British organic dairy farmers say they are being driven out of business by supermarket cuts to the price of milk.

A new code of conduct between farmers and supermarkets comes into effect on Sunday which demands reasonable terms for farmers.

But the code does not cover milk, meat or bread processing and Tesco is cutting the cost of organic milk by as much as 2.5p a litre.

Tesco says it has not dropped the price it pays to farmers and that its price cut will encourage sales and reduce the surplus of milk on the market.

(To watch Virginia Eastman�s report on Breakfast this morning, click the video icon at the top right of this page.)

Price war

But farmers are worried other supermarkets will have to compete and put pressure on their suppliers to deliver milk at a lower price.

This would cause the knock on effect that goes with a supermarket price war.

BBC correspondent Virginia Eastman says the new code of conduct is designed to iron out such disputes.

Critics of the code say it has no teeth because it does not include the crucial link in the chain - the food processors.

The dispute between supermarkets and farmers looks set to be its first test.

Mediation

Tesco, Asda, Sainsbury and Safeway have all agreed to comply with the code, drawn up by the Director General of Fair Trading.

It seeks to ensure that their terms are available in writing and transparent, and that the supermarkets will have to give advance notice of changes or compensate their suppliers.

Complaints about possible breaches can be taken to an independent mediator. The cost of mediation in each case will be borne by the supermarket concerned.

The Director General can investigate cases if mediation fails.

Industry fears

A BBC Wales investigation last week revealed that the future of the organic farming industry in Wales was under threat because supermarkets were importing cheap overseas produce.

The Week in Week Out programme found that many farmers were considering quitting the industry unless retail chains paid higher prices for home grown produce.

While the Welsh Assembly wants 10% of Welsh farming to be organic by 2005, the Soil Association warned that the future of the fledgling organic industry in Wales was under threat.

The UK Government's Rural Recovery Co-ordinator, Lord Haskins, has questioned the ability of organic farming to satisfy the food market.