Tesco has written to members of the Tesco Sustainable Dairy Group (TSDG), a group of 650 dairy farmers that supply milk directly to the retailer, to say it is launching a comprehensive and thorough review of how it buys milk direct from farmers.

In a letter to producers, Tesco said major industry changes, including the removal of EU milk quotas, world dairy market volatility and shrinking processor and producer numbers, have forced a rethink of how the company sources its milk supply.

TSDG was established in 2007 giving Tesco a direct milk supply from 650 British dairy farmers, providing for the retailer’s liquid milk, cheddar and cream needs.

Tesco pay these farmers a higher return than the average UK milk price of 24p per litre, with the price paid linked to the group’s average cost of production. The group’s milk price for the month of May was set at just over 30p per litre, making the direct supply scheme a very expensive way of sourcing milk for Tesco.

In his letter to farmers, Tesco’s commercial director for fresh food and commodities, Matt Simister, said the review would look at reducing transaction costs, add more value and manage risk better. NFU dairy chairman, Rob Harrison, has called on dairy farmer members of TSDG to “fully engage” with the review, although he acknowledges the decision will cause worry and concern for producers.

It is no surprise that Tesco has chosen to review its costly milk supply scheme in the UK after the difficulties the business has endured over the recent past. Last year, Tesco recorded annual losses of £6.4bn (€8.9bn) and the retailer is currently engaged in a bitter price war with UK rivals in a bid to regain market share from discount retailers.

In Ireland, Tesco has no such direct supply arrangement with dairy farmers but it does purchase more than 42 million litres of Irish milk every year and is a significant route to both the domestic and export markets for many Irish dairy producers.