WA is experiencing its biggest shortfall in milk supply for 50 years as the three big processors battle to lock struggling dairy farmers into long-term contracts.
The supply squeeze has forced Lion, which supplies Woolworths, to truck in milk from interstate but the majority of the 150-odd producers in WA are seeing only a modest rise in farm gate prices which have hovered at about 45ï¿½ a litre.
Dairy industry consultant Steve Hossen said yesterday that the market had failed to deliver a big price rise to farmers because it was distorted by the Coles and Woolworths' market share and their $1-a-litre pricing policies.
"Normally when any agricultural product is as scarce as this is - and milk is as scarce as it has ever been in WA - the price should go ballistic," Mr Hossen said.
"In this case it won't happen. Manufacturers are trying to constrain the size of price rise because they haven't got the ability to pass it on under $1-a-litre contacts with the supermarkets."
Brownes and Lion are offering five-year supply contracts and Harvey Fresh three-year contracts as the milk war rages in the South-West and on the south coast.
Milk production in WA, which fell by 16 per cent to 338 million litres in the 10 years to 2012, is marginally down on the same time last year. Demand fuelled by population growth is up by an estimated 3.5 per cent.
WAFarmers dairy section president Phil Depiazzi warned producers to think twice before signing long-term supply contracts.
Mr Depiazzi said dairy farmers needed to be aware of their increased bargaining power.
"We understand processors are keen to lock people in but it is a concern that farmers are not being offered the premiums we think they should be to warrant signing for longer periods," he said.
"One of the problems is that if farmers do sign long-term contracts they lose leverage."
It is understood some of the big winners in the battle for supply between the processors have been about 30 farms which held off signing contracts. They are demanding better prices for their milk.
The other big winners have been dairy farmers on the south coast, with processors forced to drop transport charges of up to 7Â¢ a litre to zero over the past 12 months.
Brownes raised the stakes in the battle between processors last week when it signed an exclusive supply deal with Ravenhill Dairy.
Ravenhill, one of WA's biggest producers at about 8 million litres a year, previously supplied Lion.