United Dairyfarmers of Victoria (UDV) president Adam Jenkins said “farmers are sick of seeing discounted private label dairy products on supermarket shelves, so it’s great to see a processor showing leadership by starting these conversations”.

The UDV said the heavy discounting of dairy products by retailers was “a race-to-the-bottom” that devalued dairy products.

“When retailers compete to sell the cheapest products, the supply chain pushes the price cuts right back to the farmer, who then misses out on receiving a fair price,” Mr Jenkins said.

The practice harmed the state’s dairy industry by reducing the value of liquid milk sold throughout the retail sector, which extends to a broader range of dairy products, including cheese, he said.

“This reduction in retail value has undermined the public perception of the worth of dairy products, weakening the margin being paid back to milk processors, who are forced to pass these losses on to their farmers,” Mr Jenkins said.

While one dollar a litre milk has become the focus of the fight against discount dairy products, other discounted private label products such as cheese return even worse margins to the processors and farmers, he said.

"Farmers need to be paid a fair price for their product,” Mr Jenkins said.

“It’s time for processors to demonstrate leadership and back the calls to end the loss-leader strategy of the retailers.”

His comments come after Saputo chief executive Lino Saputo Junior said he doubted selling milk at $1 a litre in supermarkets, when water sold for $3 a litre, gave the right value to farmers given all the energy and effort they put into producing milk.

Saputo is seeking to buy Murray Goulburn (MG) that supplies milk to Coles supermarkets where it sells for $1 a litre.

Saputo has said it will honour all MG contracts.

MG’s contract with Coles will run until 2023-2024.