairy co-ops and predicts that difficult trading conditions mean further consolidation in each sector is likely.

According to Mr Workman, Dairy Crest might remain as the only PLC processor, albeit shorn of its liquid milk business and concentrating on its cheese and spreads portfolio.

That could follow a move by co-op First Milk to add to the 15.7% of Robert Wiseman Dairies it already owns and eventually control all the business.

He said while Wiseman was a very well run business, its future growth prospects were limited because it had very little exposure to anything other than liquid milk processing and its leading position in Scotland was being undermined by Arla Foods.

But a total takeover of Arla Foods UK by Scandinavian parent company Arla Foods Amba, which already owns 51% of the business, could also be a possibility, said Mr Workman.

“The UK market is very important to them and the debacle in the Middle East might increase the likelihood.”

In terms of the three large co-ops, Mr Workman said the outlook was not that encouraging for Dairy Farmers of Britain and Milk Link after their respective purchases of the processing business of Associated Co-operative Creameries and Glanbia’s cheese business.

“Our overriding conclusion is that both have spent heavily on their members’ behalf to buy a pretty mixed bag of assets.

In both cases they have driven indebtedness up to high levels, while profitability is modest.”

This might lead to further consolidation between the two or a possible alliance with a European dairy co-op, he reckoned.

But First Milk was in a better position, although it had probably paid over the odds for its stake in Wiseman, he said.

“What does seem clear is that First Milk hasn’t poured large amounts of money into second-rate assets.”

Although Mr Workman stressed that his predictions were not foregone conclusions, independent industry consultant Mike Bessey said they were not unrealistic, even if it might be 5-10 years before they were borne out.

“Something will have to give.

With only four major retailers to supply, I can’t see three co-ops and three major PLCs surviving that much longer.”

First Milk chief executive Peter Humphreys welcomed the report’s conclusions, although he would not comment on the takeover speculation.

But a spokesman for Wiseman said: “We still have room to grow – we only have 22% of the UK market.”

Dairy Farmers of Britain said:

“DFB is well positioned in the marketplace and is excited for its farmer members about future growth and prospects.”

A spokeswoman for Dairy Crest said the report was speculation and the firm would not comment on whether it planned to withdraw from the liquid milk market or not.

andrew.shirley@rbi.co.uk