Dairy contract regulations – how we're keeping dairy farmers at the forefront

The new legislation, which will cover all contracts between producers and first purchasers, will need to pass through both the House of Commons and the House of Lords before entering into law.

Once an announcement has been made and the SI (statutory instrument) published, the NFU will update members on what the new legislation will mean for them, timelines for implementation and how farmers can work together to best utilise the powers set out under Section 29 of the Agriculture Act regarding fair dealing obligations for business purchasers.

The NFU's five key points for contract reform to support transparent, fair and functioning supply chains focused around:

1. Pricing mechanisms
2. Relationships and farmer representation
3. Exclusivity and volume management
4. Elimination of unilateral changes and one-sided contract terms
5. Consequences of breach

Read: Long-awaited dairy contract legislation to go before parliament.

The UK government has formally announced new dairy contract regulations that are set to come into force in late 2023.

The new regulations promise to empower dairy farmers’ negotiating position, helping to ensure fairer prices, transparency and accountability across the supply chain.

Speaking on the announcement, NFU Dairy Board chair Michael Oakes said: “These new regulations mark a significant step forward in the government’s efforts to increase fairness and transparency in the dairy supply chain.”

You can read the full announcement and key takeaways at: New dairy contract regulations to promote fairness set to be introduced

Following the closure of the consultation period, the Defra is currently developing a ‘Milk Purchasing Code’ which outlines legally enforceable standards to which dairy contracts must comply.

It aims to prevent abuses of power, unfair contracts clauses and improve transparency for dairy farmers.

Talking about this approach, NFU Dairy Board chairman Michael Oakes says: “The NFU has been supportive of this approach for a long time, and it has been great to see it all come together over the years.”

Aims of the code

• Price – providing more transparency to farmers on pricing and allowing flexibility and choice on options to generate milk prices
• Notice periods – formalising notice periods to protect farmers and to allow proper market function
• Exclusivity – possible options for a non-exclusive contract in some circumstances, for example, restricting exclusive contracts in combination with a volume cap, and therefore allowing a farmer to supply more than one buyer
• Variation – tackling one-sided contract clauses and unilateral variation, offering more fairness to contract changes and negotiation

Talking about tackling bad practice, Michael Oakes said: “As much as we have been providing the farmers’ perspective on dairy contracts, we also recognise that the regulation needs to work for dairy processors.

A lot of the good practice which already occurs has been recognised by Defra, and the regulation will be focused on tackling the bad practice and preventing potential abuses of farmer suppliers.”

Next steps

Defra is currently in the final drafting stages of the process. Following this, the new regulation will be laid as a Statutory Instrument in Parliament.

It is expected that a two year implementation period will ensure after this, which will allow farmers and dairy processors to, where necessary, amend contracts and set up new representative bodies.

Speaking on the journey that dairy contracts have been on, Michael said: “The journey of dairy contracts has been a long one, with many strong opinions and much discussion along the way.

“However, the NFU National Dairy Board and I feel like we are on the brink of achieving something which could genuinely put the dairy industry on a much more certain footing and allow us to move on from some of the issues of the past.

“At the moment, we are used to hearing a lot of bad news and uncertainty in the world, but hopefully this piece of work offers dairy farmers some stability to help build the future of their businesses on, and create something positive for the industry to embrace.”

Following sustained campaigning by the NFU and other farming organisations, on 3 February the UK government announced a new Code of Conduct for the dairy supply chain. The code seeks to provide a guiding framework, establishing minimum standards and providing businesses with the flexibility to adapt contracts to their individual circumstances.

Below, NFU Dairy experts provide more information and guidance on the Defra announcement.

What has lead to this Defra announcement?

The NFU's dairy board and dairy and legal teams have been working hard for many years on dairy contracts, with the aim of improving relationships, transparency and fairness in the supply chain.

