The money is intended to alleviate organic conversion and inspection costs, and will be available to every current and new member of the Organic Milk Suppliers' Co-operative (OMSCo) for the next three years.
The move marks a new strategy for Tesco, which has not traditionally had a direct relationship with dairy farmers.
Rapid growth in organic milk sales across the UK have left the country short of supplies, a report from OMSCo said this summer. It said another 60m litres would likely be needed over the next two years.
Tesco, the UK's largest supermarket chain, said consumer demand for organic dairy products was growing 45 per cent year-on-year.
"In order to secure UK supply for our customers it is essential that we support the next generation of organic dairy producers," said Kari Daniels, the group's trading director for chilled food.
"We will be focusing on innovation and bringing new British products to the market, like our recent launch of 250ml cartons of organic milk aimed at lunchboxes."
Tesco recently signed a long-term partnership with Robert Wiseman, one of the UK's top three dairy processors, to improve structure in the organic milk supply chain.
Wiseman rival Dairy Crest was also thought to be negotiating with Tesco over the launch of an organic milk, under the dairy firm's Country Life brand.
OMSCo, which supplies Wiseman and controls almost two thirds of the UK's organic milk production, said the Tesco funding was a huge boost.
"This significant step will ensure that OMSCo producers will have the confidence to invest in more production," said executive chairman Nicholas Saphir.
The UK's shortage of organic milk is a complete turnaround from a few years ago, when lakes of unsold milk were left lying stagnant because of a gold-rush style push on organic conversion.
OMSCo has cautioned against a return to this boom and bust cycle, but said the potential for organic dairy was clear. Organic milk makes up roughly one pint in every 30 in the UK.