Dairy farmers are struggling to make a profit

The row broke out as the environment and rural development committee began an inquiry on the food supply chain.

Farmers claimed supermarkets are pushing up prices but failing to pass on a fair share of the profits.

However, supermarkets argued that they negotiate prices with processors, not with the farmers.

The committee plans to examine why farms face a loss for milk production.

More than 700 dairy farmers have gone out of business in the last five years and many of them have said the price they were paid was the last straw.

Farmers receive about 18p per litre, but producing milk costs 19p per litre. It sells for about 50p in supermarkets.

MSPs heard concerns that dairy farmers were going out of business because they were paid less than the cost of production for milk, while processors' margins remained tight because of the need to compete for supermarket contracts.

The majority of suppliers said that by dealing with Tesco it... allowed them to expand their business Sarah Mackie Tesco

The NFU's James Withers said in the last five years, supermarket shelf prices for milk had risen by 50%, while the "farm gate price" had dropped.

He told the committee: "We've been rock bottom of the farm league price table for 10 years now.

"Farmers are realistic enough to know that if Tesco decides to put its price up by 2p per litre next week and the other three major supermarkets follow suit, the farm gate milk price isn't going to go up."

'More transparency'

He claimed Tesco, the UK's largest food retailer, was making tens of millions of pounds on milk sales.

Mr Withers added: "There's no doubt that [in] liquid milk, at the premium end of the market, there's a huge margin being made at the retail end, a small margin made at the processing end and a loss at the farming end.

"If we can get more transparency with the supply chain we can ensure there's a more equitable share of that margin.

"At the moment farmers are being told to be efficient and produce quality and get a better return. [They're] doing exactly that and going out of business."

Milk processors compete for large supermarket contracts

Sarah Mackie, a senior buying manager with Tesco in Scotland, said the retailer was not trying to put anyone out of business and that the company set prices with processors, not farmers.

She said a recent survey showed that suppliers thought negotiating with Tesco was fair.

Ms Mackie added: "The majority of suppliers also said that by dealing with Tesco it improved their products, allowed them to expand their business and also improved their understanding of the consumers."

She said: "We work with our processors in order to sell as much of their product in our stores."

However, Ms Mackie said she was "not qualified" to discuss milk margins, partly because of a current investigation being carried out by the Office of Fair Trading.

The committee's inquiry was launched amid growing concerns in the farming and food processing communities that they were not getting a fair return on their goods, particularly from the big retailers.

Convener Sarah Boyack said milk was just one example of the challenges facing agriculture in Scotland.

She added the committee would be looking for ways farmers could respond to globalisation and the power of the supermarkets.