The director general of Fair Trading, John Bridgeman, said he would not now refer the supply of milk to the Monopolies and Mergers Commission but would "monitor the situation closely". He added that he would not hesitate to take further action should it prove necessary.
The main dairy companies such as Unigate and Northern Foods have complained bitterly about the existing Milk Marque pricing structure, saying it fails to reflect supply and demand and results in higher prices for consumers.
Currently, the system allows prices to rise when there is an excess demand for milk but does not provide for a corresponding fall in prices when there is a demand shortfall.
The big change is that if Milk Marque receives a bid for less than 90 per cent of the milk on offer it will lower the price and hold a further round of bidding. The changes will not come into force until next April.
The Dairy Industry Federation gave a "cautious welcome" to the changes though added that it would need to see how they worked in practice. The Federation's John Price said some of the principles lacked detail and other points were still unclear. "It's a step forward but we will need to see how it works in practice before we give the changes our wholehearted support."
Mr Price said that the OFT's statement did not address Milk Marque's monopoly over the transport of raw milk. Dairy companies feel they should have the option of providing their own transport arrangement if it can be shown that their systems are more efficient that Milk Marque's.
Shares of big dairy companies rose on the news. Unigate shares closed 10p higher at 432p. Northern Foods put on 3p at 205p.
David Hallam, an analyst at the broker Williams de Broe, said: "There is now a mechanism under which milk prices can go down when the market conditions show it would do so under normal circumstances." He added that in the current climate of over-production of milk in the UK "milk prices should go down".
Both the Northern Foods chairman, Christopher Haskins, and the Unigate chairman, Ian Martin, have attacked the Milk Marque price structure, regularly giving vent to their anger at its results presentations. "There has been a fairly concerted effort by all the major milk processors. This is a result of that," Mr Hallam concluded.
The Government deregulated the milk market in November 1994, sweeping away the old Milk Marketing Board system in a move which sent milk prices sky high.
The Dairy Industry Federation made a formal complaint to the OFT at the time of deregulation that Milk Marque was abusing its dominant position in the milk market to inflate prices.
The leading dairies have been battling against a sharp fall in doorstep sales of milk as a growing number of households opt to buy cheaper milk at supermarkets. Doorstep sales have fallen by around 16 per cent on last year. Both Northern Foods and Unigate have taken radical action to restructure their milk businesses, including the closure of many bottling plants.
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