Forcibly reducing UK milk production could put between 20 and 44 per cent of the country's dairy farmers out of business, and for no real gain, warns the Council (MDC) in its new Routes to Profitability report.
Debate has raged on how to raise earnings in the UK dairy sector, and some in the industry have suggested a smaller milk supply could improve the country's low farmgate milk prices.
Ken Boyns, MDC's head economist, said this argument was causing problems.
"There is already anecdotal evidence that some farmers are not investing because because messages that the industry cannot move forward unless milk prices rise or milk production falls is triggering a lack of confidence."
Current proposals would see milk production cut by 1.5bn to 3bn litres, largely from supplies used for lower value commodity dairy products.
The MDC report says such a policy is neither positive nor workable.
It warns the industry that any attempt to orchestrate a cut in production would be viewed as an illegal supply cartel by competition authorities. Britain's Office of Fair Trading has already been examining alleged deals between processors and retailers to raise retail milk prices.
Milk production is already dropping in the UK. A government-funded report has estimated the country could be 1bn litres below its 14bn-litre EU quota by 2008.
Tim Smith, chief executive at leading dairy group Arla Foods UK, said earlier this year that a dip in production might help the industry to raise earnings by tightening supply and demand.
The MDC says farmers would not necessarily see benefits from a smaller milk supply.
"These farmers [who remain] will have had to weather a period of exceptionally low prices to force out their colleagues so it's not quite the rosy picture it might appear," said Boyns.
It would be much more sensible, says the MDC, to concentrate on efficiency, innovation and business relationships across the whole dairy supply chain.
The report argues that Britain is one of Europe's most efficient dairy industries and should be able to continue producing for commodity markets if it differentiates milk supplies and develops more added value products alongside.
The MDC, funded by a levy on all UK dairy industry players, has broad support from the National Farmers' Union.
Britain has the lowest farmgate milk prices in Western Europe, with a number of producers currently receiving less for their milk than it costs to produce. Average prices in June were 16.83 pence per litre, almost 0.5p down on the same time last year, according to MDC figures.
Dairy firms say they have had no choice but to chop farmgate prices, due to soaring input costs and supermarket pressure.