UK farmers welcome news of ‘fair and transparent’ contract regulations

The regulations have been in development for the past few years and has involved key industry players including the National Farmers’ Union (NFU) and Dairy UK.

The regulations will mean clearer pricing terms for farmers, with contracts setting out the factors which generate the milk price and allowing farmers to challenge prices if they feel this process isn’t being followed. The government called this ‘a major advance in transparency, which ensures fairer pricing and addresses historical discrepancies in the dairy industry’.

The regulations will also outline that changes to contracts could not be imposed without farmers’ agreement, in a bid to encourage dialogue between buyer and supplier. Contracts are also meant to include ‘a straightforward way’ for farmers to raise concerns, and there will be clear rules put in place on notice periods and contractual exclusivity.

An enforcement mechanism is set to be created to guarantee the regulations are followed, but it is currently unclear what the scope of the penalties would be.

DairyReporter reached out to both the NFU and Dairy UK for additional comment. Michael Oakes, chair of NFU’s Dairy Board, told us the new regulations were “all about trying to create a new relationship, rather than an ‘us and them’ between farmers and processors”.

He added the legislation’s scope goes beyond ensuring contracts are fair and transparent to solving issues around exclusivity and notice periods. “I don’t think there’s a contract within the UK that’s non-exclusive at the moment,” he told us. “Technically as it stands at the moment, you can’t supply anybody else. Going forward, if a processor doesn’t want any more liters from you, as long as you don’t break your original contract we don’t believe you should be tied to one particular buyer. If you want to take the opportunity to expand your business, you should be able to do that.”

Clear rules will also be put in place on notice periods, which can range from three to 18 months, but one of the most important changes will be around how milk prices are set. “We want to be able to clearly see what indicators drive prices up or down,” Oakes said. “What [the regulations] will do is force the processors to sit down with their supplying farmers and find a way forward that satisfies both parties.”

“We want successful, profitable processors that are going to be investing into the industry because, ultimately, we need each other. But on too many occasions in the past, farmers have taken a disproportionate share of the risk within the supply chain, and it’s been very easy for processors to manage their risk or margin with the farmgate milk price. The market will always set the price - but at least farmers will understand what it is that moves their price.” - Michael Oakes, NFU Dairy Board chair

Asked about what the possible enforcement action could entail, Oakes said financial penalties ‘need to be big enough to ultimately serve as a deterrent’ and predicted these could be comparable to what large retailers face if they abuse their position, i.e. 1% of their turnover. On a possible complaints structure, Oakes said the NFU has advocated for a stepped complained process, where minor cases would be expected to be settled by buyers and suppliers, but for major breaches, Defra would step in.

“If it was a case of a major breach of contract that involved many farmers, it would be dealt with by Defra and it would sit underneath the secretary of state, or another senior figure, who would make a decision whether there had been a breach or not,” Oakes explained.

He suggested that having the rules enshrined in law would put an end to many ambiguities – something that hadn’t been entirely achievable through the Voluntary Code of Practice. “Whilst the majority of processors have abided to the majority of the Code, they all knew it had no ‘teeth’ and could on occasions disregard [it]. This legislation will be written within law and ultimately there should be proportionate sanctions for both sides.”

In conclusion, Oakes said he hoped as the legislation comes into force over the next two years, ‘we start to see relationships changing’. “Some businesses are already there - they’ve got the governance within their farmer suppliers, they’ve got a good relationship, but that’s certainly not the case for everyone,” he told us. “It’s taken a long time to get this legislation. Hopefully, we’ll get it ratified by the end of the year once it goes in front of Parliament after the recess.

“Now, we need to be working with farmer groups to make sure they get good representation and structures to be able to use the legislation and be able to sit down along with their milk buyer in order to find a way forward.”

Dairy UK is yet to respond to our enquiries, but the body shared the following statement with the press earlier this week: “Dairy UK has always believed that this regulation should strike the right balance between greater transparency and maintaining the flexibility the industry needs to compete in a volatile and increasingly competitive marketplace. We’ve appreciated the engagement provided by Defra during the development of the regulation. We look forward to seeing the final statutory instrument and to continuing to work with Defra on the implementation of the regulation.”

Meanwhile, farming minister Mark Spencer said: “Farmers must be paid a fair price for their produce and these regulations will provide price certainty and stability for farmers by establishing written milk purchase agreements with clear and unambiguous terms. This represents a key milestone in our commitment to promote fairness and transparency across food supply chains to support farmers and build a stronger future for the industry, and will be followed by reviews into the egg and horticulture sector supply chains this autumn.”