Dairy contracts – what we know so far

Michael Oakes

Michael Oakes

NFU Dairy Board chair

First published: 11 October 2022

A picture of Micahel Oakes

Since the government consultation on dairy contracts back in 2020, it may have seemed like things have gone quiet on getting fairer terms for farmers. NFU Dairy Board chair Michael Oakes takes a look at what’s been happening behind the scenes and the significant developments that have been made. 

As I’ve been out and about at shows and meetings over the summer, dairy farmers have been sharing their concerns with me about the current situation, whether that be energy prices, input costs, labour availability or environmental regulations.

But quite a few have asked me, “what’s going on with the regulation of dairy contracts? Is it still on the table?”, so I thought this would be an opportune moment to bring you up to date.

The journey to regulating contracts

The discussions over fairness and transparency in dairy contracts has been ongoing for years – many of you will remember the 2012 ‘SOS Dairy’ crisis and the resulting ‘Voluntary Code of Practice’ for dairy contracts which aimed to improve contractual relations between farmers and milk buyers.

The voluntary code was widely adopted, but it only resulted in minor improvements, and we continued to see examples of unfair trading practices taking place.

Before long, we were calling for the regulation of dairy contracts.

In 2020, the government launched a consultation on regulating dairy contracts, which I know many of you responded to. The response to the consultation from the whole industry was very much supporting change, and therefore the government response in early 2021 was that they would regulate dairy contracts under powers contained in the Agriculture Bill.

Milk Purchasing Code

The difficult part for the government is taking the results of the consultation and turning them into legislation.

In this case, Defra is developing a ‘Milk Purchasing Code’ which outlines legally enforceable standards to which dairy contracts must comply.

The idea is to prevent abuses of power, unfair contracts clauses and improve transparency for dairy farmers.

We've been supportive of this approach for a long time, and it has been great to see it all come together over the years.

While the government has understandably been dealing with crises such as the Covid-19 pandemic and the War in Ukraine, it is inevitable that some bits of legislation take longer to progress.

It has taken nearly 18 months for the code to be developed, with further engagement from the dairy industry, but we are now in the final stages of its development.

The aim of the code

Fairness and transparency are at the heart of the regulation.

The government recognises that dairy farmers are often in a weak negotiating position and carry a significant amount of the risk in the supply chain.

The regulation is still in the process of being drafted, so the detail is not yet complete, but I can tell you that it will cover areas such as:

  • 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

Tackling bad practice

We have been involved in this process for a long time and we know that Defra has been working across the dairy supply chain to get this regulation right.

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.

Encouraging links in the supply chain

Another major part of all of this work for us is supply chain relationships.

There have been huge improvements over the past few years in farmer/processor relationships, with the proliferation of co-operatives, and producer representative groups.

However, we know there is still a lot more to be done and that is a separate piece of work that we are keen to undertake.

The regulation of contracts will set the ground rules and eliminate bad behaviour, but ultimately to improve farmers’ negotiating position, we need to look at how we encourage more Producer Organisations, Co-ops and representative groups in the next few years.

Is dairy contract reform still needed?

Another question I have been asked recently is whether dairy contracts are still relevant.

It’s tempting to think that when prices are high, that we don’t want to interfere with anything. But we have all experienced the roller coaster of the dairy market in the past and we can’t always assume it will be on the up.

That said, even now we have members who have spoken to us about issues with their dairy contracts who feel they are being unfairly treated and are having to engage legal advice.

It was only two years ago, during the Covid-19 pandemic, that we witnessed huge amounts of risk passed down the supply chain to dairy farmers at an alarming pace.

We feel that regulating dairy contracts will be an important piece of the jigsaw to help improve the entire dairy market, not just for farmers, but for relationships all along the supply chain.

Next steps

Defra is currently in the final drafting stages of the process and while much of the work is done, there are still outstanding issues to be resolved.

While the time taken to get this through has been frustrating, we know that it is more important to get it right than to just get it done quickly.

The detail is very important to make sure the regulation achieves what it sets out to do.

The next stage will be to lay a ‘SI’ (Statutory Instrument) in Parliament. The powers for the regulation are already afforded to the government in the Agriculture Act, so the process for an SI to pass through Parliament is slightly more simple, although it will still be voted on by Parliament.

Once the legislation is laid in Parliament, we expect there to be a two-year implementation period, which will allow farmers and dairy processors to, where necessary, amend contracts and set up new representative bodies.

A positive step for the dairy industry

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.

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