Fear is spreading throughout the farming community at the news supermarket giant Tesco plans to cut ranges of its own brand goods to the tune of £500 million. Faced with the implications of this latest flare-up in the supermarket price wars, farmers are seeking assurances from the company that it will be Tesco, not its suppliers, who foots the bill for the cuts. image expired

Farmers have expressed concern that the rest of the ‘big four’ supermarket groups will follow suit, offering like reductions in an attempt to match or even beat Tesco. The fear lies in the possibility that the cost of reductions will be passed onto suppliers by supermarkets who want profits to remain intact.

Tesco has assured that the cost of the cuts will be absorbed by ending promotions on its Clubcard points, increasing efficiency within the company and increasing sales through enticing new customers.

Lee woodger, head of Food Chain at the NFU, outlined farmers’ concerns that the cuts, focusing as they do on staples including fresh produce and milk, would affect their margins, which are tighter than ever in 2011. Speaking on the BBC Farming Today programme, Mr Woodger said, "What we are concerned about is the impact [price cuts] might have on farm-gate prices. If it turns out Tesco is investing in the supply chain, that’s fantastic. But the Devil is in the detail, and as we all know retailers are notorious for expecting suppliers to cut margins while preserving their own."

Although he welcomed Tesco’s assurances that it plans to fund price-cuts internally, he expressed consternation over evidence which disputes the guarantees. He revealed, "Within statements Tesco has made it has admitted talking to suppliers about at least ‘sharing’ the funding for this promotion." The NFU official warned "We can’t see how farmers will be able to pay very much out towards this at this moment in time."  

He admitted that, while it is "early days" for the Tesco promotion, he would feel more secure were an independent grocery adjudicator already in place to ensure farmers are not embroiled in the supermarkets’ race to cut prices.

Tesco were unavailable for comment on the implications of its price cuts, however, a spokesperson did say that suppliers for the company’s dedicated liquid milk contracts would see better returns this year.

Dairy industry organisation DairyCo said on Friday that it was awaiting confirmation that Tesco’s suppliers could expect a 0.43 pence per litre price increase from 1st October. Tesco calculates prices paid to its dedicated suppliers using a formula which accounts for changes in production costs as well as a market balancing element.

DairyCo said that, as the cost tracker is based on a projected budget for the current financial year rather than historical farm production costs, it believes recent rises in production costs were already accounted for in suppliers’ 1st April price increase of 1.28ppl, after Tesco’s last six month price review.

UPDATE 15.58: Tesco has confirmed an increase in price paid to its Sustainable Dairy Group members, The increase of 0.43ppl will bring the price received by Tesco's dedicated milk suppliers up to 30.21 ppl.