The Queensland Dairyfarmers' Organisation today warned that the state's dairy farmers are expected to fall short of producing enough milk to meet the State's drinking milk demand this year, and said that this trend was being worsened by artificially low milk prices set by Coles and Woolworths.

Impacts from the Queensland flood, Cyclone Yasi and farmers exiting the market mean that the 2011 milk yield may be down as much as 490 million litres.

"The supermarkets are creating a situation of market failure - which does not reflect the current supply and demand situation or the true value and cost of fresh milk," Tessmann said.

"The $1 per litre discounting is simply not sustainable for the fresh milk industry supply chain and the discounting initiated by Coles has seen their competitors drop their prices to the same price or below to try and protect their market share.

With this, the fresh milk category has been devalued right across the nation."

According to the QDO, farm numbers have dropped from 1545 in 1999-2000 to about 580 today, most producing milk for the drinking market. On the other hand, the population of Queensland is growing, with an estimated need for an extra 100 million litres of milk per year by 2021.

"Any short term gain at the check-out now will come with a hefty price tag down the track.

If the price war continues to erode confidence and profitability, we will struggle to meet milk demand now and in the future, and the value chain will be critically damaged.

You only have to look at the history over the last decade here or in the United Kingdom to see what is ahead of us if changes are not made," said Tessman.

"That will ultimately be a bad outcome for everyone - for jobs, local economies, and consumers."