Defra made the comments in its official response this week to the Efra Committee's report into the collapse of Dairy Farmers of Britain.
It claimed that work conducted through the Dairy Supply Chain Forum had shown that improved contracts could "help balance risk more equitably" but cautioned against the terms being set in stone.
"There is, however, a delicate balance between welcoming potentially positive departures in contracts and becoming too prescriptive, so that contracts inhibit reactions to market signals or the natural progression of businesses to more efficient, competitive states," Defra said.
The comments mark a more measured approach to milk contracts than shown by the EU High Level Group on Milk in a report last month. The group recommended contracts be made more prescriptive to include delivery volumes, price, timings and a set contract duration. It also suggested member states make the use of such contracts compulsory.
The recommendation was supported at the time by the NFU, which claimed writing milk prices into contracts would represent a "major step-change in milk contracts across the EU".
Processors this week welcomed Defra's stance. "If Defra's vision of a more market-driven industry is to be realised, the industry must be free to evolve its own contractual solutions," said Dairy UK director-general Jim Begg.