UK-wide consultation launched to tackle dairy sector supply chain issues

On 24 June 2020, the UK Government launched a consultation seeking to end any unfair practices across the UK’s dairy sector. This consultation is seeking views from dairy farmers and processors on whether future regulation could be used to strengthen fairness and transparency.

Recent press coverage has focused on the possible future regulation of certain aspects of the dairy industry and the pros and cons of establishing a regime of mandatory dairy contracts. Opinion is divided, with farming unions and the Groceries Code Adjudicator on one side pressing for urgent reform of the existing system and on the other, Dairy UK (which represents approximately 85% of milk processors in the UK), resisting change and arguing that greater regulation would result in increased market volatility and a reduction in competition.

Why are milk contracts such a battle ground?

In part, the answer to this question is because there appears to be a pattern of unfair or unclear terms and conditions in contracts between the milk producers (farmers) and the milk processors and their customers. In particular, issues have arisen when a processor has unilaterally decided to vary the terms of an existing contract with very little notice. Faced with a significant price change or alteration of the supply terms, farmers have reported difficulty in terminating their contracts within a reasonable period. The perception in some quarters is that dairy farmers in particular are too much at risk and subject to unfair contract terms. “All too often farmers are price takers – they are captives.” (George Eustice, Minister of State for Agriculture, Fisheries and Food – January 2019).

COVID-19 has also highlighted the difficulties sometimes faced by dairy farmers, most notably in relation to sudden price changes which has been apparent over the last few months.

In the UK there is legislation to help prevent consumers being taken advantage of, but there are few such statutory protections for business to business contracts which determine the relationship between farm and milk processors. The Unfair Contract Terms Act 1977 does apply to clauses which seek to limit or exclude liability in a business to business contract, but in general, it is up to the contracting parties to understand the terms and conditions to which they are agreeing. For small producers, any attempt to resist changes to contractual terms proposed by large scale processing companies and/or their supermarket clients can seem something of a David and Goliath struggle.

“Dairy farmers want to place themselves in a more sustainable position for the long term and dairy contracts are at the heart of this. We want to see flexible and innovative regulation that not only delivers fair terms for farmers but an equitable balancing of risk between farmers and buyers.

“During the COVID-19 pandemic, we have seen a significant number of cases where farmers have borne a disproportionate amount of the cost in the supply chain, as the risks within the market place were shunted down to farm level at an alarming pace” NFU dairy board chairman Michael Oakes said.

Several countries have already introduced regulations in an attempt to stabilise markets and address imbalances which are apparent in the dairy supply chain. In the European Union, thirteen member states including France and Spain have introduced laws on compulsory written milk contracts between farmers and processors.

In 2018, following an industry wide review by the Groceries Code Adjudicator, it was found that there is an uneven distribution of power within the dairy sector. This review has led Defra and the Government to announce that they would launch a consultation on contract regulation aimed at improving fairness in the dairy supply chain.

Proposals include an option to introduce a mandatory pricing mechanism within all contracts between dairy farmers and processors which would ensure the price paid for milk produced by the farmer is formally agreed within the contract, and that contract negotiations take place in a clear and transparent way.

What happens next?

The NFU is urging dairy farmers to engage with the Government consultation and speak up for a more effective dairy supply chain, with fairer terms for farmers.

Michael Oakes has said “The NFU has been working with all the UK farming unions to improve dairy contracts, and we will be consulting widely with our members through our website and in virtual meetings to get a range of views that will form the basis of our submission to government. Farmers can either contact us directly from today or respond to the consultation individually. This is a once in a lifetime opportunity to build a better future for the UK dairy sector.”

We await the outcome of the consultation in due course.

For further information about this article and commercial/contractual matters generally please contact a member of our team.