EU Proposals for the Dairy Industry

Written evidence submitted by N ational F armers’ U nion (DRY 07)

The NFU welcomes the opportunity to respond to the EFRA Committee inquiry into the EU Commission’s Dairy Package Proposals. The NFU represents more than 55,000 farming members in England and Wales. In addition we have 41,000 countryside members with an interest in farming and the country.

In addition to the response provided here the NFU has provided an appendix, which includes extracts from members’ accounts of their own experiences with regards milk contracts, and evidence on the operation of the dairy supply chain in Britain to better illustrate the impacts and issues reported here.

The NFU is happy to provide any additional information requested and would be willing to give oral evidence to the EFRA committee as required.

Introduction

1. There is an overwhelming amount of evidence available to suggest that the dairy supply chain is currently not functioning correctly (Annex 2). Throughout 2010, for example the industry experienced dairy companies announcing record profits and months later announcing profit warnings and share price drops; the price of dairy commodities on world, EU and UK dairy markets soared (and even achieved record levels in some cases), yet milk prices to dairy farmers stagnated throughout the year and retail gross margins on dairy increased, while margins to the rest of the supply chain fell.

2. It was against this backdrop of supply chain chaos that the EU Commission established a High Level Expert Group to examine the long-term future of the EU dairy sector. From the outset, the HLG recognised that contractual relationships between milk producers and purchasers are fundamental to ensuring fairness in the dairy supply chain, particularly with quotas being phased out by 2015.

3. The Commissioner for Agriculture and Rural Development, Dacian Ciolos, has come forward with a package of formal legal proposals to amend the single CMO regulation as part of its response to the HLG on milk’s recommendations. In its proposals the Commission has identified a significant imbalance in bargaining power between farmers and dairies and a lack of certainly and control about the price farmers will receive for their milk. The package seeks to address bargaining power and create a harmonised approach across the EU in four different areas:

· Providing a legal instrument for member states to put in place supply contracts with specific terms between farmers and milk processors

· Allowing farmers to negotiate contractual terms collectively through producer organisations (POs)

· Extending the exemptions that apply for inter-branch organisations (IBOs) in the fruit and vegetables sector to the dairy sector

· Requiring milk processors to declare information on milk deliveries

4. The NFU believes that the proposals in respect of contracts and producer organisations are of most direct relevance to British dairy farmers. In particular, the NFU believes that the Commission proposals on contracts provide a basis for addressing the significant flaws that exist in current contractual arrangements that force dairy farmers to supply all of the milk they produce to dairies, exclusively, for a duration not less than 12 months with very little, if any, predictability about the price he or she will be paid for the milk.

5. Regulation is always a last resort, yet the dairy supply chain provides a strong example of where regulation can have a legitimate role to play in ensuring fair dealings, reducing risks and raising the benchmark for all.

The Commission’s Proposals

Milk contracts

6. The Commission proposes that member states can choose to make formal written milk contracts a compulsory requirement. However, we are concerned that this could undermine the desire to see a harmonised approach across the EU and could allow member states to opt out of measures that could address the serious problems in milk contracts. There is no compulsory requirement for milk contracts in the UK currently, yet the vast majority of milk deliveries in the UK are already covered by written contracts. However, we believe that milk contracts as they exist in the UK are unbalanced and unfair, transferring all the risk of market competition and fluctuations onto farmers.

7. Dairy farmers are locked into contracts that compel them to send all of their milk to one buyer, for a normal minimum notice period of 12 months with absolutely no certainty about the price they will be paid from month to month, let alone a year. Contracts such as this exist in no other industry. Milk is a perishable product, that has to be collected every day, and dairy farmers have no choice but to agree to these contracts, thus there is no ‘freedom’ to contract from a farmer perspective. As such, the NFU believes that the UK government should follow the lead of the Commission in making written contracts compulsory to ensure that British dairy farmers are able to benefit from these proposals.

8. While the Commission’s requirements for milk contracts are elements that the NFU would consider to be necessary to have in any milk contract (as set out in the NFU’s template raw milk agreement and guidance notes for farmers) the NFU has also expressed the need to consider exclusivity alongside any volume specification so that producers are not tied in to one milk buyer. This will become particularly important once quotas are removed in 2015.

