Oversupplies in the UK organic dairy sector are expected to ease in the next eighteen months, according to new research.

Healthy market growth rates and declining production levels of organic milk are to cause supply and demand to come into balance in 2006, according to a new study by Organic Monitor. Over a third of the organic milk produced since 2001 has gone into the non-organic market due to demand falling short of supplies.

Organic milk supplies are falling in the UK due to the decreasing number of organic dairy farmers. A significant decline is predicted in 2005 when five-year conversion grants to organic dairy farmers end and the EU derogation on organic feeds is lifted. Organic livestock farmers will have to use 100% organic rations after August 2005 and the rise in production costs is likely to cause some to quit organic farming, the report says.

Organic Monitor forecasts the decrease in organic milk production to not be matched by a slowdown in demand for organic dairy products. Sales of organic dairy products increased by 12.5% in 2003 and healthy growth rates are envisaged in the coming years. Consumer demand is expected to continue to remain robust in spite of higher production costs raising retail prices in 2005.

High growth in the organic dairy products market is being driven by product innovations and the marketing efforts of producers. A number of innovative organic dairy products have been launched in recent years, which include flavoured organic milk and Greek-style organic yoghurts. Scientific research into the health benefits of organic milk and growing demand from food service and catering companies are also expected to drive market growth.

The organic milk and organic yoghurt segments are reporting the highest growth. Organic yoghurt sales account for 7% of all yoghurt sales in the UK and the market share is projected to rise to 12% by 2010. Organic milk sales have shown rapid growth since they were introduced under supermarket private labels. Sales of organic butter and fresh cream are increasing at relatively lower rates.

The study found that consumer demand for organic dairy products is widening. The re-positioning of organic brands is driving this trend. Companies like Yeo Valley Organic are adopting a brand strategy in which they are targeting consumers who are seeking premium dairy products. New organic dairy products are introduced as part of the brand extension strategy and this is expanding the organic dairy category.