As profits soar at the supermarkets, food producers say they are being forced out of business by unfair buying practices

You can pick up a punnet of British raspberries – at their best this weekend – on a two-for-one offer in most supermarkets. But as shoppers reach for that quintessential summer treat, they should perhaps ponder the fact that it is the farmer, not the supermarket, who is paying for the generous discount.

The farmer may well be making no profit at all, with no choice in the pricing and little or no idea, when he picked and shipped the raspberries, how much he would get for them. Or that the packaging would be paid for by the farm, but done by a company chosen by the supermarket – at up to twice the cost of it being packaged independently.

Farmers do not talk about these things. Many of them, during a month-long investigation, told the Observer that in the midst of the downturn they dare not risk annoying the big processors and shops. There is a "climate of fear" – the National Farmers Union's phrase – in the monopolistic world of modern food retail: small producers are too frightened to speak out about the abuses that are impoverishing them because they risk "reprisals", which may mean losing the only customers there are. Very few felt able to speak to us on the record.

Henry Dobell runs a fruit farm near Stowmarket in Suffolk. He has given up raspberries and now sells heritage apples from his 300-tree orchard, but only to local shops because the relationship with the supermarkets became "impossible". Their demands saw his costs rise by 30% and he was making no profit.

"One year Sainsbury's refused all my raspberries after we'd picked and packaged them," he said. "So the producer organisation [the intermediary the supermarkets insist on dealing with] sold them to Somerfield and we had to buy new packaging. But they all went on as a two-for-one offer: we had no say. At one point we were being paid less per punnet than it cost to put a lid on it.

"I used to grow tree-matured Cox for Waitrose – in the last year with them the fruit got lost in the organisation's system and I got a much lower price than I'd been promised. It took nine months to get paid. So I said I wanted to quit.

"There was no written contract, but the producer organisation threatened legal action. They wanted a £30,000-£40,000 payment if I didn't stay with them for another year, and said I had to sign a confidentiality agreement. So I stopped, and now we sell our apples direct to the Co-op in the east of England, or to farm shops. If I do a promotion, that's my choice. I sell for the same price, but keep 100% of the money rather than 25%."

These and many more restrictive and potentially illegal practices are blamed for driving 3,000 small and medium-scale farmers in Britain into poverty or out of business over the past decade. Many more have been affected abroad. The abuses could be addressed by a long-awaited piece of government legislation, the groceries code adjudicator bill: an attempt to enforce codes of conduct on the 10 biggest supermarkets and their processors over how they deal with their suppliers. It has cross-party support.

But the giant supermarket chains – four of which control almost 80% of food retail – have mounted a fierce attack on the bill, with the threat that more regulation will lead to food prices rising even more than the current 4.9% rate of inflation. This is a real concern to ministers committed to keeping inflation down.

The British Retail Consortium, which speaks for nine of the 10 supermarket chains, has issued a stern warning: "Prices are already under considerable pressure from rising global commodity costs and climbing fuel and utility prices… the extra costs of dealing with a new administrative body will make it even harder to keep price rises away from shop shelves."

Campaigners reject this as risible. Andrew George, the Liberal Democrat MP for St Ives who leads the Grocery Market Action Group, said: "The cost to each retailer for the costs of the adjudicator is put at £120,000 per annum. It's a gnat bite – nothing, given their record profits in the depths of the greatest recession of modern times. Are they saying that it will cost them more to behave decently and legally in their dealings with suppliers?"

From the NFU to Friends of the Earth and ActionAid, a surprising range of organisations say the draft bill, discussed by the House of Commons business select committee, needs an ombudsman who can investigate proactively and hear complaints anonymously or from trade organisations. Most importantly, they say, the adjudicator should be able to impose fines.

At issue are a range of problems that trouble the government: Britain's "food security", food price rises, rural poverty, food health scares and the bleak fact that nearly two-thirds of British farms are deemed not economically viable by the Department for Environment, Food and Rural Affairs (Defra).

At least one dairy farmer has gone out of business in Britain every day for the past decade, as supermarkets have more than doubled their share of the price of a pint of milk. As many as 30 pig farmers have gone bust in the past year, according to the National Pig Association.

