A submission to a Senate inquiry on dairy pricing and competition has suggested a regulated payment system be introduced to equalise the disparity between domestic and export prices for dairy farmers and to remove the wide cyclical variations in payments for milk.

Judith Clements told the Senate inquiry sitting in Melbourne that she had seen dairy farm returns decrease to a severely depressed level that she believed was totally unsustainable.

She was speaking on behalf of her Goulburn Valley family property, Ashley Park Farm.

"We have a share-farmer operation in northern Victoria," Ms Clements told the inquiry.

"We have experienced both the liquid milk and market milk sectors and manufacturing, and have certainly seen and endured many of the tremendous challenges that have occurred during that time."

The Senate inquiry is looking into the prices paid to producers by milk processors, the economic effects of the prices, the concentration of ownership of milk processing facilities, and the impact of supermarket supply contracts on markets.

Ms Clements argued for a bold and creative approach to achieve greater stability and sustainable pricing.

She proposed that a body have the responsibility of administering a new pricing scheme.

Under the proposed scheme, all product consumed domestically would have a pricing structure completely separate from the exported product.

The authority would set a minimum pricing structure to apply to all domestic product.

In order to do this, the authority would determine from the amount of milk produced - that is, over the period of a year, the component that was consumed within Australia, across the full range of dairy products - the percentage or amount of the farmers' production to be paid at the set rate.

This would mean that a component of all domestic sales would be paid back to Australian dairy farmers.

This amount would need to be predetermined by the authority.

It would be based on the individual farmers' production over the preceding 12-month period.

It would be done in a similar way to how the Dairy Structural Adjustment Program Scheme was struck, so that it does not allow people to suddenly come in and flood the market and receive a high percentage.

Under Ms Clements' proposal, a compulsory levy would be applied to all dairy farmers to help fund the authority's operation.

A farmer could produce as much milk as he chose to, but only a component (of that milk) would be paid at a rate to reflect that consumed domestically.

Export product would be subject to the usual forces that exist now.