Milk prices at the supermarket are rising by more than 25 cents a litre.
Much of the blame for the cost jump has been pinned on farmgate prices which have risen by almost a third in the past year.
Competition for milk volume is intense among the major processors like Bega Cheese, Bulla Dairy, Saputo, Fonterra and Lactalis.
Largely as a result of this price war, Coles and Woolworths warned customers it was raising its retail milk prices.
For Coles brand one litre milk the price is lifting from $1.35 to $1.60 (18.5 per cent rise), two litre from $2.60 to $3.10 (up 19.23 per cent) and three litre $3.90 to $4.50 (up 15.4 per cent).
Woolworths milk will rise exactly the same to retail for the following prices:
Woolworths branded one litre milk from $1.35 to $1.60, two litres $2.60 to $3.10 and three litres from $3.90 to $4.50
A spokeswoman said Woolworths branded milk is supplied by dairy processors.
Processors (not retailers) set the farmgate price paid to dairy farmers for their milk, with increases in the farmgate price being passed by processors through to Woolworths.
Coles said recent increases in sourcing, transportation and packaging costs had led to the decision.
It also said the "substantial rise" in farmgate prices paid to dairy farmers had prompted the move.
In response, dairy farmers say they are under pressure from fast rising costs to produce milk which has seen producers leaving the industry.
NSW Farmers Dairy Committee chair Colin Thompson welcomed Coles' decision saying low farmgate prices had forced farmers out.
He said higher farmgate prices were a direct result of constricted supply, and warned the situation would only get worse unless farmgate prices improved in real terms.
"This should be an alarm bell for the major supermarkets and processors that we as a nation will continue to lose dairy farms unless they provide sustainable milk pricing that covers the cost of production," Mr Thompson said.
"These prices rises announced by Coles are a result of dwindling supply driving the market up, and the best way to address that problem is ensuring ample supply by paying farmers a fair price."
United Dairyfarmers of Victoria vice-president Mark Billing said the move would help put value back into the supply chain and is a culmination of a number of factors.
"We've got fertiliser costs that have gone through the roof and significant costs around energy and grain that farmers need to feed to our cows."
"Farmers can't continue to fully absorb these costs and that's part of the reason we're now seeing retail level prices start to increase," Mr Billing said.
"Many dairy producers are just breaking even in terms of mounting costs. To have milk, we need dairy farmers, and this move helps ensure that."
The big rise in prices being paid to dairy farmers was also highlighted in an updated profit guidance given to the Australian Stock Exchange today by major Australian dairy processor Bega Cheese.
Bega Cheese said there has been "particularly strong competition amongst milk processors during June and July" and farm gate prices in Victoria, its largest supply region, have jumped by about 30 per cent this financial year .
"The farm gate price increases will benefit farmer suppliers, impact all Australian dairy companies, and is already being reflected in higher product prices in the retail and food service markets," the company said.
Coles said in a statement last week it had signed updated contracts with 100 Australian dairy farms to supply milk directly for Coles Brand.
"In recognition of the higher costs being faced by dairy farmers, this included an increase to the farmgate price paid by Coles this financial year even for farmers with multi-year contracts already in place," the supermarket said.
"In recent months Coles has also agreed significant increases to wholesale prices in markets where Coles Brand milk is sourced from processors, as the farmgate price they pay to dairy farmers has also risen substantially."
Australia's oldest dairy co-operative, Norco, which is headquartered in Lismore in northern NSW, supplies Coles Brand milk in northern NSW and southern Queensland.
Norco chief executive Michael Hampson said the increased farmgate price was making a huge difference to dairy farmers.
"Through our long-term partnership with Coles, we have been able to support our 300 farmer members with a record farm gate milk price increase," he said.
"This is especially important as farmers face pressures from rising costs of production, with many still recovering from the devastating impacts of recent unprecedented weather events."
Dairy farmers John and Anne Boyd from Pirron Yallock in western Victoria are contracted to Coles and said shoppers buying Coles Brand milk directly benefited family farms like theirs.
"As we see it, it's a win-win for all. Coles support us and we support them, then by buying Coles milk consumers can support the farmer to produce high quality milk they can enjoy," Mr Boyd said.
Australian Dairy Farmers' president Rick Galdigau said the dairy industry had lost lots of farmers.
"There's not the milk available, we have got processors with contracts to fill, who are now having to pay big money to be able to keep that milk coming in door."
Coles chief commercial officer Leah Weckert said: "Raising prices is never something we do lightly, however the increased supply chain costs we are seeing, including higher payments to dairy farmers and processors, have necessitated these increases on Coles Brand milk products.
"The feedback we've received from farmers and processors following the recent increases in farmgate and wholesale prices has been very positive, and we hope customers will help us continue to support them by purchasing their great quality Australian milk."
In an ASX update last week, Bega Cheese said the processor has already been suffering disruptions from a range of events including, the continuing impact of COVID-19, floods in various regions around Australia, the war in Ukraine and the impact of lockdowns on product deliveries to the China market.
The company said it had resolved many of those issues by passing on increased business costs in the form of higher wholesale and retail prices plus other initiatives.
Bega said after that initial opening milk price announcements by itself and other milk processors, there had been a wave of further price offers in the battle to secure milk volumes.
The company expects that price battle will impact the company's bottom line in the current financial year.
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