Supermarket giant says it will pay an extra 5p a litre as farmers vow to step up action against shops that sell below cost

The supermarket chain Morrisons last night became the biggest retailer to back down in a growing row over the amount it pays for milk, as farmers vowed to step up action against shops that promise cut-price deals.

Hundreds of farmers have blockaded the gates of the main processors across the country, demanding a reversal of cuts to prices paid to producers. More protests are planned for tonight, with supplies threatened if milk deliveries cannot be made. Jim Paice, the farming minister, warned retailers that "there will be no milk" if they continue to slash prices below what it takes farmers to produce it.

The three big milk processors, Robert Wiseman Dairies, Arla Foods and Dairy Crest, have all cut the prices they pay farmers. With further reductions due on 1 August, farmers would receive between 24p and 25p per litre, when tough industry estimates suggest it costs them 30p to produce each litre of milk.

Some supermarkets, including Sainsburys and Tesco, guarantee to pay more, but only to a small group of farmers. Others pay a premium on the base rate. But many farmers who do not have supermarket deals are forced to accept the cuts imposed by processors.

In response to growing political and public pressure, some retailers have shifted their position and promised to pay more to offset the processor cuts.

Morrisons announced yesterday it would pay a 2p-a-litre premium on top of what the processors pay. It would also offer an extra 3p per litre after the extreme weather added to the industry's woes.

Richard Hodgson, commercial director of Morrisons, said: "We recognise the exceptional pressure on farmers and continue to aim to support all farmers, not just those that have dedicated contracts. The recent announcements by our processors will reduce the payment to farmers for the milk we sell, and therefore we are announcing payments that negate their impact."

It comes after the Co-operative Group announced on Friday that it was to increase the premium it pays, to ensure 29p per litre.

However, there is no sign of the protesters backing down. Organisers Farmers for Action claimed nearly 500 farmers blockaded the Dairy Crest plant at Foston, Derbyshire, until 3am yesterday. Tonight they will target processing plants in Bridgwater, Somerset, and Droitwich in the Midlands. A protest is also planned at a new Asda store in Inverness, after radio ads boasted it would be selling "the cheapest milk in Scotland".

Mr Paice launched an unprecedented attack on Iceland for selling milk at 99p for four pints. "The big problem that we face is what I view as the absurd level of price-cutting by some retailers... The reality is that such a price is completely unsustainable. Such retailers need to understand that if they go on like that, there will be no milk.

"There is no country in the world that can sell bottled milk at the equivalent of 25p a pint by the time it has been through the processing chain. That is absurd; such retailers are biting off their nose to spite their face."

Tomorrow Mr Paice will attend emergency talks at the Royal Welsh Show aimed at resolving the crisis, with the National Farmers' Union, NFU Scotland, NFU Cymru, Farmers for Action, the Tenant Farmers Association and the Royal Association of British Dairy Farmers.

Peter Kendall, the NFU president, said: "We need a long-term solution that addresses the need for a sustainable raw-milk supply. It's now critical that other retailers and major buyers of milk respond to the responsible steps Morrisons is taking."

Mary Creagh, Labour's spokesman on the environment, said: "This crisis in the dairy sector will only be solved by negotiation or the Government imposing contracts that guarantee a fair price for farmers."