Dairy Crest has hailed a new era of transparency in the milk price debate between retailers, processors and farmers as it unveiled its new pricing formula for milk producers today.

The formula will calculate the price Dairy Crest pays non-aligned liquid milk farmers on a monthly basis based on five factors: the cost of compound feed, red diesel and fertiliser as well as the price of bulk cream and four pints of milk in the retailers.

The new formula contract will launch on 1 April with a starting price of 29.95 pence per litre. After that, it will move up or down in line with the five market factors.

Dairy processors have in the past been criticised for cutting farmgate prices when dairy commodities markets fall but not raising them once markets recover. But new formula would ensure farmers’ prices would reflect straight away what was happening in the market, said Dairy Crest milk procurement director Mike Sheldon.

The formula has been developed by consultant Stephen Bradley of milkprices.com, and is being launched by Dairy Crest in partnership with its Dairy Crest Directfarmer group. DCD company secretary Michael Masters stressed the new formula would not “fix” prices for farmers or deliver huge price increases overnight. “If you think this will deliver 35p per litre from April, you’ll be disappointed,” he said.

But the formula’s link to market movements meant that farmers would have much better visibility of where their milk prices were going, and could be confident that they were receiving a price that had been calculated in a transparent manner, he added.

This was echoed by Bradley, who said the new formula would “lift the lid” on milk prices but farmers had to accept that “living with the market” meant there were downsides as well as upsides.

Both Dairy Crest and DCD also said they hoped having a formula might take “the heat” out of arguments over milk prices.

Dairy Crest will initially restrict the new formula to 100 million litres for 2013/14, but Sheldon said the company ultimately wanted to move all of its non-aligned milk farmers onto a formula contract. In time, a formula contract could also be extended to Davidstow cheese producers, although based on different calculations than those underpinning the liquid contract.

Sheldon said Dairy Crest was currently talking to its retailer customers in order to get commercial arrangements to underpin its new formula in place, and said feedback so far had been positive. “We’re engaged with a couple of retailers. We’ve got a bit more work to do, but the response has been pretty favourable,” he said.

Sheldon added the formula could prove particularly attractive to retailers that did not currently have a pool of aligned farmers for their liquid milk. “This might be a way of showing their support to the farming fraternity without having an aligned group,” he said.

Dairy Crest’s new formula was launched as part of its commitment to the voluntary industry code of conduct on dairy contracts. In accordance with the code’s rules, the formula contract does not need to offer farmers a three-month notice period but will operate on a 12-month basis.

The NFU said it welcomed the new formula. “The NFU has lobbied hard for milk buyers to offer more certainty and transparency to farmers in terms of the price they receive for their milk,” said Mansel Raymond, NFU dairy board chairman. “While the formula will be limited at first, we hope that in the near future determinable and transparent milk pricing becomes an option open to all Dairy Crest supplier farmers.”