Milk deal will turn a profit: Helou

MURRAY Goulburn boss Gary Helou insists the milk processing co-operative can make a return on its Coles private-label contract.

MURRAY Goulburn chief executive Gary Helou insists the milk processing co-operative can make a decent return on its private-label contract with Coles supermarkets, despite the rest of the industry struggling to break even.

Mr Helou said Murray Goulburn was "absolutely not" accepting a lower than commercial rate of return on the $120 million it will invest to build two new milk processing plants in NSW and Victoria to service the 10-year Coles contract that begins in July next year.

"We have a long-term supply with a major customer that has an attractive price attached and we're quite happy with the result," he said.

Under the deal, farmers supplying the 200 million litres of milk required a year will be paid an above-market price, although Mr Helou refused to reveal the size of the premium or how it would be calculated, citing commercial sensitivity.

Analysts have questioned how the co-op can turn a profit on the deal, which is believed to have been struck at a 10c a litre discount to the price Coles pays existing supplier Lion, as well as paying farmers an above-market rate for their milk.

"We are investing in state-of-the-art plants where we will have a fraction of the headcount they have and a faster, lower-cost supply chain," Mr Helou said.

In 2010 Lion announced a $65.5m upgrade of two of its dairy plants three years after its Japanese parent Kirin bought National Foods, the dairy processor behind Pura Milk.

But Macquarie Equities analyst Greg Dring estimates dairy processors in Australia operate on margins no higher than 2 per cent and in some cases are losing 3 per cent on every sale, and therefore make too little to cover plant costs.

Mr Helou denied the Coles deal was ensuring Coles would continue to sell milk for just $2 for two litres for the next decade -- a price point farmers say is bankrupting them.

"We can't stipulate the shelf price of any retailer, but our contract is built on a farmgate price that we set and is based on commodity prices and other exposures we have, and a premium is locked into that -- that doesn't entrench dollar milk or any price for that matter," he said.

Mr Helou is set to address Global Food Forum conference organised by The Australian and The Wall Street Journal in Melbourne today, regarding growth opportunities for Australian food businesses.

While competition between Coles and Woolworths had contributed to food price deflation, Mr Helou said many food prices including dairy were rising -- but farmers had not received any benefit as processing and marketing was controlled by third parties.

Australian-owned food companies also had failed to invest in leading-edge processing technology or targeted international markets, leaving them vulnerable to takeover by multinationals.

"The future today is for Australian-owned businesses and co-operatives to link their processes and marketing efforts with exciting growth market, such as Asia," he will say.

Murray Goulburn seeks to become one of the top 20 dairy firms in the world, which would involve lifting annual revenue from $2.2bn to $4bn.