Woolworths has responded to calls from the dairy industry by announcing it will increase the price of its milk by 10 cents a litre as part of a new special drought relief milk range.

The major supermarket plans to launch the range mid-October with the extra 10 cents going to dairy farmers in drought-affected areas.

Coles followed its rival by revealing it too would increase the price of its milk, but only for its 3-litre own brand milk.

Woolworths' drought relief milk will sell at $1.10 a litre, with the range also offering additional 2-litre and 3-litre varieties at $2.20 and $3.30 respectively.

The idea of a 10-cent levy was floated two weeks ago by dairy farmer Shane Hickey, from Kyogle in northern New South Wales, and the Queensland Dairyfarmers Organisation (QDO).

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Mr Hickey said the news from the supermarket was "awesome" and "absolutely excellent".

"I'm really happy that they've actually stood up and taken the lead — that's an amazing job," he said.

"A lot of farmers have been extremely frustrated that it hasn't happened sooner, because if you go around the Darling Downs or out west of New South Wales here it's really bad and they need the money now.

"Everybody knows that we're all underpaid by about 20 per cent. The value of milk is quite poor and all the farmers need the money now and the supermarkets have been holding off."

But the dairy farmer said that 10 cents a litre would not go very far and that it needed to be 20 cents for farmers to try to cover all costs.

Woolworths has confirmed the extra 10 cents will be passed onto suppliers of its own brand fresh milk in drought-affected areas through its fresh milk processors.

It will set up a drought relief oversight committee to ensure the 10 cents is distributed to the dairy farmers impacted by the drought conditions.

Until its new drought relief range is introduced next month, Woolworths has increased the price of its Home-brand 3-litre milk from $3 to $3.30 to ensure relief starts flowing to dairy farmers.

Federal Agriculture Minister applauds Woolworths' leadership

Federal Agriculture Minister David Littleproud had backed the calls for a 10-cents-a-litre drought levy and said this was a win for dairy farmers.

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"Proudly, Woolworths has shown the courage and leadership to stand up," he said.

"They said from the get-go that they were prepared to go on that journey — initially they said only if the other retailers came with them but instead they've broken ranks and gone out on their own."

"So that took courage and leadership and they need to be congratulated with that and retailers should come on that journey in supporting our dairy farmers."

However, advertising and marketing expert Dee Madigan said the actions of the supermarkets were not really designed to help farmers.

She said the supermarkets should have been paying a fairer price for milk to allow farmers to have a buffer if the seasons were unkind.

"People have every right to be cynical. The reason farmers don't have money in the bank to fight the drought is because they are being screwed by duopoly of Coles and Woolworths on things like milk and meat," Ms Madigan said.

"We've heard from farmers before that they'd like to be paid more throughout the whole year, rather than just have this sort of payment thrown to them when they are in the grips of drought or when they're suffering.

"They've got no ability to save for a rainy day or a drought because they're being screwed all year round."

Ms Madigan, creative director of Campaign Edge and a Gruen regular on ABC TV, said supermarkets had used milk as a loss leader, so they had deliberately sold milk below cost because they were trying to get customers in the store.

"And you can't blame the consumer for wanting a cheap product. If you see dollar milk, people buy it and your cost of living is high and you've got a couple of kids and you're under mortgage stress.

"So it means supermarkets have to come to the party a little bit [and] stop loss-leading on milk."

Move welcomed by dairy farmer lobby group

QDO vice-president Matthew Trace said the move by Woolworths sounded promising.

"We're finally seeing movement at the retail side, and retailers wanting to assist farmers is exactly what we want," he said.

He said the public support for the grassroots campaign begun by Shane Hickey and the QDO had been unbelievable and immense.

"I know many dairy farmers that are so happy the community is supporting them, they are so grateful," he said.

"[Dollar a milk] has been a big issue for a long time … but this is all about the consumers, our consumers taking control and not letting supermarkets tell them what they want but the consumers telling the supermarkets how it should be."

But Mr Trace cautioned that it was not entirely clear if Woolworths' levy was going to be on all milk.

"While many consumers think 10 cents a litre is not a great hit to them personally, for it to be an effective program we really need the 10 cents to go across all milk sold in the supermarkets."

He said increasing the price of milk, for drought relief, was an important step in breaking the cycle of consumers seeing dairy as a discount product.

"It's so important that we see the entire value chain represented here — not just one section but all dairy products," he said.

Woolworths has announced it will introduce a special drought relief milk range lifting the price of its milk by 10 cents a litre. ( ABC Rural: Kim Honan )

Coles responds and lifts price of 3-litre milk

When the call was made for the 10-cent drought levy on milk, Coles responded that it was doing enough to assist drought-affected farmers.

But today it too raised the cost of its 3-litre own brand milk.

Coles will lift the price from $3 to $3.30 from today until the end of the year with 100 per cent of the increase donated to farmers affected by the drought.

A Coles spokesperson said the supermarket chain had always supported Aussie farmers.

"Coles and our customers have already committed almost $12 million to drought relief, including $5 million from the Coles Nurture Fund to assist drought-affected farmers," the spokesperson said.

"Coles for a number of years has sold a range of milk brands with a percentage of sales going to support dairy farmers in Victoria, South Australia and Western Australia."

Lion Dairy and Drinks announced on Thursday afternoon it would increase the wholesale price of its Dairy Farmers and Pura white milk brands by 10 cents per litre, effective from October 1, to help drought-affected dairy suppliers.

The price increase will be applied to products sold in New South Wales, Victoria and Queensland.