19/05/2016 9:09 AM AEST | Updated 15/07/2016 12:52 PM AEST

Being Milked Dry: More Action Needed On Dairy Crisis

There is a healthy amount of cynicism about a retailer backed fund to help struggling dairy farmers.

A supermarket employee stacks Dairy Farmers milk cartons and bottles

A big supermarket has stepped in with a program for struggling dairy farmers while cutting the price of milk, but they claim they might just be making the situation worse.

Dairy farmers are calling on the federal government to investigate the pricing scheme for milk, after a sharp cut in what farmers are being paid prompted Coles to launch a consumer-driven milk fund to help struggling producers.

But some have labelled the fund a necessary hypocrisy, accusing major food retailers of helping to create the fragile conditions currently facing Australian dairy producers.

Coles announced on Tuesday it will create a new milk brand and will pay 20 cents a litre from sales to an independent fund aimed at supporting 2,600 dairy farmers in the Murray Goulburn area affected by last month's sudden drop in payments.

"How disgraceful. You destroy people so much they need charity."

Australia's largest dairy processor, Murray Goulburn, announced it would retrospectively cut the price it was paying farmers, a move that effectively wipes out profits for some suppliers.

Following the move, Fonterra slashed its milk solids payments from $5.60 a kilogram of milk solids to between $4.75/and $5, citing a slump in global prices.

Coles managing director John Durkan said $1 million had already been put into the fund, and Deputy Prime Minister Barnaby Joyce wants other supermarket chains to follow the example of Coles fund.

The move has been welcomed by the United Victorian Farmers Federation, who described it as positive news for the industry during an otherwise difficult time.

Farm lobby group Farmer Power has appealed for community action, urging consumers to search out Australian dairy products at their local supplier.

But President Chris Gleeson also had three suggestions for politicians.

"They need to announce an independent review of the Australian dairy industry, introduce a levy on the supermarket milk price to be passed on to farmers and provide an immediate cash injection to farmers who are struggling," Gleeson said on Monday.

A petition set up by 16-year-old Ballarat girl, Chloe Scott, is calling on Deputy Prime Minister Barnaby Joyce to deliver a better pricing system. The petition has attracted 122,000 signatures.

"Putting profit before people and leaving thousands of families in the dirt," she wrote.

"To ruin Australia's own home grown business is disgraceful.

"Joyce must step in to reverse these cuts and commit to a national review of the ridiculous pricing system leaving farmers in debt."

Joyce, who doubles as agriculture minister, said Woolworths and Aldi should take Coles' lead.

"I know other people have a sense of cynicism about it, I don't," he said on Thursday.

"I'd like to see it replicated. Let's make sure we get a whole range of these retailers understanding how important it is to get a price of milk that actually reflects the work that dairy farmers put in."

But Small Business Council of Australia CEO Peter Strong says its the major retailers, such as Coles, that helped create the current crisis by offering cut-price milk in a race to a $1-per-litre product.

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Dairy farmer checking his Holstein cattle at Neerim South, Gippsland, Victoria, Australia

He described the fund as a hypocrisy -- it will give money to struggling farmers in the short term, but at no cost to what he sees as the originators of the crisis.

"Coles and Woolworths have absolutely gone out there and made life miserable for farmers. We all know that. Their aim was to use milk as a loss leader to get people in their shops," he told The Huffington Post Australia.

"By itself that's alright, that's called marketing. But the trouble is they are so big they have total control over the supply train, so the dairy farmers had nowhere else to go."

He said the past six or so years -- since the start of the race to dollar-per-litre milk at the supermarket -- had taken its toll on producers.

"The fact that they can screw you one day and come out and look charitable the next shows the problem we have got, really. It's huge," he said.

"Farmers have said they have to support this, because it will bring money to their sector. But privately they are fuming.

"How disgraceful. You destroy people so much they need charity. But you're not doing anything, it's all coming from the consumer."

Joyce reportedly acknowledged supermarket chains had followed Coles in a race to $1 a litre retail sales.

He said he was working on a relief package for dairy farmers and wants low-interest, drought-centred loans available, as well as provide more rural financial counsellors.

He also labelled recent comments from Fonterra as foolish, after the company CEO, Theo Spierings, was reported as saying earlier this week the price cut was part of a drive to send money back to the New Zealand shareholders.

"What we are doing is drive (sic) every cent of money which we can out of Australia back to New Zealand shareholders in this extremely low milk price environment," Spierings said.

"That is what we are doing everyday. And Australian business this year will be at a plus."

Victorian Agriculture Minister Jaala Pulford said about 80 percent of the state's dairy farmers would be affected by the cut.

The crisis comes amid shifting global conditions for the dairy market.

America has built up a cheese glut so large, every person in the country would reportedly need to eat an extra 3 pounds this year to work it off.