Dairy processors and farmers have taken a step towards resolving their current dispute over milk prices, after a deal was agreed in principle at a high-level meeting today.

Dairy UK and the NFU have reached heads of agreement on the long-awaited voluntary code of practice on dairy contracts following a meeting – chaired by food and farming minister Jim Paice – at the Royal Welsh Show.

The agreement sets out a number of minimum requirements and new provisions for dairy contracts between farmers and milk buyers. These include farmers receiving at least 30 days’ notice of a price change and an end to retrospective price adjustments.

When processors wish to change farmgate prices, they will in future have to give farmers the option of leaving their contract with just three months’ notice – significantly less than the 12 months’ notice many farmers are currently expected to provide.

Processors have also agreed to engage with farmers and their representatives in the event of farmgate price changes.

Additionally, the agreement contains conditions to enable farmers to supply more than one processor if their primary milk buyer seeks to cap production and the right to automatic contract release for farmers from insolvent milk buyers.

Defra said the agreement meant dairy contracts would be “freely negotiated, fairer and more transparent” in future. Paice welcomed the commitment all parties had shown to reaching an agreement.

“The Government will continue to work with all parts of the industry to secure its long-term future, including promoting farmers working together in Producer Organisations,” he said.

Dairy UK said it was very pleased heads of agreement had been reached. “There is now a lot of work to be done in taking the code to the implementation stage and we are committed to doing this,” a spokesman added.

NFU president Peter Kendall said the deal offered some hope for the long term but fell well short of solving the current crisis.

“This agreement will give us the architecture we need to make sure that we don’t end up with the same dysfunctional markets that are responsible for the dairy crisis we have today,” he added.

Dairy Crest, which last week independently cut its notice period from 12 months to three, said it fully supported the new agreement.

“It’s a good thing the whole sector will now be committed to a three-month notice period rather than us just doing it unilaterally,” a spokesman said. The other liquid milk processors did not comment.

Details of how the code will be implemented will be worked out by the end of August. Defra said ministers would be meeting retailers individually on Wednesday to discuss increasing the sustainability of the industry through “greater sourcing and promotion of British dairy products”.