Woolworths and Coles are bumping up milk prices and there could be more price hikes to come due to an expected drop in the national supply.

But relieved dairy farmers say supermarkets have brought this sudden price hike on themselves.

Earlier this week Coles said it would increase its home brand milk by 25 cents, from $1.35 to $1.60 a litre.

On Friday Woolworths matched the increase, blaming higher supply chain costs, including payments to farmers.

"The farm gate prices paid to dairy farmers have risen significantly this season and as a result we're paying our own brand suppliers more for milk," a spokesman said.

The spokesman said "processors – not retailers – set the farm gate price paid to dairy farmers" and supermarkets were simply passing on this extra cost.

Aldi, which has prided itself on offering cut-price fresh food, also indicated it would follow the milk price rise.

"We are actively reviewing the retail price of our milk range with the view to ensure our pricing reflects the additional costs that are impacting dairy farmers," a spokeswoman said.

Supermarkets partly to blame, farmers say

A combination of global and local factors are behind the milk price rise, including inflation and rising production costs.

Australian Dairy Farmers Association president Rick Gladigau said supermarkets were partly to blame for the sudden price increase.

In 2011, dairy farmers were left reeling when the supermarkets slashed milk prices by one third and started the $1-a-litre milk campaign, led by Coles.

Mr Gladigau said the industry warned at the time that the push would be disastrous.

Now, he says, "it's all coming home to roost".

"We've seen the exodus of farmers, we're now seeing that there is a shortage of milk in the country," Mr Gladigau said.

The campaign was compounded by the former farmer-owned cooperative Murray Goulburn's financial problems in 2016, when it immediately and retrospectively cut milk prices. 

This resulted in farmers being paid less than the cost of production, sparking a national dairy crisis.

Since then 1,510 dairy farm businesses have quit the industry and Australian milk production has dropped from 9.5 billion litres in 2015-16 to 8.8 billion litres in 2020-21.

National milk production was forecast to decline by 250 million litres to June 2022, with production being hit by higher fertiliser and fuel costs, labour shortages and floods.

Global production down

According to Dairy Australia's latest outlook report production is down in New Zealand, the European Union and the United States.

About one third of Australia's milk is exported and there has been a 10 per cent increase in global exports for the year ending January 2022 compared to last year.

"This has been led by the greater China region, where imports have surged 18.5 per cent," Dairy Australia said in its May report.

All of these factors contributed to record farm gate prices being offered for the new financial year.

Australia's biggest processors Fonterra, Saputo and Bega are paying  farmers an average of about $9.40 per kilogram for milk solids.

The smaller Victorian-based dairy company Bulla offered an unprecedented $10/kg for milk solids.

Mr Gladigau said frenzied bidding by all dairy processors this year led to the sky-high prices.

"Processors are now all scrambling to try and secure milk and having to pay a substantial price," he said.

'A very emotional thing'

Ben Govett, who milks cows at Dingee in northern Victoria says it has been an incredible turnaround from the dark days of 2016, when he was part of packed town hall protest meetings.

"For a number of years most of us openly admitted we're only doing it for the love of cows and the love of farming — there was no financial benefit in it," he said.

"I was struggling, like every other dairy farmer, to pay bills every month.

"There's a lot of stress, and the mental health issues that go along with that."

He said the increase in supermarket prices had lifted spirits in his small rural community.

"It makes everyone feel a little bit better," he said.

"For most of us it is a very emotional thing, when you work so hard and your product is not valued.

He said he understood that families were struggling to keep up with the cost of living.

But he said their farm costs had also soared and he hoped consumers knew they were getting a "a safe and very high quality product".