Welsh dairy sector ‘under siege’, politician insists

By Ben Bouckley

- Last updated on GMT

Related tags: Supply chain, Wales, Milk, Dairy farmers

Welsh dairy sector ‘under siege’, politician insists
The Welsh dairy sector is “under siege”, with unprecedented numbers of farmers quitting the sector in recent years, in large part due to unfair contracts with processors.

That was the assessment of Plaid Cymru agriculture spokesman Llyr Huws Griffiths (pictured) who was leading his party’s debate on the country’s dairy industry yesterday.

Griffiths said the number of dairy farmers operating in Wales had fallen from just under 4,000 a decade ago to less than 2,000 last year.

He said: “That’s to say the figure has more than halved in just 10 years. The time has come for the Welsh government to develop an action plan to tackle the unfair commercial practices within the supply chain.”

The Welsh government needed to make “clear statements of principle”​ and lobby Westminster and the European Union (EU) on these issues, Griffiths said.

“The dairy sector is a sector that is under siege,”​ he added.

Supply chain ‘not working properly’

This was essentially because the Welsh dairy supply chain not working properly, Griffiths said, and he added that there was plenty of evidence to demonstrate this.

Griffiths​said: “For example, with commodities on global markets in UK, the prices have increased significantly over the past 12 months, while the prices paid to farmers has hardly moved at all.

“The gross retail profit on milk has increased in 2010, while the rest of the supply chain suffered from a fall in profits. During 2010 a number of dairy companies announced their greatest profits ever, just a few months later the climate changed and they were issuing profit warnings.”

The Welsh dairy industry should be benefiting from increasing product demand, but had lurched from one crisis to another, Griffiths said.

He added that it had suffered from a decade of under-investment and low profitability, which could arguably be attributed to industry regulations until the mid-90’s, and perhaps a lack of processing efficiency.

But for dairy farmers the “greatest problem without any doubt” ​was the way in which dairy contracts work, said Griffiths.

Where the dairy contracts was central to forming business relations with farmer and milk buyers, Griffiths insisted that they were often far too one-sided, and ensured that farmers took too much of the risk for the lowest gain.

Farmers locked into contracts

With milk is a perishable product, which has to be collected daily, Welsh farmers often had no choice but to sign the unfair contracts offered them, since milk had to continue to flow from farms, he said.

“They are locked into contracts with a 18 month notice period, which doesn’t give them the opportunity to create a more competitive market for raw milk where farmers can move more effectively from one buyer to another.”

Even worse, Griffiths said, most of the contracts failed to provide any certainty or clarity about the price that would be paid to farmers from one month to the next.

He said: “Changes in prices often happen at little notice, and at the discretion of the buyer, and dairy farmers don’t have an exit clause in contracts to move to another buyer if prices are unacceptable to them.”

Moreover, milk contracts were often exclusive, forcing farmers to sell to just one buyer.

Griffiths said the implications of this fact in Wales were most apparent in the fact that farmers received the lowest but one price across the EU for milk: 31p per litre compared to 27.5p in Wales.

With 1.6bn litres per year sold at (on average) at around 4p less than its actual value, that represented 65m pounds lost to the Welsh economy annually, Griffiths said.

Griffiths said the government needed to lay out expectations in regard to standard contract, a code of practice to govern relations between farmers and dairy companies.

More transparent information on wholesale and retail pricing, and the distribution of profit within the dairy supply chain was also needed, he added.

Supply chain is 'working properly'

Reacting to Griffiths' comments, a spokesman for Dairy UK - which represents UK farmers as well as processors - told DairyReporter.com: "I think that the first point that we would make is that it is not true to say that the dairy supply chain in Wales is not working properly."

"The market arrangements operating in Wales are no different to the industry practice to be found anywhere in the world. The Welsh dairy industry is market driven and hugely competitive."

The spokesman acknowledged that contracts within the dairy industry were "obviously a major talking point"​, with Dairy UK's position being that long notice periods, for instance,​worked both ways.

He said: "They give farmers security, which is a priority for many, as opposed to being able to seek short-term advantage by exploiting variations in price between purchasers. Long notice periods also give purchasers the stability they require to invest in supply chain relationships."

The spokesman added that most plcs and private dairy companies worked to 12-month notice periods, "with longer periods are more normal for co-operatives, where the farmer is making an ongoing commitment to the co-operative and to his fellow members".

Existing contracts were fit for purpose, he said, but added that Dairy UK was developing a voluntary code of best practice on contracts, to address farmer concerns over predictability, security and transparency.

"Whether this initiative will have any impact on supply chain relations remains to be seen,"​ the spokesman said.

"However, in our judgement, a growing and sustainable dairy farming sector is vital to the ongoing success of the entire Welsh dairy industry and the key drivers for growth will be consolidation, product innovation, efficiency and supply chain co-operation."

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