A MAJOR new report this week confirmed that retailer margins on liquid milk and dairy products had increased significantly over the past ten years, but farmgate prices and farm margins had continued to fall.

The Milk Development Council published its Dairy Supply Chain Margins 2003-04 report on Tuesday and Andrew George, Liberal Democrat shadow rural affairs secretary, said it clearly showed supermarkets had "been happy to see farmers and consumers lose out".

"Claims that savings are passed on to shoppers are now proven to be untrue," he said, adding that, with the margins the supermarkets were making, there was room both for farmers to get a fair price for their efforts and for consumers to get cheaper dairy products.

"I hope the OFT will take a good look at this new evidence," said Mr George. "Toughening the code of practice would help farmers get fairer treatment and shed much-needed light on the shadowy deals that go on."

The report revealed that supermarket margins on liquid milk and dairy products rose by 8-10p a litre over the last decade, but farmgate prices fell by 6p.

In 2003, the farmgate milk price rose by about 1ppl to an average 18.03ppl, compared with 17.04ppl in 2002, but, with an independent academic report assessing the average cost of milk production in England and Wales to be 18.33ppl, 60pc of dairy farmers failed to make a profit, despite the average cost of milk production being reduced by 3.3ppl - 15pc - over the past six years.

That cost reduction was mainly achieved by small farms quitting and remaining ones becoming larger and reducing their costs.

The report predicts that CAP Reform will see the pressure on farmers and farm prices continue.

In 2003, 11pc of dairy farmers quit, leaving just 16,000 in England and Wales. "In addition, a large proportion - about 30pc - of those remaining plan to leave in the next two years as a consequence of CAP Reform," said the report.

Jo Speed, MDC extension officer for the Northern region, said the organisation had been concerned for some time about the lack of transparency over supply chain margins and profits in the industry as a whole.

"The report confirms that weak commodity markets and processor competition have meant it is primarily retailers, and not farmers, who have benefited from improved liquid milk retail prices," she said. "As a result, the 6p per litre fall in the farmgate milk price between 1994 and 2003 has generally increased retailer margins."

Brian Peacock, MDC chairman and council member for the North, said the UK was a significant commodity producer of mild Cheddar, skim milk powder and butter, and those products provided the base to the raw milk market.

As sterling had strengthened, commodity prices had weakened and resulted in farmgate prices falling.

"So it would be fair to say that, while supermarkets haven't been responsible for causing the low prices, the report shows they have taken advantage of the situation caused by strengthening sterling to increase their margins," he said.

Mr Peacock also said that processors engaging in price competition with each other for big retail contracts, placed further downward pressure on farmgate prices.

The report said the UK milk price was consistently the lowest in the EU. Farmers should be able to obtain slightly higher prices out of a market that was working effectively.

Mr Peacock said there were obvious areas in which farmers could look to regain value. "For example, the trade deficit in dairy products has grown to £690m, an increase of 50pc over six years," he said. In addition, imports of speciality cheese had risen by over 40pc since 1998.

The MDC report is free to milk producers (£150 copy to non-members) from 01285 646500.