Written evidence submitted by National
Farmers' Union (NFU)
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
(a) Member states can make the use of formal
written contracts compulsory. Although, contracts will remain
voluntary at EU level. Co-operatives will be exempt from any requirement
for compulsory contracts at a member state level
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.
(b) Where a member state decides that
every delivery of raw milk between a farmer and processor shall
be covered by a written contract, that contract will fulfil
the following conditions:
— The
price payable, which will be static and set out in the
contract OR vary only on factors that are set out in the contract
(ie a formula or linked to specified market indicators).
— Volume
which may, or shall be delivered and timing of deliveries.
— Duration
of the contract, with termination clauses.
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.
(c) A contract will not be required if the farmer
supplies a co-op—but ONLY if the co-op statues contain provisions
with the same objective as the Commission's "contract requirements"
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
(d) The Commission proposes to allow producer
organisations to negotiate contract terms, including price jointly,
or for some of its members' production to a dairy:
— POs
will be subject to quantitative limits at EU and member
state level.
— The
PO must notify the competent authority of the member state
to register as a legal entity.
— Strict
clauses are set out in the regulation that will restrict the
activity of the PO so as to prevent price fixing, and
other distortions of competition.
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:
— 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.
March 2011
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