* Dairy co-op fails after acquisitions backfire
* Cheese, butter imports likely to increase
* UK milk production set to continue to decline
By Nigel Hunt
LONDON, June 8 (Reuters) - The decline in Britain's dairy sector has accelerated with the failure of a major co-operative and importers could now dominate the supply of products such as cheese and butter, industry sources said on Monday.
Dairy Farmers of Britain (DFOB), which supplies about 10 percent of UK milk output, was put into receivership last week.
The co-operative's 1,800 dairy farmers stand to lose not only their latest monthly milk payment, which might represent their profits for the whole year, but also all the money invested by the co-op in acquisitions over the last few years. "They have had a massive hit over a period of time and some of the guys are going to say enough is enough," said dairy analyst Tony Evans of farm consultants The Andersons Centre.
UK raw milk production totalled 13.13 billion litres in 2008, down from 13.42 billion in 2007 and 14.32 billion five years ago, according to UK government figures.
The industry has faced growing competition from imports under European Union reforms while many farmers also argue the market power of Britain's leading supermarkets has driven down the price they are paid for milk.
A global slump in dairy markets has also helped cut milk prices, sparking farmer protests in several European countries. The EU revived export subsidies for butter, cheese and skimmed milk power earlier this year.
For factboxes on the EU dairy sector see [ID:nL8346921] and [ID:nL4960944]
Britain's three major dairy cooperatives tried to shore up returns for farmers by vertical integration -- trying to add value by buying companies and brands which stand between farmers and the consumer -- a policy which went disastrously wrong for DFOB.
BAD INVESTMENTS
"The bottom line is some people made some horrendous investment decisions. I don't think this is anything to do with the product or the market. It is about a poorly run business," Evans said.
Lyndon Edwards, chairman of the Royal Association of British Dairy Farmers, also cited overpayment for assets including a dairy business bought from the Co-operative Group in 2004. "Other companies have used a similar idea (vertical integration) and been far more successful. There has got to be some luck with every business and they certainly didn't get any of that," he said.
Andersons Centre analyst Evans said he feared Britain's dairy sector could continue to shrink.
He noted the liquid market and some high value products such as stilton cheese would continue to use British milk but the future did not look bright for bulk standard cheese, butter and milk powder.
"The logic is it has to migrate all the time to the lowest costs areas if the retailer continues to just pound away at the price," Evans said, citing South America as among areas which could make products such as bulk standard cheese more cheaply. RABDF's Edwards said UK farmers were hurt by an imbalance in the supply chain with thousands of producers supplying just a handful of dairy processors and supermarkets.
"The majority of the cheese sold in Britain now is being imported. We have a great market for liquid milk. What we don't have is the balance within the industry," Edwards said. (Reporting by Nigel Hunt; Editing by Peter Blackburn)