Increased prices could overturn milk float

THE PROPOSED flotation of Dairy Crest, the Milk Marketing Board's trading arm, could be jeopardised by the milk prices set by Milk Marque, the farmer's co- operative which is to take over from the MMB on 1 November.

Milk Marque announced last week that buyers will have to pay between 23.3p and 26.3p a litre for their milk, with the lowest price available to those who are prepared to accept fluctuations in their deliveries to match the seasonal pattern of production.

The average price currently charged by the MMB is 24.1p but manufacturers of cheese and butter pay much less for their milk - 21.5p and 21.1p a litre respectively - than those who are buying for sale as bottled milk.

Milk Marque's pricing structure means that cheese and butter manufacturers face price increases of at least 8.4 per cent even if they are prepared to accept interrupted supplies.

The price rises - which could add 1p to the price of milk - also angered dairy companies, which see it as evidence that Milk Marque is abusing its monopoly position. The industry warns it could lead to some smaller producers being forced out of business.

Gillian Shephard, agriculture minister, said when the scheme was approved last month that she saw 'no reason' why the price of milk should rise under the new arrangements.

Dairy Crest is Britain's largest supplier of English cheddar and other regional cheeses and also makes butter under the Country Life and supermarkets' own labels. The two products accounted for half the sales in its consumer foods business, and a fifth of the group's total of pounds 830.6m.

Dairy Crest makes a 6.2 per cent margin in its consumer foods business, giving pounds 20.1m profits on pounds 324.7m sales. Any reduction in that could have a significant effect on the multiple it is likely to achieve on a float.

But Dairy Crest believes that cost-cutting and efficiency improvements made over the last three years have left it able to withstand price increases and still compete effectively.

The MMB had been expected to announce details of its flotation shortly after the Government approved the MMB's reorganisation proposals on 16 June. But industry sources say that the impact on its profit margins of the price increases could mean it will have to be delayed.

Dairy Crest had been expected to be valued at about pounds 250m, of which about pounds 40m would be used to cover the costs of setting up Milk Marque and the remainder distributed to Britain's 29,000 farmers. If it is delayed, Milk Marque will borrow money, secured on Dairy Crest's assets, to finance itself.

Andrew Dare, chief executive, said Milk Marque had already signed up about 19,500 farmers, tying up about two-thirds of milk production, and was confident it could reach 75 to 80 per cent.

Northern Foods and Unigate, which are anxious to sign up farmers directly, would not say how many they had attracted although both said that the procedure was going well. The deadline is 15 July.

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