Australia's dairy industry is the country's third most important rural industry at farmgate - valued at A$3.2 billion in 2004/05 - and the fourth most important in exports.
However falling commodity prices are expected to eat into its dairy exports in the coming year.
The sector is also facing a threat from other products like soymilk which has been heavily marketed as a milk alternative, as well as successful brands from rival markets.
Just this week, Denmark's Arla Foods said it had sent extra containers of its Lurpak butter to Australia to meet the jump in demand for the product that is three times more expensive than domestic butter.
The industry body Dairy Australia said the new centre was designed to place the Australian dairy industry "at the forefront of world dairying innovation and thinking" .
It will be charged with developing higher margin dairy products and tapping into emerging trends and markets.
The new centre will replace five existing manufacturing sector centres including the Dairy Process Engineering Centre, Australian Starter Culture Research Centre, UHT Centre, Australian Cheese Technology Program, and Dairy Ingredients Group of Australia.
"The new centre will build on a decade of good science and expertise developed by the existing centres and it will adopt an 'open innovation' approach to encourage a co-investment and open innovation culture between research investors and manufacturers," said Dairy Australia managing director Mike Ginnivan.
The centre will be based in Werribee, Victoria and is expected to open its doors in January.
It will be owned and controlled by the industry and is already backed by Murray Goulburn, Dairy Farmers, Warrnambool Cheese & Butter Factory, Tatura Milk Industries Limited, Bega Cheese, National Foods and Parmalat.