Supermarkets have been accused of significantly increasing profit margins on Cheddar in the past year - but failing to pass on the benefits to processors or consumers.

The retail gross margin on mild Cheddar has increased from 37% of the retail price in 2007/08 to 47% over the past year, according to a new report by DairyCo.

Of the 10.38ppl extra paid by the consumer for mild Cheddar in 2008/09 compared with the year before, some 9.7ppl was used to increase the retailer gross margin, the report claimed. Although the price received by processors went up 0.69ppl, processor margin fell 2.06ppl as a result of increasing farmgate prices.

"Initially prices went up as a response to increasing wholesale prices," DairyCo said. "However, as wholesale prices have fallen, retail prices appear to have been slower to follow suit."

On mature Cheddar, of the extra 9.85ppl paid by consumers, 6.97ppl was used to increase the retail gross margin and the remaining 2.89ppl was passed back to processors.

With wholesale Cheddar prices declining but farmgate prices remaining relatively high, many processors were not making a profit margin, DairyCo said.

The report comes as farmers' representatives warned that more transparency on cheese sourcing, labelling and margins was needed, following criticism that imported Cheddar from Ireland was undermining prices for UK-produced cheese.

First Milk this week announced it was reducing its milk price by 1.25ppl from 1 April as a result of declining cheese and ingredients returns. "Selling prices in cheese and ingredients have come back significantly and we are now operating in a very tough market," said chief executive Peter Humphreys.

NFUS Milk Committee chairman Jimmy Mitchell claimed that poor labelling was allowing cheap imported cheese to appear on shelves marked as 'value' and 'packed in the UK', undermining UK processors' attempts to add value by creating cheese brands.