Woolworths has unveiled plans to buy milk directly from Australian dairy farmers in a bid to deflect concerns about the viability of the industry in the wake of $1-a-litre milk on offer from the big supermarkets.
The supermarkets have traditionally bought their dairy products from milk processors which deal with the farmers.
Woolworths plans a trial to stock homogenised and unhomogenised milk from a group of farmers from the Manning Valley in NSW by mid-year.
Woolworths said the farmers lodged a collective bargaining notification with the Australian Competition and Consumer Commission for permission to negotiate with Woolworths on a deal which "will allow them to trial the supply of milk directly to the retailer".
The negotiations will cover pricing, supply arrangements and contract terms.
An answer from the ACCC is expected within weeks, but commission chairman Rod Sims offered tentative support for the proposal on Wednesday.
In the statement from Woolworths, Manning Valley dairy farmer Tim Bale said the trial had the potential to provide a much better deal for farmers.
"Our aim is also to secure longer-term contracts which will give us the confidence to invest in our businesses for a sustainable future," he said. "There's no doubt that consumers like $1 milk but we think they also recognise that farmers deserve a fair price for what we produce."
Woolworths' head of fresh food, Pat McEntee, said the trial could be a model that would enhance the long-term sustainability of the dairy sector.
In a statement, Coles said it had been "working with farmer-owned groups for some years to ensure sustainable growth and improved returns".
It offered as an example the Great Ocean Road brand of milk and cheese offered through Coles by Warrnambool Cheese & Butter. It said it had also worked closely with Bega Cheese and Norco in NSW, Harvey Fresh in Western Australia and Tamar Valley Dairy in Tasmania to help improve local dairy farmer businesses.
"Coles is continuing to look at opportunities to grow our milk, cheese and yoghurt business direct with farmer-owned groups," it said.
Lion, the milk processor that owns Dairy Farmers and Pura, said: "We believe improving returns for farmers, particularly in the north, is best achieved through sustainable pricing across all white milk products."
In related news Fonterra announced plans to slash its consumer brands and jobs in Australia to restore profitability as competition intensifies for milk supply and retail sales.
The dairy giant said earnings for its Australian consumer brands fell 31 per cent for the first half of its financial year.
Chief executive Theo Spierings said Fonterra was facing "aggressive competition" in milk supply and, with a retail price war in Australia, it had to ensure its supply chain was cost-effective.
Fonterra has 21 brands in Australia, which had room for a maximum four or five, he said.