Fonterra Australia has been chosen as the preferred supplier to process Woolworths Own Brand milk in Victoria for the next 10 years.
This would be a change for Woolworths, which currently runs one-year contracts.
The deal will see Fonterra invest more than A$30 million (NZ$32.3m) into a state-of-the art milk processing plant at its Cobden site in South West Victoria, creating 30 new jobs.
''Fonterra and Woolworths will continue to work together to finalise contractual arrangements to reach a binding supply agreement,'' Fonterra said.
The Victorian contract is believed to be worth about A$60 million (NZ$64.6m) a year.
Fonterra is forecasting a payout of $8.65/kg ms for the current season, although this could take a hit if the recent slump in prices at the global dairy auction (down 8.9 per cent last auction) continues.
It recently announced a 54 pe cent drop in half-year profit, at $206 million for the six months to January 31, down from $449 million the year earlier.
The deal with Woolworths comes at a time when Australian supermarkets are looking to appeal to shoppers by using local suppliers.
This created a backlash on this side of the Tasman after Woolworths and Coles pulled millions of dollars worth of New Zealand products from their shelves.
The controversy spawned a Facebook group calling for shoppers to boycott Countdown, which is owned by Woolworths.