The mood was gloomy at a recent dairy conference. The industry was in crisis, said one speaker. Nothing unusual in that. But this was no UK delegate lamenting supermarket-induced meltdown. This was an Australian, who was bemoaning the fact that years of drought had decimated his industry. Publicly, the other delegates nodded in sympathy, but privately, they were over the moon. If Australia had the clouds (or rather didn't), the silver lining was coming their way.

Dairy price rises are rocketing. In the UK, skimmed milk prices have hit £2,000 a tonne. A year ago they were £1,360. Whole milk powder is now £2,300, where last year it was about £1,500. And butter is £1,900, where last year it was £1,700.

Such are the global rises that in the US headlines play games with the dairy industry's 'Got milk?' slogan. 'Got money?' they say. So how much higher will prices go and what will the knock-on effect be on the price paid by consumers?

The UK food industry uses nearly 1.6 million tonnes of butter, cream, cheese, whole and SMP, and we drink six million litres of liquid milk in a year. That puts the additional milk-related bill for retailers, manufacturers and processors since last May at about £415m, says Dairy UK - 10% up on 2006.

The Australian drought is not the only factor driving price rises. Milk production in the EU is down and in the UK supplies have dropped markedly.

Ironically, EU stocks of butter and dried milk powder are falling just as demand for dairy products globally is rising, particularly in Asia. Meanwhile the global phenomenon of biofuels means farmers are milking that opportunity instead.

"World demand for dairy products is increasing faster than supply," says Dairy UK director-general, Jim Begg. "Where the two balance will largely be a function of price."

For years, farmers have complained that supply and demand factors did not work in their favour. They're starting to work now. Milk Link has increased its price by 1.25ppl since April; First Milk by 0.85ppl plus incentives; and Robert Wiseman by 0.76ppl since March.

"The price rises reflect the improved revenues being generated from the market and in particular skimmed milk powder and whey," says Milk Link's chief executive Barry Nicholls. "I hope we will be able to deliver further returns in due course from the other areas of the market."

The signs are good, says analyst Mike Bessey, pointing out that cheese prices have recently seen rises of £150 to £200 a tonne. However, vagaries of the UK market aren't helping farmer confidence, in particular the middle ground - retail milk not sold on the doorstep or in supermarkets - where operators sell for as little as 44p for two litres.

"When these contracts come to an end I can see some processors drying milk rather than supply at low prices," warns John Allen, from industry consultants Kite. "It could be payback time, but a lot will depend on the bravery of account managers selling into the middle ground and whether they take a long or a short term view."

Meanwhile, the price rises will inevitably feed through into retail. Over the next couple of months, major brand owners are expected to push for a 20p-25p rise on a 400g block of butter and cheese and 4p-5p per pint of liquid milk.

"With commodity prices where they are if consumer prices don't increase then milk will be diverted away from consumer products," said Dairy Crest's milk purchasing director Arthur Reeves.

Farmers may be happy, but consumers are likely to be less so.n