Huge rises in the value of dairy commodities could encourage farmers to switch away from retail milk contracts, dairy experts are warning.

Products such as butter and milk powder are trading on the world markets at record prices, making it more lucrative to supply than fresh milk.

Milk powder prices, in particular, are up more than 50% on last year at more than €3,000 (£2,050 ) per tonne.

In Northern Ireland, where part of the province's milk output is auctioned to the highest bidder, farmers are expecting to receive up to 25ppl for raw milk by this time next year.

"Liquid milk and cheese prices will be dragged up by powder," said David Dobbin, chief executive of the province's main dairy co-op, United Dairy Farmers. Auction prices have already risen 4ppl above typical rates. "I expect our auction prices to be about 23/24ppl this winter."

By contrast, Tesco's much lauded move to offer direct contracts to farmers will be worth 22-23ppl. Waitrose has raised its milk suppliers' price to 23ppl.

"Unless the powder markets fall, then the Northern Irish milk price will overshoot the Tesco offer," Dobbin added.

High Northern Irish prices would have a knock-on effect in Britain, according to dairy consultant John Allen at Kite. He said the bullish market and new retailer initiatives have made him "more optimistic for dairying than at any other time in his career".

Milk drying plants that were on the verge of being mothballed last year are now operating flat out, and cheese manufacturers are switching milk into powder production. Allen expects the move out of cheese to give a fillip to prices, potentially adding up to £100 per tonne to wholesale cheese values. This should in turn add value to the milk used to make it.

Allen warned the middle-ground market was in chaos. "Ridiculous deals to gain business are still the order of the day."

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