Dairy farmers are bracing themselves for a bruising confrontation with the supermarket chains over low milk prices despite a continuing surge in the cost of butter and skimmed milk on global markets.

Britain faces a shortage of milk after the recent flooding, which has kept cattle off the fields, but the shortage is not feeding through into prices paid to farmers who are tied to long-term contracts with major grocery chains.

On world markets, the price of skimmed milk powder has doubled over the past year, but the cost of fresh milk in the UK has barely moved as the superstores use milk as a weapon in their continuing price wars.

“Farmers are getting extremely anxious and frustrated,” said Tom Hind, an adviser with the National Farmers’ Union, who fears that the effect of the floods on the economics of a business that depends on having cattle in fields eating grass rather than in sheds eating expensive grain. “Costs are going up, a penny a litre in the last month,” he said. “Feed prices are going up dramatically.”

None of this is flowing through to the price of a litre of milk at the farm gate, which remains stuck between 19p and 20p and barely enough for a profit margin. Most producers are locked into year-long contracts with dairies, which in turn supply the supermarkets. Some farmers are contemplating the ultimate threat of terminating their contracts in order to squeeze a bit more from the retailers.

The spot price of milk is in excess of 30p per litre, but little milk is sold at short-term rates despite an acute shortage on international markets for commodities such as butter and milk powder.

The lengthy drought in Australia and rising demand in Asia for dairy products has created a potential new market for British farmers, but one that remains inaccessible because of their contractual commitment to Britain’s fresh milk sector.

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