DAIRY farmers and milk processors are losing money on nearly half of all drinking milk sold in Australia.

It was revealed this week that milk processors are selling milk to Woolworths and Coles at a loss in a desperate bid to hold on to private label, or home-brand, contracts.

The strategy is devastating farmers and threatening the future of the industry, a Senate Inquiry into competition and pricing in the Australian dairy industry was told on Monday.

Colin Lawson from the Amalgamated Milk Vendors Association, which represents more than 500 milk vendors and distributors who sell and deliver milk to supermarkets, service stations, convenience stores and cafes across the country, warned that the industry must make urgent changes.

"Fifty per cent is sold at break-even or a loss," Mr Lawson told the inquiry.

"There is very little if any profit in supermarket generic brands," Mr Lawson said.

"Generic brands represent more than 50 per cent of drinking milk in Australia. It sets the benchmark for the rest of the market, " he said.

"It's a spiralling effect,"

Woolworths and Coles home-brand two-litre milk currently sells for $2.17.

While it was not known how much they were buying it from processors for, the retail price was 6c less than retail prices in 1998, Mr Lawson said.

"The branded price is much higher, and in a way they subsidise the Coles and Woollies contracts," he told the inquiry.

But it was useless blaming retailers, who were in the business of delivering lower prices to their customers and higher profits to their shareholders.

"Of course the supermarkets don't sell at a loss. Processors and farmers take the hit," Mr Lawson said. "If you lose a house brand contract you're letting 100 million litres slip through your fingers."

Changes to the Trade Practices Act were needed to stop the problem.

"Or we are not going to have a dairy industry in the future. "For food security we need a solution to have a more settled farmgate price," he said.

Milk processors National Foods and Fonterra, appearing before the inquiry, would not reveal how much they were paid for supplying milk for supermarket house brands.

But National Foods conceded there was considerable pressure from retailers regarding pricing.

The company also revealed there was little or no difference between a full-fat house brand and a generic brand of milk, despite the difference in price.

"Full-fat milk will be the same. There is more difference in milk that are not full fat," Corporate Services Group Executive Connor O'Malley said.

Senator Colbeck repeatedly questioned the processors about supermarket pressure on Monday.

"It must place a lot pressure on you and the farmers are the poor bloke at the end who gets what's left," he said.

Australian Centre for Retail Studies industry analyst Lisa Tartaglia said the suppliers' losses were not surprising.

"Coles and Woolworths are always competing on price," she said.

Coles and Woolworths, who will appear before the inquiry next month, were unavailable for comment.

Meanwhile, National Foods told the inquiry it was working to rebuild its relationship with Tasmanian dairy farmers and consumers, following the recent four-month price dispute.