UK milk production will stop declining by 2012, a new report has predicted.

Milk production has fallen for five consecutive years and currently stands at a 40-year low, and there are fears the UK will have to resort to importing milk in significant volumes for the first time. But new evidence suggests the decline will tail off within the next three years.

Increased dairy inseminations over the past two years - when higher milk prices encouraged farmers to invest - would bring additional heifers into production from 2011-12, the Kite Consulting report claimed. And while a recent drop in farmgate milk prices meant some farmers had switched to beef inseminations to take advantage of higher prices, there was long-term optimism they would reinvest in dairy.

Global dairy prices had now bottomed out and world prices would begin to rise again over the next year, the report predicted.

In the short term the release of EU intervention stocks would cause a 'hangover' effect of up to a year before farmgate prices rose, but the picture would be more positive after the recession ended.

"There is a lot of doom and gloom about at present and while we cannot ignore the effect of current prices or the immediate Dairy Farmers of Britain-related difficulties, our analysis suggests strong businesses have reasons to be positive," said Kite managing partner John Allen. "Weaker businesses need to become fitter to be profitable and to compete."

Dairy UK said the report showed a profitable future was possible for the trade.

"There are undeniably great opportunities for the more efficient and forward-looking dairy businesses, all driven by increasing world dairy consumption," said director general Jim Begg. "[We] must capitalise on that by keeping up the pressure to innovate, produce more efficiently and consolidate."

The report would build confidence among younger farmers who needed encouragement to invest, said Roger Evans, chair of the Dairy UK Farmers' Forum.