At the heart of the problem, say campaigners, is public ignorance of how supermarkets buy produce and the system that allows them to offer lower prices while increasing their profits. Tesco's profits were above £3.5bn for the first time last year, and Sainsbury's rose by nearly 13%.

These results – despite the supermarkets' endless price wars – are achieved largely by getting suppliers to reduce their prices. Most sectors of British farming, from eggs to fruit, vegetables and pork, have seen farm-gate prices drop in the past year, despite record increases in costs. "Supermarkets have handed the risk back to us: they charge ever-increasing markups, force us to take part in promotions," one Welsh farmer in vegetables and dairy told the Observer. "The farmer takes all the risk, pays all the costs and gets virtually nothing above the price of production."

Discounts such as "buy one get one free" are not a generous gift from the supermarket. What they mean is that the farmer will be paid less – but he or she has no ability to negotiate or even be informed if their crop is put on special offer. If a crop has been over-ordered and doesn't sell, the supplier may have to pick up the cost of disposal.

Fruit farmers contacted by the Observer said they had seen their produce on sale in supermarkets for less than it would have fetched on the same day at the wholesale market. Others have seen produce turned away at the packers for spurious quality reasons, because there was a glut. Yet contracts still oblige them to continue supplying.

The supermarkets, often working through agreed processors and packagers, offer binding contracts that do not specify prices. These tend to lift the brakes on how much is ordered, because the shop will not suffer if produce is not sold. This is particularly painful for soft fruit and salad growers, whose entire year's income can be ruined by a couple of rainy summer weekends when people don't want to buy summer produce.

But it affects more than just farmers. A major independent confectioner – who did not wish to be named – said that over his 30 years in business the basic dynamic of trade with supermarkets had changed.

"There has been a transfer of risk, from retailer to manufacturer. We have to take much more responsibility for what doesn't sell. Of course, they have other risks and I think it's fine if you negotiate under fair rules and there is no abuse of power. But what should not happen is a renegotiation, with subtle or overt pressure, after you've agreed something. It is possible to be trampled on by an unscrupulous customer and you can't really afford not to deal with them. I think that is where abuse occurs."

Despite years of appeals to government from producers' organisations and two damning competition commission reports, the retailers, led by Tesco and Sainsbury's, have resisted the proposed legislation for 11 years. Both companies said the existing code of practice was "working well" and there was no need for an adjudicator.

At the root of the debate is a host of restrictive practices that, suppliers say, has grown as the four biggest supermarkets, Tesco, Sainsbury's, Asda and Morrisons, have taken control of nearly 80% of British food retail. Farmers and organisations the Observer contacted were all reluctant to be named, citing regular occurrences of retribution by retailers or their favoured middlemen. "If I piss them off, they can just destroy me overnight. And there is nowhere else to go," said one north of England meat farmer.

Other farmers told of "punishments" exacted if they complained. One poultry farmer in East Anglia went public after a buyer told him verbally that his premium chickens would be put on sale at a discount. After he complained about "bullying" and the system of negotiating outside contracts at an industry conference, he found his next shipment refused on quality grounds.

This is just one among a range of unfair practices, some of them potentially illegal. These include "no-contract" deals that refuse to specify prices but tie a farmer to an outlet. There is often no right of negotiation or arbitration and farmers are frequently forced at short notice to let their crop be sold at a discount. The buyers do this verbally, not by letter.

A particular bone of contention is that supermarkets insist that packaging and processing be done by firms they nominate – even though charges are much higher than they would be on the open market for exactly the same service. Last week, in evidence to a parliamentary committee, the chairman of the NFU, Peter Kendall, said he knew that some processors and packers pay back some of the premium charged to farmers as a "backhander" to the supermarket.

"We have a lot of examples of where this sort of thing goes on," said Kendall, but added there no way of using the information without threatening the farmers' livelihood.

The groceries supply code of practice was introduced by the government last year and the adjudicator's job would be to oversee it. Consumer minister Ed Davey announced the code, saying: "We want to make sure that large retailers can't abuse their power by transferring excessive risks or unexpected costs on to their suppliers."

