Arla Foods unveiled what it claimed is the first milk purchasing contract to comply with UK guidelines drawn up in a peace deal between industry and farmers, as the dairy giant embarks on a milk-sourcing drive.

The UK arm of the Danish-based diary giant claimed an "extremely positive" reaction from farmers consulted in the run-up to Monday's launch of the contract, which is based on terms agreed between producers and processors following a rash of protests last year over prices and smallprint.

The new contract offers factors including extra payouts for higher quality milk, a volume bonus for larger producers, and revised terms over quitting the contract.

"In addition, we are also working to ensure that all of our farmer contracts are fully compliant with the code," Ash Amirahmadi, Arla's head of milk and member services, said.

Historic tie-in terms, locking farmers into deals even while allowing processors to cut prices, fuelled the producer unease which spilled over into a series of protests last summer which prompted talks between industry and farmer groups which led in the autumn to a voluntary code of practice.

'Important first step'

The lack of progress since in building code of practice terms into milk supply contracts had only last week prompted dairy farmers to threaten fresh protests.

However, Arla's deal was applauded by the UK's National Farmers Union, which termed the move an "important first step", and urged "all other milk buyers to fundamentally review their milk supply contracts to ensure full compliance with the code".

Arla's contract offers farmers a milk price of 30.02p, for a standard litre, among the better offers to UK producers, and boosts the co-operative's ability to tap producers who wish only to have a supply deal, rather than seeking membership too.

Quest for milk

Indeed, Arla, already the UK's biggest dairy group by turnover and milk volumes, is seeking to extend its lead through adding, by 2015, 500m litres a year to the 3.2bn litres it already processes in the country.

However, the goal comes against a backdrop of declining UK milk output, with production since June continuing to lag behind year-ago levels, as farmers struggle with elevated feed costs, given an extra boost by last year's poor UK weather, and which even higher milk prices have not passed on in full.

Dairy farms, which topped the UK farm profitability league in 2011-12, will show a 42% drop in net income in 2012-13, according to government forecasts.

The DairyCo bureau has forecast a rebound of 4.9% in milk output in 2013-14, assuming a return to more typical weather patterns, and improved forage stocks next winter.

The recovery would restore output to 2011-12 levels.