4 The voluntary code
The dairy
industry code of best practice on contractual arrangements
26. The dairy industry code of best practice on contractual
arrangements—hereafter, the voluntary code—was created
in Great Britain in 2012 in response to concern about fluctuating
milk prices, among other things.[39]
About 85% of producers have signed up to it. Among its provisions
are: 30 days' notice of a cut to a farmer's price or other significant
change to contractual terms; a farmer who disagrees with a proposed
price change or significant change to contractual terms can exercise
a right to terminate the contract on three months' notice; and
processors are encouraged to engage with producers via democratically
accountable and representative producer groups. Three significant
questions have arisen in this inquiry: whether the code adequately
protects farmers against price changes; whether it should be statutory
rather than voluntary; and whether, either way, it provides sufficient
assurance for milk producers.
A COMPULSORY CODE?
27. EU Member States may introduce compulsory contracts
between milk producers and processors, and 12 have done so.[40]
The UK Government has argued, however, that a voluntary code is
preferable since it provides more flexibility, not least in permitting
farmers the right to walk away from a contract on three months'
notice. Compulsory codes require closer adherence to the EU milk
package. There is general acceptance that the code's introduction
has led to some improvement for milk producers, although concerns
remain about its scope and applicability.
28. The recent annual review of the code's operation
conducted by Alex Fergusson, a Member of the Scottish Parliament,
was broadly positive about its impact. Among other things, though,
he recommended that the code could be extended to retailers (it
currently applies only to producers and processors) to broaden
adoption. He suggested that including retailers might encourage
the 15% or so of current purchasers and producers who have not
signed up to the code to do so, without removing its voluntary
nature. Dr Judith Bryans, chief executive of Dairy UK, disagreed
with this: "at the point where a retailer makes the code
a condition of supply, it goes from being a voluntary code to
a mandatory code […] you are very often talking about small
artisan or speciality cheese-makers. If the retailer requires
somebody to be code-compliant in order to supply them, you could
find an awful lot of those people losing their contracts and going
out of business".[41]
KEEPING THE CODE VOLUNTARY
29. Farmers' organisations have raised concerns about
the take-up of the code, but we detect little pressure for a move
towards a compulsory code. Farmers Union Wales sees a "major
weakness" in its being embraced by only 85% of producers,
and fears that code-compliant producers may be at a competitive
disadvantage against those who have not signed up.[42]
Dr Bryans, however, suggests that "a lot of [those not signed
up] are very small family businesses who have been in relationships
with their farmers for generations. A lot of those people would
not have signed up to the code because they do not see that code
as being relevant to them because they have known their farmers
for so long".[43]
Rob Harrison of the NFU praised the code's present flexibility;
David Handley of Farmers for Action "certainly would not
want to see the voluntary code made statutory".[44]
Farming Minister George Eustice acknowledged that a significant
number of smaller producers are not signed up, but argued: "What
we have actually goes further and achieves more than the EU milk
package. […] If we were to put it on a statutory footing,
we would actually lose what is really valuable about the voluntary
code".[45]
30. We recommend that the dairy industry code
of best practice remain voluntary in order to retain the flexibility
and scope it presently offers. The current crisis affecting dairy
farmers is, however, a significant test for the arrangements introduced
after the 2012 price crunch. The code is subject to annual review
and we expect the 2015 review to take full account of the lessons
learned from the present market conditions.
THE CODE'S SCOPE
31. On the wider question of how far the code has
helped farmers since 2012, there is cautious agreement that it
has been beneficial within its limits. None the less, concerns
remain about how far it protects farmers, not least because the
code does not directly affect farm gate milk prices, concentrating
instead on contractual relationships. NFU Scotland argues that
fundamental weaknesses remain in bargaining power, in spite of
the code's existence.[46]
Farmers Union Wales notes that the ability to leave a contract
and switch producers is "severely limited in many areas by
the number of purchasers operating in those areas. Smaller producers
and those in remote areas may therefore be left vulnerable, despite
the introduction of the Dairy Code".[47]
And Dairy Crest UK points out that even 100% compliance with the
code would not necessarily "make any difference to current
farmgate milk price dynamics which have been driven by global
markets".[48]
32. A perception none the less exists that the code
does or should have an impact on prices. Rob Harrison, the NFU's
dairy board chairman, calls this a misconception: the code "will
not affect the market so there is a lot of misunderstanding throughout
the supply chain about what the code is there to do and how it
should work". [49]
And, as Dairy UK chief executive Dr Judith Bryans told us, "it
was not ever built to deliver a price and it cannot address pricing
issues. I am not entirely sure that there is any code in a free
market that can address a pricing issue".[50]
33. Neither a statutory nor a voluntary code can
set or regulate prices in an open market. None the less, the instability
of current pricing within the dairy industry in general and for
milk in particular implies that closer attention is needed in
the next review of the code to the damage that sharp and rapid
shifts in price do to the industry, not least in forcing the exit
of producers for whom short-term market fluctuations may prove
fatal. Greater guarantees of likely future income are required
if farmers are not to continue to depart.
39 A separate code applies in Northern Ireland. Back
40
Defra (DAI0016) Back
41
Q52 and Q53 Back
42
Farmers Union Wales (DAI0002) Back
43
Q52 Back
44
Q10 and Q11 Back
45
Q89 and Q93 Back
46
NFU Scotland (DAI0001) Back
47
Farmers Union Wales (DAI0002) Back
48
Dairy Crest (DAI0014) Back
49
Q8 Back
50
Q50 Back
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