The industry warned then that replacing the MMB with a privatised monopoly called Milk Marque would savage profits.
The reforms were designed to liberalise the system by allowing farmers to choose who to sell to, but more than two-thirds of them opted to join Milk Marque.
Leaders of the dairy industry complained that ministers had effectively replaced a regulated monopoly with an unregulated monopoly.
Warnings that the cost of milk would inevitably be forced up - particularly the milk used to produce dairy products - proved correct. But the dispute continues over whether the real cause is deregulation or a price war with supermarkets.
Milk Marque set its prices at between 24.5p and 26.5p a litre, depending on whether customers were prepared to accept regular or interrupted deliveries.
But the problem has also been exacerbated by a shortage of milk caused by European quotas, which mean Britain's farmers can supply only 85 per cent of this country's requirements.
Upheaval in the milk industry had already forced a postponement of the flotation of Dairy Crest, the manufacturing arm of the old MMB, and the closure of two of its creameries with the loss of more than 260 jobs.
Both Northern and Unigate warned of the impact on their profitability, and the Dairy Trade Federation estimated the changes could cost its members £300m and 70,000 jobs in the long term.
Northern yesterday showed these were not idle concerns and attacked the Government for failing to heed warnings. Chris Haskins, chairman, said the Government had "botched" the move to the deregulated market.
Milk Marque, however, said privatisation had nothing to do with job losses. Competition from supermarkets was the main factor behind Northern's problems.
Milk Marque believes the price increases reflect the fact that dairy companies bid for 30 per cent more milk than is available. Also, dairy companies offer even higher prices to those farmers who agree to supply them directly.
This view was backed by the Ministry of Agriculture. "Half the redundancies are on the dairy side, affecting milk bottling and doorstep deliveries," said a spokesman. "The prime factor here is competition from the supermarkets, not deregulation."