The Co-operative is increasing its farmgate milk price to 29p/litre with immediate effect.
The premium farmers receive will rise to 2.57p/litre, rising to 4.27p/litre from 1 August.
This comes after Farmers Weekly published a league table of the UK's largest supermarkets and how much they pay farmers. The Co-operative was mid-range in pricing - paying 27.78p/litre, moving to 26.73p/litre in August - and was criticised for not paying enough to cover farmers' costs.
"We have a track record of supporting British farmers, and we recognise the importance of ensuring a long-term, sustainable future for British dairy farmers," said chief executive Steve Murrells.
"We have been in continual discussions on this issue with the National Farmers Union and we have listened to their concerns. We are taking this action to help alleviate the immediate pressures that farmers within the CDG are facing. Going forward, we are committed to finding a supply model that is sustainable for the long-term future of our dairy farmers."
The NFU described the price rise as "a breakthrough" and said that other supermarkets needed to follow suit.
"We are really pleased by the positive response from The Co-operative today in lifting its milk price significantly and moving towards a sustainable funding model for the future," said NFU president Peter Kendall.
"The company's recognition of the real difficulties being faced by British farmers this summer and commitment to support them through these difficult times is to be applauded.
"However, we now need to see all retailers and major buyers step up to the plate. We have yet to see substantial moves from either Asda or Morrisons, who are now waging war with each other on milk prices, a move that appears to make a mockery of the situation farmers are facing.
"But the spotlight will now turn on the rest of the catering, food and retail sectors, including the discount supermarkets who collectively buy sizeable volumes of milk and who I have written to in the past few days."
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