Processors and retailers have been warned they could be slitting their own throats by slashing farmers' milk prices. Furious producers in the South West say it is "ludicrous" to be cutting prices now when credit is tight, and regulatory costs are piling up.

And the chairman of the NFU's regional dairy board, Martin Whell, has warned the rest of the supply chain there is a very real risk the only outcome will be shortages.

Mr Whell, who farms in Luxulyan, near Truro, launched his attack at the weekend after farmer-owned processor Dairy Farmers of Britain followed Robert Wiseman Dairies in reducing its price.

Dairy farmers who enjoyed a brief respite as prices gained ground last year are now being plunged back into turmoil as prices once again start to fall short of the 29.5 pence a litre which the Royal Association of British Dairy Farmers says is the yardstick figure for the cost of production.

Everything from global commodity prices to a cheese glut stemming from falling worldwide demand is being blamed.

But, said Mr Whell: "The processors who buy our milk, and most of the retailers to whom it is supplied, are reverting to type with their 'hard cheese' take it or leave it attitude towards price-cutting.

"They see their bountiful margins preserved while more of us are going to be squeezed out of existence at their expense.

"This is a stupidly short-sighted attitude when what they need to be doing is committing to long-term arrangements which provide a reasonable cut of the cake for farmers – as well as those buying their milk and selling it on – by ensuring a stable supply base.

"Otherwise, there is going to be an awful lot of soul-searching among South West dairy farming families about whether or not it's worth carrying on."

The UK dairy industry has shrunk by more than a third in the last six years while British farmers have been paid nearly an average of nearly four and a half pence a litre less than their European counterparts.

And, said Mr Whell: "Even though farmers do understand that the price of milk may fluctuate, it really brings into question the efficiency, innovation and margin share of those we are supplying in this country."

Dairy Farmers of Britain cut its price by a further 1.1p a litre on Thursday, taking its total cuts to 3.1ppl since November.

NFU dairy board chairman Gwyn Jones said the move had been hasty and unexpected.

"DFB must be very clear and open with its members about the reasons behind these cuts and reassure farmers about the future strategy of the company," he said.

Meanwhile, Liberal Democrat rural affairs spokesman Shadow Tim Farron has called on the Government to press ahead with the introduction of a supermarket ombudsman in the wake of Robert Wiseman Dairies' decision to slash its price by two pence a litre.

He has tabled an Early Day Motion calling for the creation of a market regulator with the power to establish proper pricing calculations, irrespective of the pricing trends of the major supermarkets.

Mr Farron said the country had lost two billion litres of milk production in the last three years as more and more dairy farmers had left the industry.

"Britain now imports record amounts of milk – all because farmers are getting such a poor return for their efforts.

"Meanwhile, processors and supermarkets have increased their margins considerably. This is unfair and action is needed now," he said.

"It's inevitable that the supermarkets and the large processing companies are opposed to an ombudsman because they don't want to be forced to pay farmers a fair rate.

"It's about time that the Government understood this and pressed on with plans to bring fair trade for British farmers and a fair deal for the consumer – powerful vested interests must not be allowed to stand in the way."

But a spokesman for Robert Wiseman Dairies said: "It is hard to see what a supermarket ombudsman in the UK could do to halt the collapse of the European and global market for dairy commodities like cream, butter and skimmed milk powder.

"Every processor has been affected by this issue, and while we regret having to reduce our farm-gate price, we would stress that it remains one of the best available."