The retailer will remove drought levy labelling on milk products in March, however the retail price still stays the same and payments to farmers will continue until the end of the financial year.

In July, the new milk year begins, which means the price of milk will be subject to negotiations between retailers and processors.

Woolworths commercial director of dairy Jason McQuaid said during the height of the drought in 2018, Woolies was the first retail to introduce a levy to support dairy farmers.

"As La Nina has delivered record rainfall and farmgate milk prices continue to climb, we've reached an important turning point and will be phasing out the drought levy ahead of the new milk year," Mr McQuaid said.

"We will continue to pay the same amount to our milk suppliers over the coming months, with farmers receiving an additional 10 cents for every litre of selected Woolworths milk sold until the end of June.

Australian Dairy Farmers chief executive David Inall said the industry understood the drought levy was always a temporary measure.

"As far as we're aware, that measure to support Woolworths milk producers flowed through as promised," Mr Inall said.

"Now that the drought is behind us for most farmers, it is accepted and understood that the levy would be dropped," Mr Inall said.

"Appropriately, they've provided five months' notice, which is prudent and appreciated."

United Dairyfarmers of Victoria president Paul Mumford said welcomed Woolworth's guarantee that the levy payments would continue until July.

"We will hold them to their word, they've made that commitment with the processors and it's paramount that this happens," Mr Mumford said.

Woolworths is developing a strategy to provide support to dairy farmers in future drought events.

"We'd like to engage in the process and the mechanism to make sure it is fit-for-purpose and suitable for all dairy farmers," Mr Mumford said.

IN OTHER NEWS:

Both ADF and UDV have a policy calling for store-brand milk to be sold for $1.50 a litre.

Mr Inall said Woolworths had done the right thing by the industry by leaving the drought levy in place for so long and giving farmers advanced notice that it would be ending, and he hoped it was a positive signal for future negotiations.

Although it was too early to tell if the days of $1 a litre milk were dead and buried, Mr Inall said the relationship between the dairy industry and the big retailers had improved tremendously in the past few years.

"I don't believe [$1 a litre milk] will come back, the relationship has moved on since then - that said, it's a wait and watch this space situation," Mr Inall said.

"We'll be monitoring really closely what happens from July 1, because from then it's a different ball game."