The contract, which is due to kick off in the autumn, will mean Arla will have to up its milk supply by a further 225 million litres.
Robert Wiseman Dairies, which loses £70m worth of business with Asda as a result of the move, is contesting the decision.
Dairy Crest, which loses a £20m contract with Asda, said it was confident it could make up the loss. Chief executive Drummond Hall added: “It represented a relatively small part of our turnover and just 10% of Asda’s milk business.”
Arla said its existing six dairies were able to cope with the increase in processing. It also expects to recruit more farmers to its Arla Foods Milk Partnership to handle production.
Asda said the move would help build open and transparent relationships with a dedicated group of farmers and improve product traceability.
Chris Brown, Asda agricultural strategy manager, said: “For the first time in 40 years we will have a direct relationship with every farmer who supplies us with milk.”
Asda sells 450 million litres of British milk every year, with a retail value of £230m.