Dairy prices are getting out of control

Cheese supplies will soon start to run short unless prices rise. Manufacturers will switch their milk into better-paying products, such as butter and milk powder, and farmers won't keep supplying milk for low-value cheese contracts.

World dairy markets are ablaze as commodity prices reach record highs. Milk powder prices have risen 96% year-on-year to £2,650 per tonne. Butter prices are up 35% on the year to £2,300 per tonne and are still rising rapidly as demand outstrips supply.

Only Cheddar prices have resisted growth - partly because longer-term contracts have delayed price increases. They have edged up just 18% to £2,250 per tonne on the year, but are escalating. Further rises are inevitable.

For more than 40 years, EU dairy prices have remained stable thanks to careful market management and a plentiful supply of milk. But prices in the UK have nearly doubled for the key commodities, on the back of booming exports. Even the reduction and eventual elimination of export subsidies have not calmed the markets.

There are also mounting fears that the liquid market could also struggle to source enough raw milk for the first time. Fresh milk is normally the top priority for milk suppliers because it pays the best price to the farmer. That's no longer the case, and it could lose precedence to the manufacturing market this autumn unless prices in liquid contracts rise.

The bad news for buyers is that milk output is now in its phase of seasonal contraction as cows' productivity runs down towards the autumn trough. That means fresh supplies will steadily diminish over the next few months. And this time there are no intervention stocks of butter (or skimmed milk powder) to tide the market over.