Arla, Britain's biggest branded dairy firm, said it would cut the price it paid to farmers for a standard litre of milk by 0.35p to 19.65p (ppl).
The reduction, effective immediately, comes after a period of reasonable stability in which Arla had agreed to freeze prices until the end of March, and then again held them steady in May at 20ppl.
Arla said the cut was now necessary to absorb new market pressures and followed a 0.75ppl increase two months ago thanks to "the recovery of exceptional cost increases from the marketplace".
"The market is very tough. It isn't just about returns from the retail liquid sector but values in the whole milk chain," said Peter Walker, Arla's director of milk buying. "We have held the producer price for as long as we could," he said.
Britain's National Farmers Union (NFU) was livid about the move.
"There is no credible market or commercial justification for this decision. It goes completely against the current run of the market, especially since there are some positive indications of upward price moves in other areas," said Gwyn Jones, NFU dairy board chairman.
Jones urged Arla to reconsider its decision, which "sends out the wrong signals at a time when we were starting to see some renewed confidence among dairy farmers".
Arla, in its defence, said its June price would still be among the highest paid to UK milk producers and that it had already set an example to competitors by holding the farmgate price until the end of March, when others were cutting this.
Tom Heind, the NFU's chief dairy advisor, rejected this argument, telling www.dairyreporter.com that Arla could not build its standards on comparative pricing. He said that farmers' average production costs for milk were around 20ppl.
"We were expecting Arla to increase milk prices. Before the spring, some producers were in serious difficulties," said Heind, adding that the market had looked healthier in recent months with average farmgate prices creeping up by about 0.3ppl.
Heind said that many retailers were also incensed by Arla's price cut, which they see as unnecessary at this sensitive time.
Morrison's, one of Arla's biggest customers, said it refused to comment on "supplier issues and contracts". Sainsbury's and Tesco, also supplied by Arla to varying degrees, were unable to comment at the time of publication.
Arla has been more successful than its main competitors, Dairy Crest and Robert Wiseman, in securing supermarket supply deals over the last year.
The firm began a sole-supply agreement with Britain's second biggest supermarket, Asda-Walmart, last November and recently improved its supply deal with Morrison's after the UK number four retailer axed contracts with Wiseman.
In its half-year results yesterday, Arla announced a slender 1.3 per cent sales rise to £686m in the UK, although underlying profits slipped from £23 to £22m due to cost pressures.
The firm, nevertheless, expects a healthy year driven by its big brands, including Cravendale fresh milk and Lurpak butter, as well as a planned £20m per year in merger synergies expected to take effect by the end of the year.