Milk prices to fall

The Office of Fair Trading is to opt for private arm-twisting to reform the milk market, rather than order a referral of Milk Marque, the country's largest supplier, to the Monopolies and Mergers Commission.

The conclusion to the 18-month OFT inquiry, which will lead to falling milk prices, will come as a boost to Dairy Crest ahead of its flotation later this summer, expected to value the company at around pounds 250m.

Sources close to the inquiry say gentle pressure is more likely than an MMC referral.

But farmers, especially those with mixed dairy and beef herds, who are still reeling from the BSE scare, will be angry. And the National Farmers Union is reluctant to see change come too fast.

Julie Smith, milk adviser to the NFU, said the current scheme was developed to "evolve naturally, and farmers are very happy with it".

Milk Marque was established to co-ordinate sales of milk to the dairy industry after the Milk Marketing Board was disbanded in 1994. The OFT launched its inquiry within a month of the start of the new system, at the request of dairies and milk buyers aggrieved at high fixed prices.

John Price, of the Dairy Industry Federation, wants to see an auction system introduced instead, "which will allow milk to be cleared efficiently and fairly". He and his fellow members believe the system is a monopoly, with Milk Marque controlling 70 per cent of allsales. He said that before November 1994 a system of checks and balances prevented monopoly abuse. But despite Milk Marque's smaller share, "since deregulation, all those have been removed".

Under the quota system farmers are unable to increase their production to meet rises in demand. This has led to a situation in which farmers who opted out of Milk Marque receive an even higher price for their milk, particularly from cheese or butter makers who prefer high-protein or high- fat milk and are willing to pay above the market rate.

Private supplies can also be traced back to individual herds, whereas Milk Marque does not offer this facility - something for which there is increasing demand in the BSE scare.

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