Asda today (10 March) threw down the gauntlet when the UK unit of Wal-Mart announced that it will be dropping the price of milk in stores and increasing the price that it pays to its farmers.

Asda, unlike most other supermarkets, has a defined supply chain – buying all its milk from a group of farmers within Arla. “We don’t think that enough people know that we source milk in a very different way to our competitors,” Asda spokesman Nick Agrawal told just-food.

Asda has urged other supermarkets to adopt a four-point pledge to set up a dedicated supply chain, invest their own margins when cutting prices, publish what they pay their farmers, and to adopt the National Farmers Union’s vision for the dairy industry.

“Most other retailers don’t have dedicated supply arrangements and will find it hard to cut the price of milk without cutting the price they pay to their processors, and in turn farmers. That’s why we’re urging other retailers to adopt our four-pint pledge,” Chris Brown, agriculture strategy manager explained.

Kevin Bellamy, chief executive of the Milk Development Council, told just-food: “In the short-term Asda farmers will receive a better profit margin. In the long term, there is the potential that other supermarkets may cut prices to compete. We have yet to see how other retailers will react.”

Bellamy said that in recent years, supermarkets’ profit margins on dairy goods have actually risen, despite a number of ‘price initiatives’ designed to pass more money down the supply chain. “At the same time as the prices that consumers pay has risen as part of the price initiatives, we have seen farmers re-tendering,” he commented. “Each time dairies go out to tender, we tend to see price erosion, the result being that farmers further down the supply chain don’t feel they are receiving the payments they should, while consumers are paying more for their milk.”

This situation has led many in the dairy industry to call for a competition commission to look into the relationship between supermarkets and milk producers.

Asda has denied any link with a potential investigation. “Our move is nothing to do with that,” Agrawal said. “We started the programme to source milk in 2004 because we were fed up that money wasn’t going where we thought it was – to the farmers.”

Asda will be cutting the price of one-pint containers by a penny, two-pints by 11p and four-pints by 16p.