Industry body Dairy Australia will pay biotechnology group Cryptome Pharmaceuticals to conduct research for three years.
Cryptome said it was confident the funds (equal to €530,000) would enable it to uncover new proteins and protein fragments in milk that could provide health and nutritional benefits, and even help manage certain cancers and heart disease.
The group said milk products were known to be a hotbed of bioactive material and also that milk is generally viewed as a cost-effective source of high-value proteins.
This could save producers money, with peptides produced from new milk proteins likely to be measured in hundreds or even thousands of kilograms.
Dr Phillip Marzella, of Dairy Australia, said the research would build on a strong new focus on research and development in the Australian dairy industry. Dairy Australia invests around $30m (€18.7m) of special dairy farmer payments and taxpayers' money into dairy R&D.
"This collaboration is also another example of how Dairy Australia's Dairy Chain Innovation Program is working with leading technology partners and companies to ensure the Australian dairy industry is globally competitive," said Marzella.
Many dairy and ingredients firms in Europe believe the nutraceutical, or functional, foods sector will be one of the biggest growth drivers in dairy markets over the next few years.
Novel proteins are expected to play an important part in this development. Market research firm Frost & Sullivan has predicted that the European protein ingredients market, worth €3.77bn in 2004, will reach €4.43bn in 2011.
High-value milk protein isolates and concentrates have been one of the fastest growing sectors in recent years and account for half of the total market.
Those able to discover and apply novel proteins would inevitably gain an advantage, and may also be able to increase revenue through licence arrangements with other areas of the food industry.
One of the biggest discoveries in the last few decades has been the health and nutritional benefits associated with whey proteins.
Dairy processors had always discarded whey as a useless by-product of cheese and casein production until researchers found it was rich in certain amino acids, including cysteine, which is thought to help maintain a healthy immune system.
This, together with whey's cheapness and low-fat credentials, has turned whey into one of the key components for functional dairy products and industry innovation.