The Japanese-owned company, Lion Dairy and Drinks, has firmed up its decision to cut by nine per cent the amount it will take from farmers for the fresh milk market, reports ABCRural

A price for that premium milk is being decided this week.

Lion has also cut the price of the non-premium milk (Tier 2) to 15 cents a litre, backdated to the start of July.

Upset farmers say it means they've been producing milk below the cost of production for 21 days.

Farmer Steven Downes, from Jamberoo on the NSW south coast, says most of his milk will fall into Tier 2 category, worth half the price.

"My income looks like being shattered at the moment," he said.

"They've cut our Tier 2 price, which is well over two thirds of my milk, to 15 cents, and they've brought it in early. "So it's nearly going to chop about 50 per cent out really."

"What that means is I've worked all July, and assuming for August (I was) budgeting at 44 cents per litre, and a lot of that money spent back in March sowing etc for winter, and we just found out that for most of that milk we're going to be paid at 15 cents instead."

Lion says it hasn't hid the price it was offering for Tier 2 milk.

For two months, the rumour in the dairy industry was the price would be nearly halved, because there was a shrinking market for milk. But it was not confirmed because the Dairy Farmers Milk Co-operative wanted to increase it.

Lion's Murray Jeffrey says it was up to the Co-operative to pass on the details to its members about the prices Lion was offering. "July is our pricing period, July through to June.

"In our discussions with the DFMC we've always spoken about a price from July, so I'm not sure why that has been miscommunicated through to their members."

About 750 members of the Dairy Farmers Co-operative across Australia are being sent letters confirming their milk allocation with Lion Dairy and Drinks has been cut. But negotiations over milk prices between the co-operative and Lion have reached an impasse, and now it's before a barrister for a dispute resolution. The barrister will hand down the decision on a price for the premium milk this week, with an announcement due mid-August.

Meanwhile, the Dairy Farmers Milk Co-operative says South Australian dairy farmers can join a second co-op. But co-op chairman Ian Zandstra denies it's a breakaway or rebel group, designed to protest against Lion.

"No not at all. This is a commercial exercise to place farmers milk in the marketplace," he said. "It was formed to handle the milk in South Australia that Lion didn't really need.

"It's not an absolute breakaway co-operative. When fully formed, it will be a new entity with the members being members of the Dairy Farmers Co-operative anyway. "So it's under the auspices of the the DFMC."