Small and independent retailers could run short of milk as farmers threaten to tear up supply contracts and sell their milk themselves.

First in the firing line are the lowest-paying contracts for farmers - usually those to supply milk for the so-called 'middle ground' retailers. Hard-pressed milk producers say they're furious about the time it is taking retailers and processors to pass back the meteoric price rises they have been able to charge in the wholesale dairy markets.

NFU dairy board chairman Gwyn Jones said milk processors would be forced to raise farmgate prices. "If they don't then they won't get the milk," he said. "Milk is just too short."

Modest farmgate price rises in recent months, including an extra 0.6ppl announced by Dairy Crest last week, have not mollified farmers. Some have started to confront milk processors by giving notice on supply contracts. Arla is already paying extra to buy back milk it lost when its biggest farmer, David Barnes, ended his contract last month.

Kite's John Allen said large groups of farmers were preparing to go "quota holding" by setting up their own supply group, which would sell milk independently to the highest bidders. At least two industry figures have been approached to begin broking the milk, although they asked to remain nameless.

Fresh milk supplies to big retailers such as Tesco, Asda and Sainsbury's are not under threat, because they already pay farmers a premium. But it could affect supplies of yoghurt or cheese, because the price paid for milk used in these products has yet to rise significantly.

The PTF price for Cheddar is up £600 per tonne in four weeks - a 26% rise. But Asda has cut the cheese's shelf price to £4/kg - a 37% cut on mature Cheddar. "We will absorb the rising wholesale prices from our own margins," said a spokesman. Sainsbury's is also committed to a cheese price promotion planned back in February.

John Allen urged processors to bite the bullet with price rises now or pay more later.

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