Dairy farmers are threatening to quit the industry if Tesco fails to pay its 800 dedicated suppliers higher prices.
It could spark a mass exodus if other retailers followed suit, warned Jonathan Ovens, chairman of the Arla Foods Milk Partnership.
It called on Tesco to set a positive example. "Retailers must send a strong signal to farmers by increasing prices," said Ovens. "A lot of farmers are saying they will take the decision whether or not to make winter feed this month. They need the confidence to keep their cows now."
Ovens estimated that the cost of milk production was now 26-27ppl as a result of increases in feed, fertiliser, energy, oil and other inputs, compared with 20-22ppl a year ago.
For Tesco's producers, these increases will be factored into their milk price through an agreed price fixing equation.
Tesco is currently assessing production costs with the consultancy Promar.