Tesco, the largest retailer of milk in the UK, will offer direct contracts to farmers, raising the price they receive to about 22 pence a litre - the best price paid by any supermarket. However, Tesco shoppers will not pay any extra.
The contract prices will be reviewed every six months to ensure they reflect the farmers' costs of production.
Tesco has also launched local choice milk, which will be sourced from local farms and sold at Tesco stores in or close to their counties. It will sell for slightly more than standard milk, meaning smaller producers can make returns.
Tesco commercial and trading director Richard Brasher said: 'We know that some UK milk producers - often through no fault of their own - have had a very difficult time for a number of years.
'Our customers tell us they are not comfortable with this and they want us to help if we can. Dairy farmers also tell us that they would value a more direct relationship with Tesco.
'This has enabled us to lay the foundations of a new milk direct sourcing model and we are pleased to announce this£25 million investment in our UK Dairy Industry.
'Many of our shoppers have told us they want us to make it easier for them to buy food that is local to their area - reducing environmental costs through transport and providing confidence that, if they buy a local product, they are helping their local economy and local suppliers.'
The National Farmers Union (NFU) has hailed Tesco's announcement, with NFU president Peter Kendall describing it as 'the most significant and encouraging development in the dairy industry for a very long time'.
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