The boards of Milk Link and First Milk have agreed not to continue with the proposed merger of the two businesses.

First Milk handles 1.8 billion litres of milk annually on behalf of 2600 producers, while Milk Link has a throughput of 1.1 billion litres from 1650 producers.

Since October last year there has been thorough due diligence, but there were a number of important issues that both co-ops were unable to resolve, including the valuation of the two businesses.

According to a joint media statement, it has not been possible to agree terms for a merger that either party felt they could recommend to their memberships at the present time.

In a letter to his members, Richard Greenhalgh, chairman of First Milk, explained: "Part of our obligations as directors is to do proper due diligence on deals of this size. We had therefore commissioned a valuations expert to look at the assets and liabilities of both businesses.

"His report stated that the value of the First Milk business was considerably in excess of the Milk Link business. A significant part of this difference in valuation is the growth in value of our shareholding in Wiseman Dairies that we purchased for £28m in 2004 and is now worth around £60m.

"As the business case for this deal was compelling, we showed a great degree of flexibility in our attempt to reach agreement with Milk Link. This included discounting our valuation premium and then presenting a mechanism that not only rewarded capital, but would also put the new business on a sound financial platform. However, having exhausted every avenue, we were unable to reach an agreement with Milk Link."

Reflecting widespread disappointment NFU Scotland president Jim McLaren, who also milks 130 cows, commented: "For years we have talked about the need for consolidation and today a huge opportunity has been missed.

"I am not interested in hearing who is to blame for the talks collapsing, the fact is that a real chance to create a united, rather than fragmented, dairy sector has been blown, certainly in the immediate short-term.

"What is more frustrating is that, after a decade, we had finally got the competition authorities to back off. They have taken a really forward-thinking approach to this merger, giving the industry a chance to create a solid platform for the future. Members of both co-operatives will be demanding explanations as to why the best opportunity in a long time has been allowed to slip from our grasp."

Don't talk down the market The chairman of the Scottish Dairy Cattle Association, George Templeton, warned milk buyers this week that any talk-down of ex-farm prices for milk would be resisted.

Recently some buyers of milk for the liquid market have been making noises about possible reductions towards springtime, if not before.

Templeton, who milks 245 cows at Knowe Farm, Ochiltree, Ayrshire, said: "The main costs of producing milk have spiralled - feed, labour, cow depreciation and fertiliser, the last two nearly doubling, which has added 6p to 8p per litre to inputs.

"Probably the most fortunate producers are the ones who signed a direct supply contract on a cost-plus basis with forward-looking supermarkets keen to maintain a regular liquid supply. If the supermarkets stick to their word, these producers can look forward to the recent costs being covered by at least another 6p per litre."

Templeton's comments follow a statement by Wiseman Dairies that it will hold current milk prices for its non-retailer contracted producers for February.