Fonterra Chief Executive Miles Hurrell has announced the Victorian Western District factory at Dennington will close.
The announcement was made as part of a strategic review which is also looking at the company's two farm hubs in China and examining its partnership with Nestle in a Brazil joint venture.
Mr Hurrell described the Dennington decision as a "tough call".
"The Australian Ingredients business continues to feel the impact of the drought and other significant changes that mean there is excess manufacturing capacity in the Australian dairy industry.
“This is not a one-off for this season, it’s the new norm for the Australian dairy industry and we need to adapt. We need to get the most value from every drop of our farmers’ milk and, with the reduced milk pool in Australia, we must put it into our highest returning products and most efficient assets.''
Mr Hurrell said Dennington was over 100 years old and not viable in a low-milk pool environment.
The decision will throw 98 employees out of work.
Fontera released third quarter financial results revealing sales up but earnings before income tax down by about nine per cent.