Prospects for the dairy industry are good, as trading conditions for farmers continue to improve, reckons Dairy UK in response to DairyCo's annual survey of farmer intentions.

The survey showed that 37% of farmers plan to expand their business, while 7% plan to leave the industry. However, GB milk volumes are still forecast to fall a further 0.6% in the next two years to 11.1 billion litres.

Significantly, the survey estimated that 30% of farmers would leave the industry if milk prices were to fall by 2p per litre, and 65% would leave if prices fell by 4p per litre. That scenario would reduce GB milk production to 5.2 billion litres.

Dairy UK director-general Jim Begg said: "Major changes in the dairy market over the past year have improved trading conditions for most dairy farmers. However, for UK milk production to fully stabilise, farmers need the confidence to undertake major investment, allowing them to achieve production efficiencies while meeting a growing burden of regulatory costs.

"It is therefore important that the maximum value is obtained from milk. The recent rise in farm gate prices has seen milk recover the ground it has lost over the past 10 years, and sterling's devaluation will underpin these gains.

"Longer term, the prospects are good. The opportunities for further gains from product innovation, supply chain co-operation and efficiency improvements are still enormous."

NFU Scotland tempered the optimistic tone of the report by highlighting the fact that milk prices must now rise in order to secure future supply. It points out that farm input costs for essentials such as feed, fertiliser and fuel continue to rise to record levels against a backdrop of static farm gate milk prices, effectively leading to a drop in income for producers.

Willie Lamont, NFUS Milk Committee chairman said: "This survey is positive in that it shows a renewed and much-needed optimism within the dairy industry. Higher prices towards the end of 2007 led many to feel encouraged and that has been demonstrated within the survey.

"However, what is also clear is the intense fragility of the industry. There are still many out there who plan to leave dairy farming."