The deal, which is for an initial six-month period, is estimated to cost Tesco about £45 million.

That's peanuts to this colossus of the retail sector. But will it stick and what will be the consequences for the 13,000 dairy farmers throughout the UK?

For a start, only 850 producers will benefit directly, and of that total, about 70 are in Scotland.

Judging from some of the media comment one would have thought that every farmer with a herd of cows was set to gain substantially. The reality is that unless the remainder of the major retailers follow suit, it is conceivable that by autumn the price will drop back.

Farming is no different from any other industry in having to face the laws of supply and demand. I will not gain many brownie points for suggesting that the UK industry is producing too much milk and if less was available the price would probably increase. But that is the very essence of a real market.

For many years arable farmers throughout the EU have been paid to take land out of production. This set-aside measure was introduced because there was too much grain on the market. However, the position has changed dramatically and world stocks of cereals are now at a historically low level. Set-aside will go next year in the impending "health check" on the Common Agricultural Policy.

Milk production in the EU is controlled by quotas, with the UK having the right to produce 14 billion litres each year. If that figure is exceeded, farmers are subject to a super-levy. However, in recent years production has fallen substantially short of quota as farmers have come to realise that there is little profit in flooding the market with excess milk.

That message is clearly percolating through the dairy sector, judging from the most recent survey by the Milk Development Council into farmer intentions. I have read the report - well, most of it - and am not surprised that over the next two years milk production in the UK is likely to fall by 7 per cent or 900 million litres.

Willie Lamont, chairman of NFU Scotland's milk committee, said: "The uncertainty in the industry is very obviously having an effect and making people think seriously about quitting. Even the most efficient units are either giving up or failing to reinvest, which is a worrying pattern. It is important that the Tesco move marks the beginning of a positive momentum to build a sustainable future."

Economists, certainly those who subscribe to the thinking of Milton Friedman, would argue that if there is less milk around then the price will surely rise. That appears to be the line now being pursued in the US.

Source: The Scotsman