Coles will pay over $5 million to Norco dairy farmers after it was found it had not passed on the full amount of a milk price rise, despite claiming it did in a marketing campaign.

Key points: The ACCC said Coles reduced its payments to Norco below the 10 cents a litre promised

The ACCC said Coles reduced its payments to Norco below the 10 cents a litre promised ACCC said it was prepared to take Coles to court over an "egregious breach of Australian consumer law"

ACCC said it was prepared to take Coles to court over an "egregious breach of Australian consumer law" Coles said it respected the ACCC process but disagreed with its "interpretation"

The payments follow an Australian Competition and Consumer Commission (ACCC) investigation into whether Coles had fully passed on to Norco a 10 cents per litre price increase it charged consumers for Coles branded milk, as it claimed it would do in marketing materials.

The ACCC's investigation focused on claims that when an unrelated 6.5 cents per litre increase commenced on April 1, 2019, Coles reduced its payments to Norco under the 10 cents per litre retail price increase from 10 cents per litre to 3.5 cents per litre.

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Norco is a milk co-operative comprised of 194 member farms in northern New South Wales and Queensland.

Norco supplies milk to Coles for its Coles branded milk, and also produces milk bearing the Norco brand, which is supplied at several of Coles' stores.

"We were fully prepared to take Coles to court over what we believe was an egregious breach of Australian consumer law," ACCC Chair Rod Simms said.

The ACCC said apart from the lump sum payment to Norco, Coles would also pass on the additional 7 cents per litre for its Coles branded two and three litre bottles of milk up until June 2020 .

In a statement after the ACCC announcement, Coles painted the move as helping farmers "cope with the impact of drought".

"Coles is pleased to be able to provide additional support to Australian dairy farmers while we continue to work with industry and government stakeholders to find long-term solutions to ensure the sustainability of the Australian dairy sector."

Coles said while it respected the regulatory process it disagreed with ACCC's "interpretation" of the issues.

However the ACCC said while concluding that a court case could have taken years with no certainty the money would end up in farmer's pockets it was confident it would have ended in a win for the Commission and therefore primary producers.

"We believe we had a strong case to allege misleading conduct by Coles." the ACCC stated.

Money 'very much appreciated'

Norco CEO Mike Hampson said, at this stage, Norco was uncertain how much per litre would be paid to each farmer.

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"The money will make its way back to our members which will be very much appreciated when we are facing some of the worst climatic conditions that our members have ever faced," Mr Hampson said.

The bulk of the $5.25 million is to be paid to Norco within seven days, which Mr Hampson said would be passed on in its entirety to producers.

"We haven't fully calculated that at this point in time, but suffice to say that every cent Norco receives will be paid to its farmers," Mr Hampson said.

The ACCC was prepared to take Coles to court over what it believed was an "egregious break of the Australian consumer law". ( ABC Rural: Kim Honan )

'Black mark against Coles'

Graham Forbes, president of the NSW's chief dairy industry lobby group, Dairy Connect, said the announcement came as a shock.

Mr Forbes who farms at Gloucester and is a major supplier to Norco said he doubted how transparent Coles was being in its claim it was assisting drought-affected farmers.

"This is really concerning that if consumers have been thinking, and farmers have been thinking that that 10 cents per litre was being collected at Coles was coming back to the farmers and now it appears that it hasn't been," he said.

"It's a big black mark against Coles.

"I think this is a real ethical question, both farmers and consumers have been misled by the actions of Coles."

"It's an unfair playing field between the farmers, the processors and the supermarkets and this announcement by the ACCC really just shows how unfair, and how much risk is put back on the farmers," Mr Forbes said.