Tesco has unveiled the milk price it will pay farmers in its Sustainable Dairy Group for six months from 1 April.

It is the first major price announcement of the new quota year and represents a reduction of just under 0.5p/litre from its 27.37p/litre price announced last October.

Tesco said its new price highlighted a “minimal reduction in farmers’ costs primarily driven by reductions in feed and fertiliser.”

The retailer will pay its 800 farmers on direct supply contracts up to 26.90p/litre, based on dairy farm production costs provided by consultant Promar.

A statement for the retailer said its new milk price was “considerably above the current market value”.

The milk price puts Tesco towards the head of the field, only behind Dairy Crest’s Waitrose, and Marks & Spencer premium contracts.

Dairy farmers in Tesco’s direct supply group who have signed up to participate in Promar’s cost tracker will receive the full 26.9p/litre from 1 April. Farmers outside the Cost Tracker will receive 26.4p/litre.

The Tesco Sustainable Dairy Group is now entering its fourth year.

Andy Bloor, chairman of Tesco’s farmer committee, said: “We are now four years into the partnership with Tesco and this announcement re-affirms the long-term commitment Tesco has to the TSDG membership. We are operating in a volatile market but the relationship we have is providing the confidence and stability we need to invest in the future.”

Promar’s costsings reflect a small drop in variable costs – which include feed, fertiliser, silage, vet-and-med and rearing costs – from 14.4p/litre to 13.64p/litre.

The consultancy firm’s costings – which cover the period April – September 2010 – also make provision for a marginal increase in farmers’ overheads, including labour, rent and finance, fuel, repairs and utilities costs.

Promar said it had also made a “significant” allowance for unpaid family labour and more than £70k provision for capital reinvestment.