The federation, which represents Britain's milk users, is starting proceedings for a judicial review of the Government's handling of deregulation.
A row has been brewing since the Milk Marketing Board's proposals to wind itself up were approved by the Government in June. The dairy industry was concerned that Milk Marque, the farmers' co- operative set up to succeed the MMB, would in effect have a monopoly over the supply of milk and would use that to inflate prices.
Its fears seemed to be confirmed yesterday - the deadline for farmers to sign with the large dairy companies - when Milk Marque said it had signed up about two-thirds of Britain's 29,000 dairy farmers and was expected to secure the 10 per cent who had yet to sign contracts.
Milk Marque has also set its prices sharply higher than those now charged by the MMB. These will range from 27.4p a litre for those who want constant supplies and the freedom to vary the quantities taken each day, down to 24.7p for buyers who are prepared to accept interrupted supplies.
Prices have been affected by devaluations of the green pound, which have added 0.9p a litre.
At the moment prices vary depending on how the milk will be used. Those intending to use it for butter pay 21.5p a litre, rising to 26p for liquid milk for bottling.
Up to now, disputes between dairy companies and the MMB, which bought all the milk produced by farmers, could go to arbitration. No such mechanism exists for Milk Marque, despite intense lobbying by the dairy industry.
Christopher Haskins, chief executive of Northern Foods, said that the increases could add 2p to a pint of milk, 12 per cent to yoghurt and up to 25 per cent to some types of cheese. He estimated that the increases would cost Northern an extra pounds 50m a year and warned that, because it was unlikely that all the increase could be passed on to retailers, its profits were likely to be pounds 15m lower in the year to March.
Unigate, Northern Foods' rival, claims its costs will increase by pounds 40m, cutting pounds 10m off its profits.
The increases are also likely to mean that the flotation of Dairy Crest, the dairy arm of the MMB whose sale was intended to fund the changes, will be delayed. A decision is expected by the end of the month.
The sale had been expected to fetch pounds 250m, of which pounds 200m would have been distributed among dairy farmers. Dairy Crest's profits are likely to be badly affected by the increased charges, driving the flotation value considerably lower than forecast.
The Dairy Trade Federation estimates that the price increases will cost the industry pounds 250m a year - more than its combined profits - and it warns that factories will be forced to close, with the loss of some of its 70,000 jobs.
The federation wants the Government to refer Milk Marque to the Monopolies and Mergers Commission. William Waldegrave, the Minister of Agriculture, is to meet DTF and Milk Marque representatives on Thursday.
Mr Waldegrave's predecessor, Gillian Shepherd, warned Milk Marque that she would monitor its behaviour and said she saw no reason why prices should rise.
Milk Marque claims that the increases reflect the fact that dairy companies bid for 30 per cent more milk than is available, and pointed out that dairy companies are offering even higher prices to those farmers who agree to supply them directly.
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