Embattled dairy processor Murray Goulburn has lost a $108 million contract to supply Woolworths' private label cheese, UHT milk, adult milk powder and cheese to competitor Bega Cheese.
MG was formally notified on Thursday night of the supermarket giant's decision, after it was outbid in a competitive tender.
The company said it has retained the private label contracts for mozzarella shred cheese and private label butter. Murray Goulburn said this butter contract has been expanded to include additional products and increased ranging.
While the company will take a $108 million hit to annual revenue, it claims the financial impact in the 2017 financial year will be "limited given timing of existing contracts completing".
The dairy group said it will "adjust future manufacturing planning to redirect this capacity to other markets, limiting future revenue and earnings impacts".
Murray Goulburn did not revise guidance for 2017. In August the company forecast net profit of $42 million after tax.
Interim chief executive David Mallinson defended the company's approach to the bidding process.
"We believe our tender to retain this business was competitive, whilst balancing acceptable returns for our products given the current environment for our farmer/suppliers and investors".
The Woolworths contract will expire in January, a month before its $130 million deal to supply Coles with private label cheese starts.
Murray Goulburn shocked the sector in April when it downgraded its forecast 2015-16 profit to between $39 and $42 million, down from its February guidance of $63 million, itself revised from its prospectus the previous July of $89 million.
Chief executive Gary Helou resigned on the same day and the company implemented a savage and retrospective cut to the farmgate price it pays its farmer-members, including clawback provisions for milk already paid for.
During the recent federal election campaign, the Turnbull government announced a rescue package for dairy farmers, including low-interest loans.
Helou had aggressively scaled up the co-operative's production capacity, building debt-funded plants and signing a 10-year deal to supply Coles' private label milk, in the lead up to a partial float last year. This strategy coincided perfectly with a crash in the global price of milk powder.
Bega will take over Woolworths' cheddar cheese production in January. Murray Goulburn will continue to produce Woolworths' private label butter and its mozzarella - a vastly smaller cheese category than cheddar.
It's understood the supermarket giant was determined to keep the contract with an Australian-owned processor, leaving third player Canada's Saputo, owner of Warrnambool Cheese and Butter, an unlikely tender winner.
- This story first appeared on The Australian Financial Review.