Dairy co-op Fonterra would double its stake in Australia's fourth-largest dairy company, Bonlac Foods, to 50 per cent and market all the company's products, under a proposal to be put to Bonlac's shareholders.

The companies didn't provide financial details of the plan, disclosed in a joint filing to the Australian Stock Exchange.

Melbourne-based Bonlac said it would sell its dairy brands, including Bodalla and Perfect Italiano cheese, to Fonterra for A$40 million ($46 million). Fonterra's rights to a special dividend would be cancelled.

Fonterra said Bonlac would focus on milk collection and processing, while Fonterra would buy and market the products manufactured by Bonlac.

Bonlac has been selling assets to reduce debt and restore a non-investment grade credit rating that's fallen five levels in less than three years. It also needs access to more milk after a third of its farmers left during the past three years because rival companies offered higher prices.

Bonlac's net income slumped 43 per cent in the six months ended December 31 because of lower prices for its dairy products and after drought forced farmers to cull cows they couldn't feed, reducing the amount of milk delivered to its factories.

Milk production in Australia, the world's third-biggest dairy exporter, declined for the seventh straight month in March from a year earlier because of the El Nino-linked drought.

Australia's total milk supply may fall more than a tenth in the year ending June 30, analysts have said.

"The proposal will ensure our long-term sustainability, a competitive milk price for our suppliers, full value for Bonlac shares and the recommencement of dividend payments following a return to profitability," chairman Noel Campbell said in the statement.

The plan will be discussed with Bonlac's farmer-shareholders at a week-long series of meetings which began yesterday.

Deloitte Corporate Finance will make an independent assessment of the proposal.

Bonlac's "intention to refocus on its core milk collection and processing activities would see its domestic ingredients business transferred to Fonterra as part of the total proposal," the joint statement said.

Bonlac's 1800 farmer-shareholders in Victoria and Tasmania states will receive an explanatory document by the end of the month before the proposal is put to a vote in late July.

It would need the support of at least 75 per cent of shareholders voting, as well as approval from Australia's Foreign Investment Review Board.

Fonterra will "provide support and flexibility in negotiations for the restructuring" of Bonlac's debt, the companies said, without giving details.

Bonlac had liabilities of A$519 million at December 31, including about A$98 million of perpetual notes which are traded on the exchange.

Fonterra, which has an AA- long-term credit rating, would have lower debt costs than Bonlac, which is rated B+, or four levels below what Standard & Poor's considers to be investment grade.

Fonterra sells yoghurts, cheeses, spreads and food supplements in 140 countries under the Anchor, Fernleaf, Anlene and Soprole brands and employs 20,000 people.

In Australia, it also owns Perth-based Peters & Brownes Foods and owns about 18 per cent of National Foods, Australia's biggest fresh milk supplier.