Coles has confirmed it's had inquiries from more than 500 dairy farmers, following the announcement of its Direct to Farm Milk Program, in early June.
A Coles spokesman said there was strong competition in the market for fresh milk.
"Under our direct sourcing model, Coles has brought a new and competitive farmgate price offer to dairy farmers," the spokesman said.
Coles will source milk directly from farmers in Victoria and Southern and Central NSW for Coles Brand 2L and 3L fresh white milk, delivering more value to farmers including competitive farmgate prices and improved certainty of future income.
One source said Coles could be prepared to pay as much as $8.95 a kilogram of milk solids for the first tier of their milk but that could go as high $9.38/kgMS.
Fonterra Australia managing director Rene Dedoncker said he'd be interested in seeing how the model worked out.
"Coles are not processing the milk themselves," Mr Dedoncker said.
"They need a partner and a partner is not going to do this, unless they get a reasonable return."
The Coles spokesman said the company would pay Saputo Dairy Australia to process and bottle the milk, under a toll processing agreement.
"We believe the new arrangement is beneficial to Coles, farmers and Saputo," the spokesman said.
Mr Dedoncker said Fonterra knew there was overcapacity in white milk production.
"There are choices, so they are going to have to be smart, in the way they play it," he said.
"They are certainly taking control of the pointy end.
"Will it work?
" I don't know, but what I do know is they will need to make it attractive, through the whole dairy value chain, otherwise they will find themselves stranded."
Mr Dedoncker said Fonterra was only a small player, in the white milk market, supplying Woolworths private label, in Victoria.
"It's not a big part of what we do, and we are not planning to expand it," Mr Dedoncker said.
"I think there is something for everyone, but it will be interesting to see how it plays out."
Saputo Dairy Australia declined to comment.
This story first appeared on Stock & Land
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