In addition to the 250 million litres Arla already supplies to ASDA, the UK's second largest multiple, Arla will now sell a further 200 million litres. This is substantially more than Danish-Swedish group Arla's total supplies of liquid milk to the Danish market.
Asda said the move was prompted following concerns that farmers were not being paid enough for their milk. Farmers went on strike last autumn in protest against dairy companies, accusing them of swallowing up supermarket price increases without passing on any benefits to the farmers.
The supermarket group asked its three suppliers to come up with a new supply chain that would give Asda a dedicated group of farmers, with Arla winning the tender. This signals a return for Asda to its dairy roots, with Asda and Arla once being part of Yorkshire-based Associated Dairies, which was formed in the 1960's.
"This move means that for the first time in 40 years we will have a direct relationship with every single farmer who supplies us with milk," said Asda's agriculture strategy manager, Chris Brown. "Arla is able to provide Asda with a segregated supply chain using a dedicated group of farmers. This will enable us to trace our fresh milk from the farm through to the bottles in our customers' trolleys."
Asda's move is expected to send shockwaves throughout the UK dairy industry. Wiseman recently secured a new deal with Tesco, but it faces a series of critical talks with Morrisons to safeguard its current volumes with Safeway.
Wiseman is set to lose some £70m of revenues from losing its Asda contract. The company currently supplies almost half of Asda's milk, which accounts for 15 per cent of Wiseman's annual milk volumes. Its shares slumped by 17 per cent as a result.
Dairy Crest's shares also fell by 4.65 per cent following the announcement, with the company currently providing 10 per cent of Asda's milk.
Gwyn Jones, chairman of the National Farmers Union's dairy group, described the move as "a positive step in connecting farmers with the needs of the marketplace." However, David Handley, chairman of Farmers for Action, expressed concern that the deal tightened Asda's control on dairy farmers.
Arla's milk pool is reported to be one of the largest in Britain, with farmers stretching from south west of England to the north east of Scotland, and ASDA has emphasised the importance of Arla providing a more direct line from cow to consumers. "We will have full traceability along the entire production chain," said Brown.
Arla Foods UK was formed through a merger with Express Dairies last year. The division is now the country's leading dairy company, processing around 2.4 billion litres of milk a year, and employing 7,000 people nationwide.
Arla Foods UK plc and the milk producer group, Arla Milk Partnership, will now embark on a programme aimed at selecting a group of dedicated milk suppliers to ASDA in order to meet the multiple's wishes for a closer relationship with Arla's British milk producers.
Wal-Mart, the world's largest retail group, acquired Asda five years ago and has since changed its fortunes. Riding on the back of the company's success in the UK, Wal-Mart now plans to establish itself firmly on the European market.