Coles is set to unwind its house brand milk contract arrangements with dairy processors, instead locking in direct purchase deals with individual southern farmers.
Saputo Australia will continue to pack the milk for the supermarket chain's discount lines, which have sold for $1.10 a litre since March.
The retailer confirmed it will start sourcing milk directly from farmers in Victoria and southern and central NSW from July.
It has now put out the call to Victorian and NSW farmers interested in contracting their milk production to send in an expression of interest.
Coles was also "looking for opportunities" to expand its direct buying footprint to other milk-producing regions. It is even weighing up direct purchases for milk destined for other dairy products it sells, which would replicate a contentious buying model adopted by British supermarkets.
The supermarket chain believed its new offer would deliver more value to farmers and improved price certainty into the future. The direct sourcing deal would provide longer-term contracts of one to three years.
The contracts would lock in guaranteed prices to farmers for two years and a floor price in the third year with flexible supply options.
A company spokesperson said the direct purchase and payment arrangements for part or all of a farm's milk production should help build the confidence of farmers to invest and grow.
Coles previously relied on dairy processors, notably Saputo and Norco in eastern Australia, to divert a portion of their total milk pool into its private label milk supply contracts, leaving the dairy companies to set the farmgate price with producers.
Saputo took over a 10-year contract established by Murray Goulburn when the co-operative opened two new milk processing plants in Sydney and Melbourne in 2014. The plants were primarily built to handle the supermarket's big order.
Last year Saputo acquired debt-heavy Murray Goulburn's assets for $1.3 billion, plus its Coles housebrand contract, which in theory still had five years to run.
Coles chief operating officer Greg Davis said Coles was proud to collaborate directly with dairy farmers.
"Over many years, Coles has developed direct relationships with thousands of meat, seafood and fresh produce farmers supplying to our stores; it is a successful model, and we think it can work in dairy too," he said.
"In addition to offering a fair and competitive price, dairy farmers will have more choice regarding the length of contract and more certainty around income."
Coles branded fresh white milk would remain the same price in stores. Mr Davis said the additional 10c a litre added to its retail price for two and three-litre bottles in March will continue to be distributed to those supplying milk for the products.
He described the new sourcing model as an important first step to improve returns for dairy farmers while the industry and government continued to work towards a long-term solution to structural issues facing the industry.
"We hope our customers will embrace the investment in sustainable dairy farming by purchasing Coles brand fresh white milk," he said.