No farmer has yet made any complaint under the code and the retailers say that is proof it is working. But the NFU and other organisations say the lack of complaints are because farmers are frightened of revealing their identities and have often been made to sign confidentiality agreements.

Patrick Holden, former head of the Soil Association, is a dairy farmer in Lampeter, west Wales. For 20 years he farmed organic carrots for supermarkets, but gave up in 2007, frustrated at unreasonable demands that continually pushed up his overheads. He said that the decline in small and medium-sized agricultural businesses in Britain is largely because of the big retailers' "amoral" buying policies.

"Government wants food prices kept down, but the only way to do that in this country is through this tyranny of exploitation, continually screwing down the prices paid to producers. And if a producer doesn't sell to them, you go quietly out of business," he said."But we're all complicit. We shop in supermarkets, we own shares in them, our pension funds are in them. We have to question this way of providing cheap food. It has put me and tens of thousands of others out of business."

The chicken farmer

Michael Thompson, Holsworthy, Devon, 10,000 chickens

Our problems started four years ago when the big egg packers merged, controlling about 60% of the market. There wasn't any competition any more and the prices started to go down, while everything else, like the feed price, was going up. I'd be getting 91p a dozen for large free range eggs, and it had been over £1. Meanwhile, my eggs were being sold for £3, while I was losing 15p on each dozen.

I was desperate to get away, it was so unfair. I lost £40,000 last year and I could see Noble Foods' [Britain's biggest egg supplier] profits going up. It came to the end of the road when I got a letter saying: "This week your egg price is going down." No discussion. And I knew the price of my eggs in the shop was up.

I tried talking to them. I'd ring up the representative. But they'd almost laugh at you – they knew there was nothing I could do. Most suppliers believe if you speak out, they get back at you. I did speak about it publicly. And the next time my eggs went for packing the number of seconds [eggs rejected as inferior] went up 5%. I can't prove this was done as a punishment, but I believe there was nothing wrong with the eggs.

I'm at the end of the road.

The pig farmer

Stewart Houston, North Yorkshire, producing 9,000 pigs a year

I've been in this business 30 years, and it's worse than it's ever been. I think 20 or 30 pork farmers have gone out of business since last August, when the feed price suddenly soared. We had no help from the processors or the retailers at all and we've all been losing between £10 and £30 per finished pig.

We've had to cancel family holidays, and like all producers we're cutting back. You don't buy replacement gilts [young sows], so next year there'll be less pork around. I've lost £140,000. I've given evidence to the parliamentary committee on the bill, and what I want to see is that trade associations can make representations on the producers' behalf to the code adjudicator.

Usually in pork, the processor deals with the supermarket and he should represent us. But you'll never get a processor disagreeing with a retailer. The supermarkets play them off against each other on price – and the retailers bear down on any attempt to get the price up. But that's forcing producers out of business.

The dairy farmer

Ray Brown, Crewe, Cheshire, 300 dairy cows and 200 pedigree bulls

Only a quarter of the people round here who were in dairy 15 years ago are still doing it. It's a wonder we've stayed in business. In 1997, we got 25p a litre at the farm gate. We're getting 26p now. But the price in the shops then was 42p a litre and now it's anything from 70p to £1. And we've seen all the costs go up.

Now we're selling to a milk broker. My milk might end up with supermarkets or Wiseman's. I'd rather be with Tesco or Sainsbury's, because they're guaranteeing 28p a litre to farmers. But they've capped the market because they're under pressure from Aldi and Lidl. They're playing a very clever game, and it's all about the naivety of shoppers. The milk price could be much higher.

You sign up to take whatever price the middlemen set and that can be retrospective. They might say, oh we're going to give you a penny less for June's milk, and there's nothing you can do about it. There's no negotiation.

We couldn't survive without our pedigree bull business. The money for farmers has gone.

• This article was amended on 5 July 2011 to make it clear that the

company that threatened Henry Dobell with legal action was a

intermediary producer organisation, not Waitrose.