Fonterra Australia has been selected as the preferred supplier to process Woolworths "Own Brand'' milk in Victoria for the next 10 years instead of the current one-year contracts, the companies said.

The proposed arrangement would give farmers certainty that they would have a guaranteed buyer for their milk, they said.

Under the proposed deal, the details of which are yet to be finalised, all Woolworths Own Brand milk sold in Victoria would be be made and processed in Victoria.

It will also involve Fonterra investing more than A$30 million at its milk processing plant at Cobden, in South West Victoria.

Fonterra's Australian farmer-suppliers represent its second largest milk pool outside of New Zealand.

Woolworths managing firector of supermarkets, Tjeerd Jegen, said Fonterra had sought certainty of a long-term contract for their Australian suppliers.

Jegen said Woolworths did not want to see milk shipped long distances, which added to costs and increased the time between the farm and the supermarket shelf.

Fonterra Australia managing director Judith Swales said the deal would expand Fonterra's current "white milk'' portfolio and would complement its Riverina Fresh milk business in New South Wales.

- APNZ