This month, Ian Potter asks whether milk contract legislation will actually be bad for the industry and questions the response of some industry organisations.
Dairy farmers are currently being encouraged to respond to Defra’s milk contract consultation which seeks ’to end unfair practices across the UK’s dairy sector’. The NFU and NFU Scotland have been pushing for contract reform since 2011 and are the UK dairy Industry’s equivalent of religious zealots on the subject.
The voluntary code was an attempt to improve the balance, however it has seen few milk purchasers stick to its commitments, particularly when it comes to farmgate milk price changes. Hence the consultation and almost certain legislation.
I have previously warned of the unintended consequences of the Government intervening in milk contracts and potentially forcing milk buyers to offer a specified fixed price for a fixed period. Far from increasing farmgate milk prices, I believe it will add cost and could as easily reduce farmgate prices as increase them.
We had deregulation back in 1994 and I question whether we really want regulation again. It comes at a time when arguably there are two more important matters the industry has to wrestle with: Covid-19 and Brexit.
The contract regulation position statement from First Milk caught my eye, to the point I believe it should be adopted as a UK co-operative position statement adopted by the likes of Arla, South Caernarfon Creameries, OMSCO, Long Clawson, and the UK’s largest indigenous co-op, Dale Farm. First Milk’s position is that ’it’s not appropriate to treat all milk buyers the same’, and I think that is entirely reasonable.
First Milk goes further, however, and offers a solution by suggesting the remit and scope of the Groceries Code Adjudicator be extended to have teeth further down the dairy supply chain as ’a better solution than legislating milk contracts’. I concur and while Covid-19 problems have been managed by the co-ops with limited impact on members, I question whether contract legislation would have resulted in some of the private liquid processors treating farmers any different to how they did.
Formula pricing could be a solution if both buyer and seller, for example, processor and farmer or retailer and processor, trust each other and have joint long-term commitments to the supply of dairy products. But trust is very much lacking in the industry and I can’t see legislation taking away the central gripe of many dairy farmers, that no matter what the price ’it is not as high as it should be’.
However, processors know a significant number of dairy farmers will not leave the industry and are born optimists. So it is no wonder some processors take an easy margin and pass what is left back to the farmer, working on the notion their milk supply will be maintained whatever they pay.
Many farmers appear to carry a disproportionate amount of the risk. However, full marks to those processors and retailers which have offered long-term fixed price contracts for a percentage of their farmers milk.
But farmers taking the pain does not always work and recently some farmers’ response to their milk purchasers’ ability to delay payments and drop the milk price without notice or consultation during the eye of the coronavirus storm has been to either shut up shop or leave on the processor on the grounds of breach of contract.
With that has come litigation, with one threatening farmers with a High Court injunction. That’s a very rocky base for future trust.
One thing I do believe has changed is the demise of the dairy farmer mentality that if he gets up early every day to milk his cows he is entitled to a living. That was the case until 1994, but it has gone now and contract reform on notice periods will intensify it further.
The fact is simple and contract legislation will not change this fundamental in any shape or form: milk is simply too cheap with few, if any, milk processors making money in the liquid market. Cheese processors are making money, but excluding Covid-19, most make it on exports.
With Tesco demanding lower supplier prices and a Government supporting their push for cheap food, farmers will be squeezed even harder. Will legislation stop this? You bet it won’t.
Now to the Dairy Hardship (Aid) Fund and humiliation for some. Back in April there were loud calls for urgent financial support for dairy farmers as a result of Covid-19. Thirteen chief executives of private milk purchasers wrote to Defra claiming to represent 2,000 farmers, all facing hardship and needing financial assistance.
At the same time, the NFU dairy board claimed 2,000 dairy farmers were facing severe financial pressure. At the time, I described those numbers as a back of the fag packet calculation and suggested any business knocking on the Treasury’s door must go prepared and armed with accurate facts and data in order to win any argument. I used the fishing industry as an excellent example - they assembled all their facts and sent in a representative who had negotiating skills and common sense, but no fishing skills.
Then enter left the Royal Association of British Dairy Farmers which took its own approach with a two-minute survey for those affected and came up with a much lower and realistic estimate of 300 severely affected farmers.
At the time, Defra was unimpressed with the chief executives and NFU’s fanciful number and almost laughed at the beefed-up 2000 farmer number, and sensational use of words like the need for government to prevent ’a national catastrophe’. Veiled threats of adverse publicity with buckets of emotion were not well received.
I believe the disappointing outcome of the scheme would have been different if the NFU had dumped the emotion and hype and put forward a more realistic number. Those 300 or so severely affected could easily have qualified for more financial help than was awarded.
The Rural Payments Agency confirmed 145 farmers qualified for aid, with only 35 English farmers qualifying for the maximum £10,000 per farm, which has truly torpedoed those arguing for help for 2,000 farmers.
But I still don’t understand why Covid-19 necessitated extra support for dairy, as it also put other agricultural sectors and businesses under extreme pressure, many of whom have simply had to make unpopular moves in order to survive.
In the gritty cut-throat world of liquid processing some customers turned their backs on their processors, and one or two even seized the opportunity to stick the knife in. It is a dog eat dog world out there and sure as eggs are eggs, milk contract legislation will not sort that out either.