Cuts to farmgate milk prices this year are likely to see 2006 remembered as a gloomy year for farmers, but some stability may return in 2007, according to the Milk Development Council's (MDC) new Supply Chain Margins Report.
The news comes after an eventful week in which Britain's number three supermarket, Sainsbury's, announced a new partnership with farmers, and the country's National Farmers' Union said it would collect invoices to reveal the true extent of producer losses.
Concerns have grown that the current milk supply system puts unsustainable pressure on farmers. Nearly three farmers per day have left the sector in the last year, some estimates say.
Reduced market support and prices under the EU Common Agricultural Policy reform made milk prices more volatile in 2006, said Ken Boyns, head of economics at MDC.
"The period of intense change may be coming to an end in the short-term and those who are focusing on improving their farm productivity and maximising the price of their milk at the moment may start to see better returns compared to the present."
Farmers may also be helped by greater efforts to make the supply chain more stable.
Top UK dairy firm, Dairy Crest, announced Tuesday it would raise the price it paid to direct milk suppliers by 0.2pence per litre.
The move came after Sainsbury's said last week it would work directly with 450 farmers, linked to processing firms Robert Wiseman and Dairy Crest, in a new Dairy Development Group.
"Early project suggestions include using Sainsbury's buying power to help members buy the goods and services they require at a lower cost, and a project which looks at optimising nutrition, feed efficiency and herd health," Sainsbury's said. The retailer, which sells 420m litres of milk per year, recently signed an 18-month supply deal with Wiseman and Dairy Crest.
Both dairy firms, the MDC and NFU welcomed the move as a way of bringing the supply chain closer together. Dairy firms, too, have faced significant margin pressure due to soaring input costs, retailer pricing and CAP reform.
Sainsbury's' project follows growing criticism of retailers for their part in maintaining low earnings in the dairy supply chain. MDC figures show that retailers have increased profits on liquid milk by a quarter in the last 10 years, and more rapidly since 2003.
"The main message from the NFU was that there is clear evidence of abuse of power within the supply chain and that the major retailers are in a dominant position," said NFU director general, Richard MacDonald.
He recently gave evidence to a Competition Commission panel investigating the UK grocery supply chain. The Commission's final report is not expected until 2008.
The NFU has asked its milk producer members to fill in specially sent, blank invoices so it can better document the gap between milk prices and production costs. It hopes this will help to spur more action to make the supply chain more sustainable.