As the milk wars between supermarkets have crunched margins for the nation's major milk producers, industry sources say permeate is increasingly being used by the major producers to reduce the cost per litre.

Just how much permeate - which is cheaper that fresh milk and can be used to moderate fat levels - is used has been a closely held secret by Australia's dairy industry.

In 2008, a number of NSW farmers accused the milk industry of adding up to 12 per cent permeate to milk to cut its production cost. Internal documents from Australia's biggest supplier, National Foods - which makes Pura, Big M, Dairy Farmers and supplies both Woolworths and Coles brand milk - reveal that its milk now contains up to 16.43 per cent permeate. One document, labelled ''permeate cost savings'', reveals that up to $22,960 can be saved by adding 16 per cent permeate to the production of 350,000 litres of whole milk. This shaves almost 16 per cent of the cost off the price of production, and does not have to be disclosed on the label.

In Australia, the Food Standards Code allows producers to dilute milk with ''milk components'', such as permeate, as long as the total fat level remains at least 3.2 per cent (for full-cream milk) and the protein at least 3 per cent (for any milk). Natural cow's milk has a fat level of 4 per cent.

There are no known health risks associated with adding permeate to milk. Its use in the Australian dairy industry is a cost-saving measure.

Not only does its addition to milk reduce costs, but it eliminates the need to dispose of the permeate.

According to industry consultant Dairymark, ''increasingly stringent environmental regulations means that discarding the [permeate] material in waterways is no longer an option for most companies''.

A Dairymark report recommends the industry change its view of permeate to ''a rich source of dairy carbohydrate, rather than a more orthodox view on permeate as a waste stream that is proving problematic in disposal terms''.

A2 Milk chief executive Peter Nathan, who said none of his milk contained permeate, described the substance as a ''lemony-green liquid substance, it's certainly not attractive.'' He said consumers were ''being led to believe that milk they drinking is pure milk. It's not.''

Mr Nathan said supermarket ''milk wars'' put pressure on producers to boost the permeate levels.

The leaked documents, which cover 2007 and 2008, also show the percentage of permeate added varies each month.

A spokeswoman for Lion declined to say how much permeate was in Lion's milk.

''We have not increased the use of permeate in milk, and certainly not due to the price wars, beyond the standard variations according to seasonality and fluctuations in protein levels.

''Permeate use varies according to seasonality. It is used to standardise protein levels in milk across the entire year. We manage this in line with the FSANZ food code.''

Parmalat, the second-largest supplier of supermarket-brand milk, also uses permeate in its milk. When asked how much permeate it used in its milk, Parmalat Australia declined to comment.

But it has a fact sheet on its website explaining that ''permeate is used to help ensure cow's milk is consistent in taste, texture and nutrients.''