Iceland has delivered an early Christmas present to dairy farmers – announcing the price it pays milk processors for their milk will now be linked directly to the farmgate price.

As a result, should a processor drop the price it pays farmers, Iceland will drop the price it pays the processor by the same amount.

It is a significant development for beleaguered farmers who have seen the average minimum farmgate price plummet by almost a quarter since April in the wake of a global supply/demand imbalance. Meanwhile, the supermarket price war has taken its toll on the value of milk at retail.

With no sign of global dairy prices recovering in the short term, the dairy industry has understandably been lacking in festive cheer. It is a combustible situation that has prompted pressure group Farmers for Action to organise a series of protests over the past few months.

One of the main targets of its ire has been Iceland, which slashed its price for four pints of milk to just 89p in October. At the time, the retailer claimed it had “not changed the price that it pays for its milk, only the price it charges to its customers”. But the move was viewed with suspicion by some farmers - many of whom believe they are indirectly funding low milk prices.

Now, it seems intense lobbying from Farmers for Action has encouraged Iceland to make changes to its dealings with dairy producers.

Iceland has also agreed to open up its books – should government choose to investigate the industry - to prove it has not been passing the cost of price cuts down the supply chain.

A spokesman for Iceland told The Grocer the deal it had agreed with its main processors Arla and Müller Wiseman meant that “any future price negotiation is effectively replaced by an agreed mechanism that directly links our purchase price to the farmgate price”.

He added this would “avoid the need for protracted negotiations and is intended to ensure that the farmgate price will in future drive our cost price, rather than the other way around”.

With farmers bemoaning the often ‘murky relationships’ between retailer and processor, Iceland’s move towards increased transparency is a shrewd one.

It means Farmers for Action will direct its protests elsewhere.

The decision also puts pressure on other retailers to do the same and show they are not ultimately behind the fall in farmgate prices.

Farmers for Action chairman David Handley said today that “the others have got to follow” now. It will be interesting to see if they do.

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