In 2012, the NFU was a critical driver in the development of the Dairy Contracts VCOP (Voluntary Code of Practice). While this was a step in the right direction, it was not enough to create significant and lasting change.

Since then, the dairy sector has faced many challenges, and while there have been some improvements towards fairer contracts and better relationships, it has become clear that regulation is the only way forward, so we are delighted to see government take this important decision.

In summer 2020, a long-awaited Defra consultation on regulation of contracts was announced and the NFU provided a robust response on behalf of our members, following a series of regional and national engagement meetings to develop our response.

We are proud that many of our members contributed valuable, individual responses to the consultation, with 88% of the 839 responses to the consultation coming from producer respondents. Response rates in each devolved nation also provided good geographical representation for all parts of the UK.

The government has published the summary of responses to the consultation.

We have provided a short analysis of some of the key areas below. For the full details, please see the link, above.

Views on legislation

The question around the need for contract regulation prompted a significant demand for legislation; 72% of respondents either ‘agree’ or ‘strongly agree’ that contract reform legislation is needed.

A significant majority of respondents from Great Britain support the introduction of UK-wide legislation, highlighting the need for a level playing field. However, some specifically referenced different circumstances in Northern Ireland, noting the milk market there is export-focused, co-operative led and heavily dependent on cross-border trade with the Republic of Ireland.

This is something the NFU is working with our colleagues in the Ulster Farmers Union to ensure the correct approach is taken.

There was a mixed picture on those who have experienced problems with contracts, but a number of processors shared the view that, as not all processors currently follow the Voluntary Code of Practice, it has created an imbalance across the sector.

Price

Most respondents favour the inclusion of a price mechanism within a contract. Many respondents suggest this would improve the overall transparency of the contract and facilitate long-term planning.

A number of respondents (including the NFU) recognise the need for flexibility in developing pricing mechanisms.

There was also a fair amount of support to change the system of ‘buyers’ discretion’ to set price.

There was strong support for pricing mechanisms to be detailed in contracts, but processors raised concerns that this could lead to more price volatility.

The government has indicated that price will be one of the main areas for further discussion to find a suitable way forward, working with the industry.

Volumes

Most respondents did not favour fixing of volumes in contracts, although some saw merit in using specified volumes to prevent overproduction and flooding of the market.

The external factors in milk production and volatility of the markets were flagged as key issues, but overall there was no consensus on the volume questions.

Duration

The responses show a preference for a minimum contract duration of 12-months. However, substantial numbers of respondents preferred both longer and shorter durations, which shows the need for flexibility. There was also support to maintain rolling or ‘evergreen’ contracts.

Opinions were divided on the issues of review periods for contracts and periods for fixing of price in contracts.

Termination

A large majority believe termination clauses should be mandatory in a contract and there is support for this across both producers and processors; 85% of producers either strongly agree or agree, as do 96% of processors.

Three months was deemed to be the most favoured option for notice periods for farmers to terminate a contract, but there was some support for 12 months, especially from members of co-operatives. There was also support for lower notice periods for those on contracts with discretionary pricing mechanisms.

On the part of the processor giving notice to a farmer, the consensus was that 12 months is the most favoured approach for both minimum and maximum notice periods allowable, as this is a suitable time period to allow the farmer to plan and find a new buyer.

Variation

The overwhelming majority support that any contract changes should be agreed between both parties, thus wishing to remove the ability for either party to make unilateral changes.

In terms of the notice required for any changes, many support three months as a minimum, but it is noted flexibility may be required, depending on what the change is.

Charges and premiums

There is a strong consensus that contractual terms and conditions should be set out in clear and unambiguous language. This result is consistent across both producers and processors and there is recognition that this will hopefully leads to fewer disputes.

Exclusivity

Opinion is divided on whether exclusivity should be prohibited or not. There is support for exclusive contracts, particularly from co-operative members, but also some considerable support for non-exclusive contracts from farmers who believe it could help them manage risk and engage multiple buyers.

