The dairy industry has been put on high alert over potential price-fixing allegations, after dairy farmer protest group Farmers for Action wrote to processors demanding talks on milk prices.

The letter, dated 1 August, has been deemed so controversial from a competition law point of view that some processors have been advised by their lawyers not to respond to it at all. It is also understood the letter has been passed to the Office of Fair Trading.

In the letter, seen by The Grocer, Farmers for Action called for all dairy farmers to be paid at least the cost of production by 1 October.  This would be calculated by independent consultants using industry data, the FFA says.

It said: “A letter has been sent to all your customers stating that we expect them to engage in talks on the cost of production for all their milk requirements and that they are to reply to Farmers for Action by 14 August 2012.

“You must reply in writing to Farmers for Action your intention [sic] to engage in at least cost of production talks for all of your milk supply.”

One industry source said the letter was “deeply flawed from a competition law perspective” as it was calling for the price of raw milk to be fixed in a way that was not market-related.

“The advice we’ve received is that to respond to this letter would put us in breach [of competition law] and lead to allegations of collusion,” the source added.

It is understood the letter has now also been passed on to the OFT. A spokesman for the competition regulator declined to confirm or deny receipt of the letter and said the watchdog was not in the habit of commenting on correspondence.

The letter is signed by Farmers for Action specifically rather than by the wider dairy coalition, which includes the National Farmers Union and the Women’s Institute as well as the FFA and has been co-ordinating high-profile protests against farmgate milk price cuts in recent weeks.

The letter was, however, sent out on behalf of the FFA by NFU Scotland. A spokesman said the union had assisted the FFA in circulating the letter but added the NFUS’s own position on milk prices was reflected in the joint coalition statement made on 31 July.

In that statement – which was also backed by the FFA – the coalition partners said they would push to flesh out the heads of terms on the contractual code of practice between farmers and processors, agreed last month.

They would also look to put more pressure on retailers and processors that were not yet paying their farmers a price reflecting the cost of production, and check that farmers received any extra monies promised by retailers and processors.