A substantial rise in milk prices is needed this autumn if milk producers are to cover rising costs of production.

That was the conclusion of the latest cost-of-production report from Kite Consulting, which forecast year-on-year costs would increase by 3p/litre through to March 2009, taking the typical cost of production to 28-29p/litre, before any allowance for reinvestment.

Variable costs (mainly feed and fertiliser) were expected to rise 17% compared with 2007/08, while overheads (including fuel, contractor charges and drawings) were likely to be 7.3% up.

“Oil price is the biggest driver, as it affects nearly every line of the cost sheet,” Kite’s Edward Lott said. “Prices have fallen back a bit recently, but I don’t think we’ll see it drop below $100 a barrel.”

While 28-29p/litre was needed to cover costs, Mr Lott said a further 10% (3p/litre) was also needed to provide a reasonable margin for capital investment and to improve farmer confidence.

“Rising costs and the terrible weather this summer have really eroded confidence and the inclination to reinvest. If we don’t see a significant price increase this autumn, we could see a big pick up in farm sales and people getting out [of dairying], particularly with cow prices relatively high.”