Ministers are to order a review of the nursery school free milk scheme claiming abuse of the system means the Government is being billed up to £1 a pint.
Internal Department of Health audits revealed middlemen are charging around double the retail cost under a "scam" that is costing taxpayers an extra £10 million a year.
A loophole in the system means the Government is obliged to pick up the bill, regardless of cost, submitted by firms that are acting as schools' go-between with suppliers.
Government sources insisted every eligible child will continue to receive their free milk despite the planned shake-up of the service next year.
One option that will be considered is setting up a system of national suppliers to cut out the middlemen.
"Every child will continue to receive their free milk," a government source said last night. "That entitlement will not change, but the system has to.
"Taxpayers will be furious that on Labour's watch agents took over this scheme, charged vastly inflated prices and literally milked the taxpayer.
"We are clear that this abuse of taxpayers money is going to end."
Plans to alter provision have proved politically explosive for the Conservatives in the past.
Last year Prime Minister David Cameron slapped down suggestions by minister Anne Milton that the supply would be scrapped saying he "did not like" the idea.
In 1971 Margaret Thatcher earned the nickname "Thatcher, Thatcher milk snatcher" for ending free school milk for the over-sevens while Education Secretary.
Ministers have been shown figures suggesting that additional costs could hit £30 million a year in the next few years.
Every child under five receives a third of a pint of milk free of charge at school each day and the nurseries claim back the cost from the Government.