The move, announced this week, follows farmers' calls for an increase in the price of milk as national production continues to fall.

Drought is largely to blame for the 20 per cent fall in domestic milk production over the past five years.

The dairy firm said the decision had been made because there was insufficient milk production in the Kiewa Valley, New South Wales, one of the worst effected areas by the drought.

While soft cheese manufacturing will continue at the company's Tangambalanga plant, hard-grated cheese production will switch to Cobram in October.

Doug Sims, site manager with Murray Goulburn, said that the measure was necessary because soft cheese uses less milk than hard-grated cheese.

"We don't have as much milk in this area as we used to have, so putting them in products that don't utilise as much milk, and we have the expertise to work our way through ... the decision was made to go down that track."

Farmers across Australia have urged for an increase in milk prices to offset rising production costs.

A Dairy Australia report published this year said that a second major drought in five years had affected 90 per cent of dairy farmers.

"The strong international outlook, as well as competition for reduced milk supplies, should see significantly stronger farmgate prices for the full 2007-08 year - possibly 10 to 15 per cent higher," the report said.

Murray Goulburn has told suppliers to expect a 15 to 20 per cent rise in opening prices, driven by strong global demand and a reduced supply due to the drought.

Murray Goulburn is one of Australia's largest dairy exporters and processes about 35 per cent of the nations milk supply.