Dairy farmers were losing an average 3.42 pence for every litre of milk they produced, according to a new report from the National Farmers' Union (NFU) and Royal Association of British Dairy Farmers. It is another stark portrayal of life as a liquid milk supplier in the UK, keeping up intense public pressure on processors and retailers. Cost of production for milk has risen 16 per cent over the last year to reach 21.3 pence per litre (ppl), the report says. Average farmgate prices have remained around the 18ppl mark. Dairy UK, the industry-wide association, moved quickly Thursday evening to warn against a growing rift in the UK supply chain over farmgate prices. "It's right to draw attention to the difficulties encountered by farmers but we must not lose sight of the potential future that is open to us," said Jim Begg, Dairy UK director general. "There has been clear evidence recently that supermarkets - the biggest customers of the industry - and dairy companies are striving to give the best possible deal to farmers." Major dairy processors, including Arla Foods UK, Dairy Crest and Robert Wiseman, have all committed to farmgate price increases in recent months. And supermarkets, faced by rising public awareness of the problem and a grocery chain investigation by competition authorities, have also upped their game. Tesco is set to pay 22ppl to 850 farmers via direct contracts. Royal Society chairman, Lyndon Edwards, praised Tesco but warned: "These direct contracts are only available to limited numbers of producers, therefore it is of paramount importance that the remaining retailers and other parts of the supply chain follow suit." The need for greater innovation in order to capture growing added value dairy markets is something everyone in the sector can agree on. Gwyn Jones, NFU dairy board chairman, said strengthening demand for cheese, whey and milk powder offered hope to the sector, providing supply chain "imbalances" were corrected. A Dairy UK conference on cheese this week emphasised the need to develop new products to attack both domestic and foreign markets. Earnings for processors as well as milk producers remain under heavy pressure, however, and some in the industry have said there are still not enough funds being channelled into research and development.