Improving Dairy Sector Stability Through Contracts

EU - The European Commission has adopted a proposal on "contractual relations in the milk sector".
calendar icon 10 December 2010
clock icon 4 minute read

The proposal aims to boost the position of the dairy producer in the dairy supply chain and prepare the sector for a more market oriented and sustainable future. It provides for written contracts between milk producers and processors, the possibility to negotiate contract terms collectively via producer organisations in a way as to balance the bargaining power of milk producers relative to major processors, specific EU rules for inter-branch organisations and measures for enhancing transparency in the market. The measures are proposed to be valid until 2020 with two intermediate reviews.

Appropriate size limits for collective negotiations and other specific safeguard measures should ensure the achievement of the objectives of strengthening the bargaining power of milk producers whilst safeguarding competition and the interests of SMEs. The Commission has also adopted today a report on the dairy market within the context of smoothly phasing out the milk quota system.

EU Commissioner for Agriculture & Rural Development Dacian Cioloș stated: "Our intention from these proposals is to learn some of the lessons from last year's dairy market crisis. Other recommendations from the High Level Group, established after last year's crisis, will be addressed in our CAP reform discussions (coping with volatility and boosting innovation) and the quality package (marketing standards and origin labelling). These changes are important to help the sector prepare for a "soft landing" when quotas come to an end in 2015."

The proposal provides for optional written contracts between milk producers and processors to be drawn up in advance of deliveries, which should include details of price, timing and volume of deliveries, and duration. Member States can make the use of contracts compulsory in their territory. Cooperatives, in order to take into account their specific nature, are not required to have contracts if their statutes include elements with similar effects.

In order to rebalance bargaining power in the supply chain, the proposal foresees allowing farmers to negotiate contracts collectively through producer organisations. Appropriate quantitative limits to the volume of this negotiation will put farmers on equal footing with the major dairies while maintaining an adequate competition in the raw milk supply. The limits are set at 3.5 per cent of global EU production and 33 per cent of national production, with specific safeguards also provided to avoid serious prejudice in particular to SMEs.

The proposal provides also specific EU rules for inter-branch organisations covering all parts of the chain. These organisations can potentially play useful roles in research, improvement of quality, promotion and spreading of best practice in production and processing methods. They contribute to expand knowledge and transparency in the sector. Moreover, more regular information on volumes of raw milk delivered is provided so as to allow better knowledge of production and following market developments.

These measures are proposed to remain valid until 2020, with a review in 2014 and 2018; this time frame should be sufficient for milk producers to adapt to the situation without milk quotas and to improve their organisation in view of a more market oriented environment. More clear and balanced relations and transparency in the supply chain should also lead to efficiency gains and allow for the EU sector to take advantage of new market opportunities inside and outside the EU.

The measures stem from the recommendations issued by the High Level Experts' Group on Milk (HLG) and endorsed by the Council's Presidency conclusions of 27 September 2010. Comprising senior officials from member states and chaired by the Director-General of DG AGRI, the HLG was created following the 2008-09 dairy crisis with a view to looking at medium and long term measures for stabilising the market and producers' income and enhancing transparency.

The HLG found important imbalances in the supply chain, an increasingly concentrated industry dealing with many and dispersed milk producers and an uneven distribution of the added-value. This situation has led to a lack of transparency, rigidities and problems of price transmission in the supply chain.

The Commission has also adopted a separate report on the dairy market situation and the consequent conditions for smoothly phasing out the milk quota system. With only 3 Member States (DK, NL, CY) having produced more than their quota in 2009/2010 and milk quota prices now having a very low value, already zero in some Member States, the report concludes that soft landing is on track in an overwhelming majority of Member States.

Under these circumstances, it concludes that there is no reason to revisit the Health Check decisions with regard to the gradual increase in quotas and the end of the quota regime on 1 April 2015. In order to provide an additional safeguard, the report also suggests that, in exceptional cases and where existing policy measures are insufficient, the Commission could consider a mechanism that would allow milk producers to be compensated for reducing their deliveries in order to avoid serious imbalance in the market.

To further pave the way towards quota abolition, the Commission raises for consideration the organisation of meetings gathering experts of the Management Committee for the single CMO with the Advisory Group on Milk in order to assess market developments and prospects. A second report is scheduled for 2012.

Link to proposal and quota report:

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