Dispute resolution

The majority of respondents highlighted that legislation will only succeed if there are meaningful sanctions for non-compliance.

There was no major consensus on how this should be approached by, but there was support for an independent adjudicator or ombudsman to enforce new regulations. Many others also highlighted need for different levels of enforcement.

Producer organisations

There was strong support for work to encourage the use of producer organisations. Many responses suggest that producer organisations will help to create a more equitable sector through the promotion of farmer representation and enhanced bargaining power.

This may not be part of any regulation, but could form a crucial part of the future for dairy farmers.

Implementation

The majority thought that 12 months was an appropriate transition/implementation period, but there was also support for longer periods, with processors favouring two years.

What next?

While the important work now begins to collaborate with government and industry in developing the legislation and getting it right, this is a prominent step towards a fairer future for the dairy sector.

There is still significant detail that will need to be considered and the NFU will be heavily involved, alongside other industry colleagues across the supply chain, in stakeholder engagement work in Defra in finding a path through some of the challenges, including around pricing mechanisms and a code regulator.

This work will feed into designing the SI (Statutory Instrument) that will then be laid into law, using the regulation making power in section 29 of the Agriculture Act 2020.

We will continue to engage with members throughout the process, through live events, online articles, through the Dairy Focus newsletter and via regional board meetings. We look forward to working with members and collaborating alongside industry and government through the code development.

This consultation closed on 15 September 2020. 

Flexible and innovative regulation of dairy contracts will help ensure the sector’s sustainability and improve the way dairy farmers and processors work together, the NFU has said.

The NFU has submitted its response to the landmark government consultation on the future of dairy contracts that has presented the dairy industry with its most important conversation in a quarter of a century.

The government launched the consultation after looking at the issue for two years when a review by the Groceries Code Adjudicator found an uneven distribution of power within the dairy supply chain.

NFU dairy board chairman Michael Oakes said: “The NFU has been consulting its dairy farmer members widely over the past few years to help develop our consultation response. The consensus is that it is time to change and for the better; to change the structure of the dairy industry so it is more sustainable, progressive and improves the way farmers and processors work together.

“For far too long, dairy farmers have borne the brunt of contracts that are weighted heavily in favour of the milk buyer who can change contract terms and pricing mechanisms, and even introduce retrospective penalties and price cuts without negotiation.

“We want to see freely negotiated and flexible contracts which are tailored to the needs of both buyers and dairy farmers. Fairer contracts should increase transparency and trust, that benefits both sides, and mean that any changes need to be mutually agreed.”

NFU members: Read the NFU’s summary response to the dairy contracts consultation.

Key areas of the NFU’s response are:

• Outlining changes to the system of ‘buyer’s discretion’ which is archaic and used very rarely in other countries or sectors of agriculture. A farmer should have transparency and influence over the mechanism which sets their price rather than it being dictated to them.
• Giving farmers the option to supply more than one milk buyer. For many farmers this will not be of interest, but for others it could become a valuable tool. Dairy farmers should be given that choice.
• Our views on how the regulation should be policed. We would like to see government consider how a structure such as the Grocery Code Adjudicator could be used which is independent and effective. The regulation needs to be backed up with strong powers, to ensure compliance and truly drive change.

Michael Oakes added: “The consultation process with our dairy farmer members and industry has raised a number of concerns which we also address in great detail as part of our consultation response.

“We recognise the good practice and collaboration which already occurs in the British dairy sector. We have spoken to a number of co-operative businesses to understand their concerns and ensure that regulation does not create any unintended consequences.

“There are many private and PLC dairy companies who operate well in partnership with their dairy farmers. We feel very strongly that regulation should only help to improve the situation of those who share our principles, not adversely impact them.

“Post-Brexit, the UK dairy market needs to be commercially focused, innovative and resilient in order to tackle the challenges and opportunities that leaving the EU will bring. We believe this vital consultation can help the industry find a successful way forward.”

