Woolworths is planning to bypass the middleman, buying milk directly from farmers rather than dealing with processors, in an attempt to prove it doesn't exploit producers.
According to AFR, farmers are unsure if dealing directly with the supermarket giant will be of benefit, with concerns that Woolworths might impose extra conditions and further dry up costs.
The National Farmers Federation is supporting the proposal, however, with president Jock Laurie arguing it could give farmers more bargaining power.
"When you're dealing directly with farmers and understanding the costs of production, you can take all that into consideration at the time of negotiation of the contract," he told AFR.
Woolworths plans to market the milk under a new brand, 'Farmer's Own' which it hopes will convince consumers that it supports primary producers.
In order for it to go ahead, however, farmers would need to get authorisation from the ACCC to bargain collectively with Woolworths rather than the processors.
News emerged earlier this week that WA dairy farmers are reluctant to sign long term contracts with milk processors, for fear that they won't see strong returns, despite the current milk shortage and a rise in demand.