Tesco offers direct contracts to milk suppliers, paying 22p/litre UPDATE

Tesco offers direct contracts to milk suppliers, paying 22p/litre UPDATE

	Published : Tue, 03 Apr 2007 17:28 By : Agencies Print this Story

(Updates with response from Arla Foods)

LONDON (AFX) - Tesco PLC, the largest retailer of milk in the UK, has committed to offering direct contracts to dairy farmers, raising the price they receive for a litre of milk to around 22 pence.

In a press release, Tesco claimed that represents the best price currently being paid by any supermarket. However, it emphasised its shoppers will pay no more for that milk than they do now.

Around 850 dairy farmers will benefit from the new contracts.

The new deals will run for twelve months with prices reviewed every six months to make sure they reflect the farmers' costs of production and will be determined using key variables such as feed, fertilizer, energy and labour.

The retailer is also launching 'Localchoice' milk, which will be sourced from local farms and sold at Tesco stores in or close to their county.

It will sell for slightly more than standard milk, meaning smaller producers can make returns more in line with the proportionately higher costs of their business, Tesco said.

That gives customers the option of paying a premium to support local producers.

'Localchoice' milk will be sourced from around 150 small family-owned dairy farms around the UK and then sold in Tesco stores throughout their county.

A premium of up to 6 pence per litre more than they are currently getting will be paid to these farmers, who can also take part in Tesco local marketing initiatives.

The National Farmers Union welcomed the announcement, with president Peter Kendall describing it as 'the most significant and encouraging development in the dairy industry for a very long time'.

Today's news comes a day after the UK's biggest supermarket chain responded to the Competition Commission's 'Emerging Thinking' document, part of its investigation into competitiveness in the sector.

Part of the Commission's remit is to examine concerns over the relationships between grocery retailers and their suppliers, including the issue of whether their behaviour threatens the economic viability of the suppliers.

In the 'emerging thinking' document, the Commission raised concerns about farmers and said it has not received as much specific evidence about unfair treatment of suppliers as it might have expected.

It appealed to farmers to come forward with evidence and assured them that requests for confidentiality would be taken on board.

Arla Foods UK PLC, which supplies 40 pct of Tesco's milk, welcomed the announcement.

Arla supplies around 600 Tesco stores with over 370 mln litres of fresh milk each year.

It indicated it will work with Tesco and Arla Foods Milk Partnership (which locks the 1,600 farmers who supply Arla into exclusive contracts) to 'ensure the earliest possible implementation of the new arrangements'.

'We are confident the new pricing deal will allow the AFMP members both a much improved financial return and the confidence to further invest in their enterprises,' said Arla Foods' chief executive Tim Smith.

At 1.10 pm, shares in Arla were trading at 71, up 1/2.

Arla is in the process of being taken over by its 51 pct-shareholder, Arla Foods amba, which has made an agreed offer of 71 pence a share for the remaining 49 pct stake in the business, valuing it at 434.5 mln stg.

matthew.scuffham@thomson.com

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