Concerns have been raised over a plan by Coles to buy two milk processing facilities, with the consumer watchdog questioning whether it could send prices down for dairy farmers.
The supermarket giant is proposing to buy the plants in Victoria and NSW from Canadian dairy company Saputo.
The Australian Competition and Consumer Commission, along with a "significant" number of industry players, have raised concerns, given it will result in major changes to the industry.
The watchdog will consider whether the acquisition will give Coles greater power and bargaining influence on the market.
That could lead to reduced competition at the wholesale level, impacting milk processors and with flow-on effects to farmers in NSW and Queensland.
NSW Farmers' dairy chair Phil Ryan said the acquisition could result in some farmers going out of business because they would potentially earn less for their milk in farm-gate prices.
"We've seen, with dollar-a-litre milk, the damage that has done to the dairy industry, and those concerns are still front of mind for many farmers," he told AAP.
"That competitive struggle for milk is a very advantageous and necessary thing for farmers in NSW to remain profitable and sustainable into the future."
Coles chief executive Leah Weckert is confident any concerns can be addressed.
"We see no lessening of competition in any relevant market, noting that Coles already acquires approximately 80 per cent of the volumes at the facilities," she said in a statement on Thursday.
The ACCC will also weigh up the chances of Saputo leaving the NSW milk market after the acquisition, which deputy chair Mick Keogh said would concern farmers.
"If Saputo does exit NSW as a result of the acquisition, this would leave limited competition in regions of NSW, which could result in farmers receiving lower prices for their raw milk," Mr Keogh said.
Mr Ryan said the milk processor had committed to continue sourcing milk in the NSW market, but he was unsure whether that extended into the longer term.
Should the Coles bid be successful, it will be the first time a supermarket will own and operate its own milk processing facilities.
Mr Ryan said this could result in there being more Coles milk and fewer local and smaller processor milk on the shelves.
NSW and Victorian farmers currently sell raw milk to the supermarket giant, and it processes the product at the two Saputo plants.
