The retail price of milk could fall as a result of increased European quota levels - good news for consumers but not necessarily for dairy producers.

With more milk being produced across the continent, there are fears in the dairy industry that in the short term supply will outstrip demand, leading to prices being forced down.

EU milk quotas are to rise by 2% for 2008/09 as part of an ongoing strategy to liberalise the market.

Dairy UK warned the 2% hike "offers no gain for British dairy farmers", adding that in a market of tight stocks, a small increase in supplies could have a disproportionate downward effect on milk prices.

UK farmers are thought unlikely to see the benefits as they currently produce well below the existing UK quota of 13 billion litres per year.

The EU plans a phased increase in quotas until 2015 when the system will be abolished entirely and the market opened up. This year's quota reflects Brussels' prediction that EU demand for milk will rise by eight million tonnes over the next six years.

Dairy UK, however, said the 2% increase was too much too soon.

"We want a smooth landing for the abolition of the quota regime but this will get us off to a bumpy start with an excessively large increase," said a spokesman.

Global milk prices have risen steadily because of strong demand both in the EU and overseas, in particular China and Latin America.

However, NFU chief dairy adviser Tom Hind played down the significance of the quota rises, saying the union had supported quota increases on the grounds that they should be phased in gradually.

"Suggesting prices will fall ignores the fact the milk market is affected by many diverse factors, and also belittles UK farmers by suggesting they would overproduce and destabilise the market," he added.

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