Sainsbury's has signed a deal with dairy companies to work directly with a group of 450 British farmers.

The retailer has formed the Sainsbury's Dairy Development Group, which aims to help farmers make their businesses more efficient and profitable.

The move has been widely welcomed, although it falls short of a similar move by Asda three years ago, because Sainsbury's will not necessarily take milk from the farmers it works with. At present there are no plans for a separate, ring-fenced milk supply chain in the Arla-Asda mould, which commands a 1ppl premium.

The new arrangements have been agreed with Dairy Crest and Robert Wiseman Dairies, which together currently provide Sainsbury's annual requirement of 420 million litres. The group will be recruited from their direct producers.

Dairy category manager Michael Hodgson said innovation and efficiency projects in the pipeline would boost milk suppliers' profitability. "Early project suggestions include using Sainsbury's buying power to help members buy the goods and services they require at a lower cost, and a project which looks at optimising nutrition, feed efficiency and herd health."

Sainsbury's has committed to the arrangement for an initial 18 months, during which it will not re-tender for milk. It has also promised to recruit a specialist dairy development manager to liaise with the farmers, who will be chosen on their involvement with future seminars and workshops.

NFU dairy board chairman Gwyn Jones said it was a big step forward for the industry that would add value to the chain. "In the Vision for the Dairy Industry document, we advocated retailers and farmers coming together to foster mutual trust and understanding."

The pressure is now on Morrisons and Tesco to make a similar commitment, Jones added.