Tesco said it had overtaken Asda with its decision last week to put all liquid milk suppliers on contracts worth 22p per litre.
Trading director Richard Brasher said the retailer would pay farmers a premium of up to 5ppl instead of Asda's 2p, which has been in place for two years.
The move, which also includes paying 150 smaller milk producers 23ppl for supplying regional milks to their local stores, would cost it £25m a year in lost income.
Brasher said Tesco would move to a physically segregated milk supply from dedicated farmers as soon as its suppliers, Robert Wiseman Dairies and Arla, could set it up. The first contracts should be in place by the early summer.
Sainsbury's and Morrisons were also said to be close to setting up segregated milk pools.
David Handley of Farmers for Action said Tesco deserved credit for the move. But he cast doubt on the claim that the 850 farmers involved would see their incomes boosted by 5ppl. Some farmers at Tesco supplier Robert Wiseman Dairies would see an improvement of just 0.8ppl under the deal, he claimed.
"A Wiseman producer who's on a contract and meeting all the composition criteria would have been on 21.2ppl before."
Handley also said he was far from hanging up his spurs as a dairy industry activist. "Tesco are lifting 1,000 farmers up to a price that covers their costs of production, but it still buys its dairy products made from the milk of the other 18,000 farmers."
The NFU welcomed the announcement but appealed for other milk buyers to recognise the true value of milk. NFU president Peter Kendall said: "This is not a panacea for the whole industry. Not all milk produced on farms is sold in bottles through supermarkets."
The Women's Institute is running a series of debates later in April to discuss "the crisis facing the industry".