HEALTHY BONES, SICK INDUSTRY: An inquiry is hearing submissions into milk pricing at supermarkets. Source: The Daily Telegraph

The Senate economics committee is set to call for tougher competition laws to prevent consumers being dudded by the milk price wars.

Supermarkets and large suppliers could be using heavy discounting to kill off smaller competitors so they can later hike prices, the inquiry will warn.

Looking at the impact of the price wars on the dairy industry, the inquiry will call for new laws on "price discrimination" to allow smaller players to take legal action if big competitors can buy goods cheaper from suppliers.

Sources said the report will resurrect a raft of recommendations for tougher competition laws proposed by a similar inquiry by the same Senate committee last year but not yet adopted by the Government.

The proposals include tougher laws against misuse of market power, predatory pricing and mergers and acquisitions.

There are doubts whether the Government will adopt the re-heated recommendations.

Any measures that could increase milk or other grocery prices would be politically sensitive, as the Government is under fire over the rising cost of living.

The inquiry is likely to call for the Australian Competition and Consumer Commission to monitor and report on how milk prices are set at each stage of the dairy chain to test claims that farmers and smaller retailers are being priced out of the market.

ACCC chairman Graeme Samuel last month said he was examining all aspects of the milk supply chain.

But the Senate inquiry is likely to call for the Government to order the consumer watchdog to take a more formal role monitoring the way milk prices are set.

The would involve public reporting on milk prices based on the way petrol prices are watched.

Victorian Liberal Senator Julian McGauran, who sits on the committee, said farmers could suffer if Coles and Woolworths renegotiated a lower farm gate price for milk when their supply contracts came up for renewal.

"When you have two big players, they can do that," Senator McGauran told The Courier-Mail.

"It's another sign of the market dominance of Coles and Woolies."

The Senate inquiry is dominated by Coalition senators and independent Nick Xenophon, with Labor senators in the minority.