Coles has dumped Bega Cheese as the supplier of the supermarket chain's own brand cheese products.
Bega will be replaced by Australia's largest dairy co-operative, Devondale Murray Goulburn, which has just signed a five-year partnership with Coles.
Under the agreement, Devondale Murray Goulburn will supply a range of Coles brand cheddar-style cheese including tasty, colby, mild and light cheese from January next year.
"We look forward to continuing our good relationship with Bega Cheese and remain committed to stocking branded products produced by Bega Cheese," a statement from Coles said.
A statement from Bega said it would redirect its milk supply to other value added dairy products and markets, including the rapidly growing infant formula and nutritionals markets as a result of Coles' supply changes.
"Bega Cheese expects to manage the change in our business mix over the coming 12 months in a manner which will sustain the underlying financial performance and trajectory of the business," it said.
Bega said it would see a significant decrease in inventory holding with up to $60 million of cheese inventory being realised as a result of the change of supply arrangements with Coles.
In 2014, Coles struck a 10-year deal with Devondale to produce Coles branded milk for Victoria and New South Wales.
Coles said this resulted in Devondale Murray Goulburn investing $160 million in state-of-the-art facilities in Melbourne and Sydney to increase production efficiencies and reduce costs.
"At the time, the new contract represented the most significant investment in dairy industry processing since deregulation in 2000 and resulted in the creation of 50 new highly skilled jobs for the co-operative," it said on Monday.
Shares in Bega have dropped nearly 12 per cent, or 83 cents, to $6.23 at 1305 AEDT.
Coles' parent company Wesfarmers' share price was up 77 cents, or 1.83 per cent, at $42.94.
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