$1 milk here to stay

In Western Australia Brownes has been contracted for seven-and-a-half years from July.

The deals follow a similar arrangement between rival supermarket chain Coles with Victoria's other big milk processing company Murray Goulburn co-operative which begins supplying $1/L private label milk in NSW and Victoria in July.

Dairy farmers are angry the long-term Woolworths contracts indicate the $1 milk scourge of the domestic milk industry is showing no sign of fading.

But the new contracts also suggested the supermarket giant was worried domestic milk supplies were getting tighter and it had to lock in long-term contracts before the market became too competitive, said Australian Dairy Farmers (ADF) spokesman Karl Leibich.

"We know the prospect of milk supplies running short is not just a theory - $1-a-litre supermarket prices have certainly contributed to the decline in production in Queensland and Western Australia," he said.

"Woolworths' long-term bottling contracts will have some benefit in that they provide some certainty for processors and farmers to plan.

"They also require Select milk to be originated from farms in those States in which it is sold - that's a particularly good move for places like Queensland."

Mr Leibich said ADF still strongly opposed $1 milk because it squeezed processors and farmers, but accepted it could not compel supermarkets to change marketing strategies especially when consumers wanted cheaper grocery bills.

"But given milk is in bigger demand, $1 milk doesn't necessarily have to be here to stay forever," he said.

ADF also hoped pressure on Canberra to reform retail competition laws would force supermarkets to modify their strategies to avoid penalising producers.

However, Queensland dairy farmer Ross Lehmann, at Kalbar, said many producers in his State were devastated Parmalat was given such a long contract and they feared $1 milk was here to stay.

"Farmers cannot pay their bills now despite their best efforts and they can no longer see a chance of getting a milk price rise which is desperately needed now," he said.

"Parmalat has offered an extra five cents for the next three months provided you sign an exclusive supply contract until 2016, otherwise you can have 2c/L if you are still supplying and at the same level of supply in January 2015.

"We're basically being treated no better than the farm dog."

Woolworths argued that while it was a reluctant participant in the $1 milk war it would continue to selling the $1/L range "as long as Coles does".

"We will continue to match our competitors when it comes to our Select brand milk," a company spokesman said.

"Woolworths will always offer our customers the lowest prices on groceries and milk is no exception."

Fonterra and Parmalat will invest in new processing plant and packaging technology in a direct response to winning the house brand milk contract.

New Zealand-owned Fonterra will spend at least $30 million on new milk processing lines at its Cobden site in south western Victoria which will start operating in July next year.

Fonterra, which has traditionally turned its farm milk receivals into dairy products such as butter, cheese and milk powder, confirmed the proposed long-term arrangement (still to be ratified) would give its suppliers market certainty to invest in their farm businesses with the confidence.

In Queensland Parmalat will install leak-proof foil seal equipment on its bottling lines - also being introduced by Brownes and Fonterra - and improve filling points.

Parmalat maintains its current Woolworths house brand contract in NSW for two years, while Lion maintains its existing yearly contract arrangements with Woolies in South Australia, Northern Territory and Tasmania.

Lion has lost its WA contract to Brownes Dairies and will cede its current Victorian packaging contracting arrangements when Fonterra takes over.

Woolworths supermarkets managing director Tjeerd Jegen claimed the new contracts were a win for farmers and ensured customers received even fresher milk produced nearby.

"Fonterra has told us that with the certainty of a long-term contract they and their farmers can invest and innovate.

Fonterra Australia managing director Judith Swales said the "milestone initiative" would expand her company's white milk portfolio complementing its Riverina Fresh milk business in NSW.

Australia was Fonterra's second largest milk pool outside NZ and the business wanted to take a long-term view and to "deliver profitability, growth and sustainability in the dairy industry".