Downward milk price pressures and other cost squeezes are forcing farmers out of milk production and jeopardising future milk production. That is the concern raised by the NFU in a recent State of the Industry report.

While such fears are well-founded, it must be recognised that they are largely the consequence of EU dairy policy reform. Over four years, this is cutting support price levels for dairy products by 22%, as well as making large cuts in export refunds and domestic subsidies. The much-maligned Single Farm Payment system is intended to offset part of this potential loss of income for dairy farmers and will continue, probably on a declining basis, into the next decade.

UK milk returns to farmers are likely to fall this year by about 5%. At the same time, the Mid-Term Review completed its third phase on 1 July with most of the support price and subsidy cuts now implemented.

There remains one more cut to the butter intervention price of 4% next July (the last part of a 25% cut over four years), while the agreed support price cuts for SMP were completed on 1 July with a third cut of 5%. About 20% of the cuts as they translate to milk prices have already been implemented against the overall programme of a reduction of 22%. It suggests that there may be light at the end of the tunnel in 2007 as the downward pressure on dairy product prices comes to an end.

The protein element of milk is now in a more encouraging situation with no intervention stocks, no export subsidies and a firm market. The butterfat sector is still challenged by the EU market's reliance on intervention and export subsidies, but official forecasts expect butter production in the EU to decline and restore balance. Cheese is more delicately poised, but is still enjoying rising consumption and healthy exports.

Perhaps those UK dairy farmers who can cope with the changes over the next 12 months will emerge into a more stable and predictable milk price environment.