Tesco has increased the price it pays to its dedicated milk suppliers by 0.5ppl in a move that will put pressure on rivals to follow suit.

The chain is now paying 28ppl, 6ppl more than a year ago when it launched its direct sourcing scheme, the Tesco Sustainable Dairy Group Committee.

It claimed it now paid the highest price of any major supermarket for liquid milk, but stressed the move was unlikely to result in retail price rises in the short term.

"Even though commodity prices such as bulk cream, SMP and WMP have gone down in the past few months there has been concern among our farmers over rising costs," said a spokeswoman.

"We hope this will reassure our dedicated pool of farmers that we remain committed to them and the future sustainability of the British dairy industry."

It was widely believed a month ago that Tesco would hold its price because of the downturn in commodity values, but since then pressure has been increasing on retailers to increase prices as the true extent of milk costs and low farmer confidence became clear.

In his letter to producers Tesco dairy category manager Alain Guilpain said the price was determined by Promar's Input Cost Tracker indicating production costs would be 26.8ppl for this year, but that was tempered by falling cream and other commodity values. "While the natural conclusion would have been a hold in price, the Committee perspective was that due to both the infancy of the initiative and a need to maintain confidence in relationships, the price should rise," Guilpain said.

The NFU said the increase was a "move in the right direction". "We described Tesco's arrangements as ground-breaking when they were announced a year ago. We've been encouraged by genuine effort to forge closer relationships and communicate specific requirements under the contract to producers," said dairy board chairman Gwyn Jones.

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