The proposed merger between First Milk and Milk Link has been billed by the NFU as "the best news the dairy industry has had for many years". But while it has been welcomed by milk processors and dairy farmers, is it really the great white hope it's been cracked up to be? And will the OFT give it the green light or see the new co-op as nothing more than the return of Milk Marque - and refer it to the Competition Commission?

The new co-op would certainly have clout. Representing 4,250 British dairy farmers, it would produce 2.9 billion litres of the UK's 13 billion litres of milk a year, making it easily the number one producer in the £3bn milk market. It would also have a 20% share of the UK cheese market and a much larger share of the own-label cheese market (see Dairy, p58).

The NFU believes it would allow the co-op to cut costs, boost R&D spending and ultimately secure a larger share of the dairy market. "It will be a tremendous force for good in the dairy industry," says NFU dairy board chairman Gwyn Jones. "It will create economies of scale, transform the dynamics of the supply chain and offer consumers the security of a continuing supply of home-produced products."

It would also strengthen the arm of milk producers, says The Royal Association of British Dairy Farmers. "We are losing dairy farmers every day because they are going out of business thanks to the unfair dairy margin," says chief executive Nick Everington. "This will give milk producers more flexibility to negotiate on prices. There is already a shortage of dairy farmers in the UK, which is in no one's best interest."

Farmers agree that a single large dairy co-operative would be able to compete against big European players and negotiate better deals with UK retail giants.

Milk processors are also in favour. "We see real benefit in the coming together of two of our key suppliers of milk," says a spokesman for Robert Wiseman Dairies.

But while many believe the OFT will give the merger the green light, some are concerned about the resemblance of the new co-op to Milk Marque. England and Wales' fledgling milk marketing cooperative was dismantled in the mid 1990s following a damning report from the Competition Commission, which said it was dictating prices to processing customers.

It was from the break up that First Milk and Milk Link emerged and with them the problem of producers offloading commodity milk at commodity prices, the chief catalyst for more than 6,000 dairy farmers going out of business.

The question now is whether the OFT will see the new co-op, albeit smaller than its predecessor, as exerting too much influence over prices paid to farmers and ultimately by the consumer.

Supporters of the merger argue that while the new company might dominate certain areas of the domestic market, notably own label cheese, it would have a comparatively small share of the European milk market, at just 2%.

The new co-op doesn't face the same issues as Milk Marque. "Since Milk Marque was broken up, the industry has restructured and there is much more direct sourcing," says Nicola Mallard, food analyst with Investec. "The price of milk is more influenced by the price set by the global commodities market today. The merger will arguably make very little difference except in improving efficiency."

Most are confident the merger will go ahead as planned next April - as long as the OFT takes a broad view of the market. If it doesn't, the industry faces the very real prospect of the farmer exodus continuing.n