How did milk become cheaper than water?

The price of milk has fallen by more than 50 per cent over the past 12 months

A glass of milk (MYCHELE DANIAU/AFP/Getty Images)

Dairy farmers need greater protection as they struggle to cope with the sharp fall in the price of milk, MPs have warned.

Globally, returns from dairy products have fallen by more than 50 per cent in the past 12 months.

The price has plummeted so rapidly since last summer that milk is now cheaper than bottled water.

The drop comes after prices hit their highest level for several years.

Dairy farmers are being driven out of business week after week, with some 60 dairy farmers leaving the industry in December alone, according to the the National Farmers Union.

The total number of UK dairy farmers currently stands at under 10,000 – the lowest ever. But what has caused this sudden change?

Why is milk suddenly so cheap?

Thanks to the combination of fewer orders from China, a Russian trade ban, and good weather helping farmers deliver a surplus, supply has risen while demand has fallen.

Fierce UK supermarket price wars have exacerbated the problem.

The price of a four-pint carton of milk has tumbled from around £1.39 to £1 in Tesco and Sainsbury’s, while Asda is selling a four-pint carton for just 89p, the cheapest of the big four supermarkets, according to the Guardian.

In turn, Glasgow-based co-operative First Milk, which is owned by British farmers, admitted last Monday that payment to 1,000 suppliers would be delayed for two weeks.

Its chairman, Conservative MP Sir Jim Paice, told the Telegraph at the time that it is uncertain how long the current downturn will last, and that the organisation is aware that “hundreds of UK dairy farmers are unlikely to find a home for their milk this spring.”

How do MPs plan to help farmers?

The Groceries Code Adjudicator's (GCA) remit currently covers suppliers to the big supermarkets and retailers. The parliamentary Environment, Food and Rural Affairs (Efra) Committee is urging the Government to extend the remit of the scheme to include dairy farmers – the vast majority of whom fall outside its protection.

MPs are also calling on ministers to help dairy farmers tap into worldwide opportunities for exporting, and press for clearer “country-of-origin” labelling to help consumers know if they are buying British. An EU review of the protection against very low prices is also proposed.

Anne McIntosh, the committee’s chairwoman, said: “The volatility of worldwide and domestic milk markets is making financial planning and investment impossible for small-scale producers unable to hedge against changes beyond their control."

The current GCA, Christine Tacon, can only investigate complaints which direct involve suppliers to the big 10 supermarkets and retailers. As most milk production is small-scale, most dairy farmers are excluded, Ms McIntosh explained.

Ms McIntosh also said the committee was "shocked" to learn that the adjudicator was still unable to levy fines on retailers as the Government had not yet set the level of fine she could seek, and called for the power to be activated before the general election.

In a report on dairy prices, the MPs also called on farmers to consider forming "producer organisations" to increase their clout in the market.

How has the Government responded?

A Government spokesman said: "We understand the concerns of British farmers over the current pressures on milk prices caused by the volatility of the global market and we are doing all we can to help manage this.

"This includes giving dairy farmers the opportunity to unite in producer organisations so they have greater clout in the marketplace.

"We have also brokered a dairy industry code of practice on contractual relationships to improve transparency and give farmers a fairer deal, which now covers 85% of UK dairy production.“

He added that it was important to remember that the long-term prospects for the dairy industry were good.

"We are helping the dairy industry to take advantage of opportunities such as opening new export markets and pushing for better country of origin labelling for British dairy products.

"We strongly support the work of the Groceries Code Adjudicator. Its jurisdiction is currently limited to the scope of the Groceries Supply Code of Practice, and does not cover pricing - which is the responsibility of the Competition and Markets Authority. There will be a statutory review of the GCA next year."

Additional reporting by PA