THE competition watchdog will launch a three-month investigation into the power imbalance between farmers, food processors and supermarkets.
The Australian Competition and Consumer Commission (ACCC) will consider if supermarkets should face tougher regulations when dealing with the farmers who supply their fresh produce.
Agriculture Minister David Littleproud said the aim of the inquiry was "to make sure that supermarkets are not abusing their power in their dealings with farmers".
"This isn't about regulating prices, this is making sure farmers are treated fairly," Mr Littleproud said,
"When you have two supermarkets that have over 60 per cent of the market, that adds some complexity and gives them some bargaining power that could be abused.
Farmers and agricultural organisations have long called for an investigation in to the bargaining power within the agricultural supply chain, particularly with Coles and Woolworths controlling the lion's share of the market.
Mr Littleproud said he couldn't care less what the response from the supermarket sector was.
"Supermarkets are big enough and ugly enough to look after themselves," he said.
"They are the ones that create this culture, particularly in the dairy industry, of destroy livelihoods of so many farmers across the country with this $1 a litre milk stuff."
Mr Littleproud said the ag industry was plagued with stories about supermarkets using their market power to get farmers in to contracts, "then pulling them out from under their nose".
"They've made significant capital investment, and it's sent them broke," he said.
"We don't want to kick this into the grass. We're going to do this, and sort this out once and for all."
Mr Littleproud indicated that should the investigation find abuses of power, the government could force a mandatory code of conduct upon supermarkets.
While there is already a Grocery Code of Conduct, it is voluntary and only focused on big companies, not small family farms.
"These small family farms don't have much power and don't have any legal recourse because they don't have the financial means in which to prosecute," he said.
Deputy Prime Minister Michael McCormack said farmers would be able to give evidence to the ACCC confidentially, without fear of repercussion.
"If there are things that are found to be underhanded, they will be stamped out," the Nationals leader said.
"We want to make sure there is fairness of price, fairness of delivery and fairness of outcome."
There will also be a specific focus on the Dairy Code of Conduct.
The inquiry is due to deliver its report before the end of the year.