Dairy farmers are furious at plans by supermarket giants Coles and Woolworths to reduce the price of their milk.

A two-litre carton of the supermarkets' own-brand milk will be slashed by about a third, to about $2.

The lobby group, Australian Dairy Farmers, says despite assurances from the retailers, it believes the reduction will be passed onto producers.

Spokesman Chris Griffin says the move could destroy the local dairy industry, as other producers struggle to compete.

"In the longer term, we believe it is a threat to the industry and to do it on Australia day, it's not what you'd call the Australian thing to do, as far as we're concerned," he said.

"They're saying that its going to be absorbed by them but I think in the longer term, they can't sustain it for any length of time so it will flow down to the dairy farmers."

Coles spokesman, John Durkan, is adamant farmers who supply milk to the retailer will not be left out of pocket.

"We are making sure that the farmers get paid exactly the same price for their milk," he said.

"We have structured our milk contracts to ensure that.

"Whatever the farm gate price is, Coles will pay, and we'll make sure farmers are looked after in the middle of that."