Low milk supply has started to translate into big wholesale price increases for butter and cream.
There is even the prospect that the UK could suffer from shortages of butter and cream in time for the all-important Christmas season.
Milk output is widely reported to have fallen this year because producers ran down supply in 2016 owing to a supply glut in the market.
Peter Tuborgh, chief executive of Arla, told viewers of the BBC´s Today programme that available milk supply was barely keeping up with current demand, especially for products made from milk fat.
It came just days after Arla raised its milk price to farmers by two eurocents per kilogramme, equating to a 1.65 pence increase on a standard UK manufacturing litre.
Arla director Jonathan Ovens said the increase was a reflection of rising fat prices.
“The current market situation is characterised by strong demand and low stocks of fat, which is driving up prices for butter, cheese and other products containing fat,” added Ovens.
It is not the first time the dairy market has been known to be volatile, with changes in global supply or unusual weather patterns tending to have a significant impact on wholesale prices for products such as butter and cream.
However, higher dairy prices could turn into a thorny issue if the latest wholesale increases get passed onto consumers.
With inflation having reached 2.9%, its highest level in four years, the UK is already experiencing a squeeze on living standards. Weakness in the pound since the Brexit vote has pushed up import prices, skewing UK inflation to the upside.
Dairy UK, the British dairy trade association, confirmed there had already been “significant increases” in wholesale prices for butter and cream.
“To what degree price increases are transmitted to consumers is a matter for retailers,” said a Dairy UK spokesman.
The National Farmers´ Union (NFU) claimed that wholesale cream and butter prices had in fact reached record levels, though this had not yet fed through to farmgate milk prices in a major way.
NFU chief dairy adviser Sian Davies called on the government to set up a system so that farmers get better access to information, including data on milk volumes and trade prices for milk products.
“This should at least provide more trust in the market and allow farmers to better plan their production going forward,” said Davies.
Davies claimed confidence within dairy farming was at an all-time low, with “suspicion” about how milk buyers are treating farmers, as well as uncertainty over the impact of Brexit.