The NFU Dairy team have held a webinar discussing the dairy contracts consultation – a once in a generation opportunity for dairy farmers to shape the future of the dairy sector. 

During the webinar, NFU Dairy Board Chairman Michael Oakes, Chief Dairy Adviser James Osman and Chief Legal Adviser Nina Winter talked members through why the consultation should matters to members and the NFU's five key points for contractual reform. 

Members could also ask questions to the dairy team about the consultation. 

Member exclusive – NFU members can log in to watch the webinar again at: Dairy contracts consultation - why it matters

For most dairy farmers, their contract to sell milk is the single most important piece of paper they have for their business and shapes the relationship with their milk buyer.

Unfair milk contracts have been an area of concern for the dairy sector for many years. A significant proportion of the calls that the farming unions receive are from farmers with issues which ultimately relate back to their milk contract.

In 2018, following an industry wide review of the Groceries Code Adjudicator, it found that there is an uneven distribution of power within the dairy sector. This led Defra and the Devolved Administrations to announce that they would launch a consultation on contract regulation aimed at improving fairness in the dairy supply chain.

The four UK farming unions (NFU, NFU Cymru, NFU Scotland and Ulster Farmers’ Union) are supportive of this approach and will be providing a response to the consultation. We have developed ideas over the past few years in consultation with our members which will be further enhanced over the consultation period.

This includes the development of five key points for contract reform for a more transparent, fair and well-functioning dairy supply chain. 

NFU members can log in to read the five key points to dairy contract reform.

The NFU is urging dairy farmers to engage with the long-awaited government consultation on dairy contracts and speak up for a more effective dairy supply chain, with fairer terms for farmers.

The government has launched the consultation after looking at the issue for two years, since a review of supply chain fairness by the Groceries Code Adjudicator found an uneven distribution of power within the dairy supply chain.

The consultation launched on 24 June 2020.

NFU dairy board chairman Michael Oakes said: “Dairy farmers want to place themselves in a more sustainable position for the long term and dairy contracts are at the heart of this. We want to see flexible and innovative regulation that not only delivers fair terms for farmers but an equitable balancing of risk between farmers and buyers.

“During the COVID-19 pandemic, we have seen a significant number of cases where farmers have borne a disproportionate amount of the cost in the supply chain, as the risks within the market place were shunted down to farm level at an alarming pace.

“As we leave the EU, the UK dairy market needs to be commercially focused, innovative and resilient in order to tackle the challenges and opportunities that the change will bring. At times when the market is under pressure, milk buyers often have the discretion to change contracts terms and pricing mechanisms, even to introduce retrospective penalties and price cuts without negotiation. A headline milk price is of no value whatsoever if a buyer has the sole right to change it at will. We need to be able to share risk along the supply chain much more effectively than we currently do. At the moment, there is no incentive for a milk buyer to look up the supply chain to manage their risk, as they know much of it can be managed by pushing the risk down to a farm level.

“The NFU has been working with all the UK farming unions to improve dairy contracts, and we will be consulting widely with our members through our website and in virtual meetings to get a range of views that will form the basis of our submission to government. Farmers can either contact us directly from today or respond to the consultation individually. This is a once in a lifetime opportunity to build a better future for the UK dairy sector.”

How to have your say:

• Contact your regional NFU representatives to feed in to the NFU dairy team at HQ. Find your regional office details here.
• Contact the team at CallFirst on 0370 845 8458.
• Visit Defra's website and respond to the consultation directly.

The consultation will remain open for responses until midnight on 15 September 2020. The NFU, alongside UK farming unions have been working closely together to prepare for this long-awaited consultation, which we believe is a golden opportunity for the future of the UK dairy sector. The NFU dairy team and UK farming union representatives will be engaging with members over the coming months though a series of virtual events, in national and regional meetings and webinars.

Read more about the consultation on gov.uk.