The Dairy Supply Chain Margins report shows that, in the last year, average retail prices of liquid milk have dropped to their lowest levels in more than seven years. The price the farmer receives at the farm gate has increased by 11.6% year-on-year.

The report aims to answer the question of who benefits from price changes in the dairy supply chain.

DairyCo/AHDB analyst Patty Clayton said: "In the past, increases in processor costs have been matched with rising retail prices, but a significant factor in the liquid milk market in the past year has been the lack of such an increase. Price promotions on liquid milk and consumers tightening their belts meant retail prices did not rise."

Prices were down to 55.5ppl, 4.6% lower than in 2010/11.

The well publicised recent milk price cuts are evidence of the continued squeeze on processor gross margins.

Mrs Clayton said: "Unless there is significant change in the structure of the liquid milk market to alter the balance of power, it is likely that processors' gross margins will remain under pressure.

"This reinforces the importance of the industry working together to improve milk contracts and the negotiating power of farmers.

"It also identifies the need for all dairy stakeholders to understand dairy markets. For example, farmgate prices will continue to be driven by wholesale markets for dairy products, with demand for milk from the various product segments driven by their profitability.

"It is also important that farmers align their individual circumstances with the right milk buyers and understand their position in the market. DairyCo's annual reviews will continue to explore this area."

The DairyCo Supply Chain Margins report can be downloaded at www.dairyco.org.uk