Australian Government intervenes in milk contracts

sian davies dairy blog march 2016_33417

The current dairy crisis has led to Government intervention in milk contracts – unfortunately, for the time being, that’s the case in Australia, not the UK. 

NFU chief dairy adviser Sian Davies writes:

On November 12 2016 the unfair contracts law in Australia will extend consumer protection to small businesses who deal with large businesses. Think dairy farmer versus milk buyer.

The Australian dairy sector has rarely left global dairy news in recent months with the issues facing milk buyers Murray Goulburn and Fonterra widely known to those in the sector. Both have slashed milk prices retrospectively to supplying farmers amongst other things.

Under the new law, a Court will be able to strike out any unfair contract terms in new contracts written and offered after November this year. The Australian Competition and Consumer Commission (ACCC), their equivalent of the CMA, state there are three main points to consider:

  1. Is there a term in the contract that is not really necessary to protect the legitimate commercial interests of the big firm?
  2. Does the term, under point 1 cause a loss to the small business?
  3. Is there a major imbalance in the rights and responsibilities between the two sides?

This change in the law will cover all business-to-business contracts including financial services, phones, leases, franchises and agriculture. Businesses will have the opportunity to improve contracts before the law comes into force after which a judge will be able to strike out unfair contract terms and allow the rest of the contract to operate.

This will apply to annual contracts worth up to $300,000 (just over £174,000) or multiyear contracts covering up to $1m. Importantly for dairy, the ACCC says that if the price is not specified the contract (as is the case with milk contracts) the contract is deemed to be under the threshold. In Australia, like the UK, most milk contracts are worth well over $300,000 but supply agreements often don’t state a clear price because processors change price over the life of the agreements.

The unfair contract law could also stop the long held practice where most large processors insist that dairy farmers supply them exclusively as this could be considered a restriction of trade. Some Australian farmers want to supply some of their milk to new buyers but don’t want to risk changing over their whole milk contract.

So what does this mean for the UK?
To be fair Government has intervened in milk contracts already, bringing the farming unions and processors together to set in place the Voluntary Code of Conduct on Milk Contracts. This has brought in fairer, more balanced contract terms for some farmers – and the majority of milk volume – although unfortunately a large number of milk buyers have chosen to ignore the best practice provided in the Code.

Contractual relations in the dairy sector are currently governed by the European Commission, under the single CMO regulation but Brexit now allows us to look at milk contracts with a fresh light. If we had a clean sheet, how would we design milk contracts that are fair on both parties?

The NFU will be following developments in Australia with a keen interest and encouraging our own Government to look at how our own milk contracts can be improved.

Last edited on: 24:08:2016

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  • Posted by: Tricia WilliamsonPosted on: 07/09/2016 11:00:57

    Comment: A non-aligned milk contract should have clarity of the basic price set by an external indicator, say, an average of the last three months GDT price three months in arrears or some other milk price indicator. This would allow the farmer to know what he will get in three months time and the buyer not to forward sell milk or cheese at too a low price otherwise the buyer would have to take the difference. Each buyer could add incentives to this basic price to attract the sort of milk they want. The farmer would accept that if world price is dropping then he takes a drop and the price isn't set by the buyer.
    Another suggestion would be that farmers should be able to tender for a contract to forward sell the milk for a period of time.
    One thing is for sure no other business man in the country would have to accept a contract which allows the buyer to take away the goods and pay what suits the cash flow of the buyer. As in the case of Muller, where they actually said there would not be price rise to the farmers until Muller had felt an impact on their own business. The buyers have so little regard for the large numbers of farmers who had to take out loans, sell assets, and cash in pensions to keep the farm going and consequently the business of the buyer.
    Unfortunately, the only way buyers will change contracts, because at present they have the upper hand, as their suppliers i.e. the farmers are too many individuals and terrified of upsetting the buyer, and the NFU has no power with regard to contracts, is for the Government to state that the non-aligned milk contracts are restrictive practice and force the buyers to change. I suspect I might see pigs fly before this ever happens.

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