Asda has signed First Milk on an 18-month contract to supply regional cheese, despite speculation that it was looking to switch manufacturers.

The deal covers more than 20,000 tonnes of cheese from the dairy co-op's three creameries at Aspatria, Haverfordwest and Campbeltown.

The location of the plants will allow First Milk to label the cheese as coming from Cumbria, west Wales or the Highlands.

A spokesman for the co-op said the news came as a big relief after speculation Asda would change supplier. "The fact the contract lasts for 18 months is a sign of Asda's commitment to us," he said.

Jeff Halliwell, MD of the First Milk Cheese Company, said: "What is exciting is Asda's recognition of the importance of provenance to consumers and the opportunity we have to work with them not only on developing this aspect, but also in a category management capacity on a whole range of new innovations."

The deal had not been won on price, he insisted, but because of the service levels First Milk had shown since buying Aspatria and Haverfordwest from Dairy Crest last autumn.

Chris Brown, Asda's head of ethical and sustainable sourcing, said the fact First Milk was owned by dairy farmers had played a role in the decision. "First Milk is ideally placed to help us provide our customers with better local produce."

Most of the cheese will come from Aspatria and Haverfordwest. First Milk's acquisitions came under pressure last year when it emerged Asda was encouraging the construction of a brand new commodity cheese factory in Cumbria by Partners in Cheese.

Ronald Akkerman, the entrepreneur leading the project, said he was still in touch with Asda. He has won the backing of hundreds of local dairy farmers. Building is set to begin in September and cheese production in summer 2008.

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