DAIRY farmers may be facing a cut of 7p a gallon in the price they get for their milk. The various dairy processors meet next week to decide the April milk price.

Dairy farmers are now heading into the peak milk production period. There is speculation that some of the major co op processors will try to maintain the milk price at an artificially high level and accept the subsequent squeeze on margins and profits.

However, Davy stockbrokers' analyst Mr John O'Reilly has warned that 1996 earnings expectations for the publicly quoted dairy groups hinge on a significant cut in the average milk price for the year.

He said: "A failure to deliver 1996 earnings expectations, particularly if the principal cause of this is a squeeze on domestic milk manufacturing margins will have more than temporary consequences.

The Davy analyst is forecasting 1996 profits of £35.1 million and earnings per share of 16.7p for Avonmore, £16.4 million and 8.4p for Golden Vale and £29.9 million and 13.1p for Waterford Foods. Kerry currently derives little more than 10 per cent of its earnings from its Irish dairy operations and, as a result, milk price is a relatively minor factor.

"At the heart of the debate when co ops were listed in the late 1980s was the risk that if producer interests were to clash with those of investors the former would triumph. Nearly a decade on, that we are worrying about what the April milk price, will be is a measure of how little progress has been made to minimise this risk," says Mr O'Reilly.

"The co op tail was at some point always likely to wag the plc dog," the Davy analyst states bluntly. "That this is now happening reflects a number of factors, including a deeper involvement by some dairy plc's in Irish milk processing, a failure to diversify sufficiently and the failure of investments to deliver the level of profitability that would allow institutional investor interest be satisfied at the benchmark price for milk established by the principal co op dairy, Dairygold."

Mr O'Reilly warns: "The long term consequences that will result from a milk price hit to 1996 earnings will be even more scepticism about corporate strategies than is already manifest in single digit ratings".