Dairy Crest has signed up 175 farmers under its new milk contract which links farmgate milk prices to production costs and retail milk prices.

Launched earlier this month, the contract was devised by independent consultant Stephen Bradley. It determines farmgate milk prices based on a formula of five indices: bulk cream, retail liquid milk price, feed, fertiliser and fuel.

Dairy Crest has secured its 100 million litre supply target after putting the contract out to tender to its existing milk suppliers last week.

Farmers’ interest in the new contract indicated they valued the simplicity and transparency that underpinned it, said Mike Sheldon, Dairy Crest group procurement director: “We now have a great opportunity to move forwards with our farmers and look to expand formula-based pricing beyond liquid contracts.”

“Having a price more closely related to market returns would also see quicker reductions if market values weakened” - DairyCo

Existing Dairy Crest liquid milk farmers were able to sign up all – or a 25%, 50% or 75% proportion – of their monthly milk production under the new contract. The contract runs from 1 April 2013 for 12 months and farmers will initially be paid 29.95 pence per litre. Farmers who signed up only a proportion of their milk supply will continue to supply the remainder under the standard Dairy Crest liquid milk contract, which will pay 29.85 ppl from 1 April. 

Levy body DairyCo said one key advantage of the contract was that gains in the global commodity market would quickly be passed back to farmers, allowing them to build up reserves and to invest during the good times. However, in its latest newsletter, it warned: “Having a price more closely related to market returns would also see quicker reductions if market values weakened.”

Applications to supply under the new contract were accepted on a first-come-first-served basis via email from Tuesday last week. It was over-subscribed but Dairy Crest agreed to accept all farmers’ applications.