In its third annual report, the Organic Milk Suppliers Co-operative (OMSCo) says that demand for raw milk products in the UK alone has grown by 40 million litres for the twelve-month period ending March 2008. This accounts for just five per of the country's total milk production, according to the report. The claims reflect growing demand for organic dairy across the EU, which has seen some of the bloc's leading processors commit themselves to organic production in a bid to expand investment in the market. While welcoming the increased demand, OMSCo says that supply constraints have proved to be one of the key factors holding back growth in established markets, despite higher imports to patch over holes in supply. Incentives Cooperative executive chairman Nicholas Saphir said that economic incentives to encourage organic dairy farming remains a key factor in safeguarding industry supply. He conceded though that higher prices being paid for non-organic milk and rising production costs were making this difficult. "Two years ago, organic feeds cost 30 per cent more than non-organic versions. Today they cost 80 per cent more," Saphir stated. "The extra cost of producing organically now outweighs the farm gate premium, which is clearly unsustainable." Saphir said the situation was leading to an overall decline in UK production, with net output this year falling by three million litres due to the rate of farmers leading the industry. "Two years ago 90 million litres entered conversion - last year this number halved," he stated. Saphir said that farmers already involved in organic production were also rethinking their strategy. "If the issue of pricing is not resolved, there is a real danger that supply shortages could reoccur relatively swiftly," he said. "If just 30 of the larger organic dairy farms revert to non-organic production, the industry will lose 10 per cent of its supply base." Industry reaction Some major European processors, citing similar price concerns across the EU have pledged to encourage more dairy farmers into adopting organic production methods. Arla Foods said earlier this month that it was looking to increase the supply of milk from its member farmers to tackle growing concern over organic supply, particularly in its Swedish and Danish markers. The Nordic manufacturer, which claims to be the largest producer of organic milk, says it is hoping to offer improved incentives for farmers to ensure it can offset a production shortfall. Arla says that before 2011, it is aiming to annually produce 375m kg and 266m kg of organic milk in Denmark and Sweden respectively for use in drinking milk and other traditional dairy products like cheeses and yoghurts. The group adds that it remains currently 55m kg behind its goal in Denmark, while output in Sweden is 100m kg short of its target. To meet its needs, the group says it will be raising payouts for organic milk as of 1 July 2008 by 10 Danish oere (€0.01) per kg of the product to 65 (€0.08) Danish oere (€0.08) per kg. Group spokesperson Theis Brøgger told DairyReporter.com that growing demand, particularly in Denmark for all things organic and the high potential of the German market, highlighted the need for a new, more reflective pricing system. Global demand Even outside of Europe, US groups are also looking to tap the potential of growing demand for organic dairy products. Last year, ingredients firm Glanbia said it was stepping up production of organic cheeses to offset declining profitability for its conventional products. The decision reflects the increasing pressure on dairy processors to look to new markets and higher value production to offset increasing commodity costs. Group president Jeff Williams told DairyReporter.com that the company was increasing its focus in organic production after witnessing annual growth of about 20 per cent for such products in the US market alone, especially for milk and yoghurt.