9. There is a risk that volume clauses in milk contracts could become a replacement form of quota, managed and regulated by milk buyers. The ability for dairy farmers to supply agreed volumes to one or more buyers would improve competition for milk and strengthen producer bargaining power. The NFU would like to see the Commission consider exclusivity alongside its contract requirements.

10. Importantly and, we would say most significantly, the Commission will require that the price is written into the contract. By definition therefore a means of varying the price must also be agreed between the parties. This will represent a major step-change in milk contracts and go a large way towards addressing the current lack of certainty and clarity on price that are offered to dairy farmers in milk contracts currently. However, a means of varying the price must also be agreed between the parties. The requirement to have an agreed method of price variation written into the milk contract would strengthen the Commission’s proposals. Furthermore, we suggest that price variation and termination clauses be linked, and that any price variation that occurs outside an agreed formula must be agreed freely between dairies and farmer representatives, or Producer Organisations.

11. As the current statutes for UK co-operatives do not meet the requirements set out under the Commission’s proposals these measures will be equally applicable to dairy farmers supplying co-operatives as it will be to dairy farmers supplying private dairy companies. The NFU certainly believes that farmers supplying co-operative businesses would also benefit from more balanced, professional, business-like contracts, which are tailored to the supply requirement of milk buyers and also bring greater certainty to the way milk prices are determined. At the same time milk contracts offered by co-operatives and private dairies should allow dairy farmers to capitalise on other selling opportunities, manage risk, grow their business, and prepare the ground for the end of milk quotas in 2015.

Producer Organisations

12. Producer organisations can play a role in increasing bargaining power provided that they have sufficient scale, capital and are professionally run. These proposed amendments could become applicable to UK farmers if the current direct selling groups (Dairy Crest Direct, Wiseman Milk Partnership etc) seek formal PO status. However, there needs to be much greater clarity provided at a member state level on what the requirements are, and what responsibility this would provide to farmer representatives.

13. The NFU suggests that the following measures could be complementary to those proposed in the dairy package with regard to Producer Organisations:

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· The appointment of independent facilitators by producer organisations could be seen as a useful first step in seeking to resolve contractual disputes between farmers and dairies.

· The NFU believes that there is a strong case for improving the professionalism of producer organisations. This could be achieved by employing the services of professional negotiators to assist POs / representative groups in negotiations and price discussions with dairy companies.

· Greater uptake of formal training by farmer representatives could be encouraged through the Rural Development Programme and is going to become more important as the level of responsibility and influence farmer representatives have increases.

· Adding value and innovation provides some opportunities for farmers and farmer co-operatives to increase their bargaining power with dairies and retailers. Rural Development programmes continue to offer a means by which innovation and value-adding can be encouraged although there should be some examination as to the flexibility of programmes to ensure that funds are accessible.

What can Government do?

14. The measures proposed by the Commission are certainly promising, and have the potential to be beneficial for UK dairy farmers, providing Defra gives them its full backing. The proposals mean that the UK Government now has a unique and powerful opportunity to help address the dysfunctions in the dairy supply chain by acting on the EU Commission’s proposals for changes to milk contracts and producer bargaining power.

15. Specifically we would urge UK Government to:

· Introduce legislation to make the use of written contracts between farmers and dairy companies compulsory; to eliminate unreasonable contractual practices especially with regard to milk pricing and create fair and balanced contractual terms prior to the removal of quotas.

· Draw up a contractual code of practice that highlights best and worst practice in relation to raw milk contracts, backed up, if necessary, by regulation to ensure fair dealings between farmers and dairy companies. This could have a broader scope than the Commission’s proposals and encompass a wider set of common contract clauses such as price variation, termination, exclusivity and assignment.

· Prepare standard template contracts as an example of best practice. The NFU’s template contract would provide an excellent basis for this.

· Examine whether the operation of Rural Development programmes can be improved to assist farmers and producer organisations in adding value and by enabling the employment of professional support for negotiation.

· Investigate the possibility for producing more transparent information on the distribution of margins in the supply.

2 March 2011