Pricing Formula In Contracts Receives Backing

UK - Key reports published today (Friday, 29 July) on the UK’s dysfunctional dairy sector add substantial momentum to National Farmers Union Scotland’s (NFUS) ongoing campaign to drive fundamental changes into milk pricing and contractual arrangements.
calendar icon 29 July 2011
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An influential committee of Westminster MPs has backed NFUS and called on the Government to ensure that UK dairy farmers are offered written contracts by processors that specify either the raw milk price or the principles underpinning the price in the agreement. Unless such contracts are made compulsory, the Environment, Food and Rural Affairs Committee (EFRAC) believes there will be no improvement in a system that currently means our dairy farmers have little certainty over the price they will receive for their milk.

Also out today is an independent report, commissioned by levy body DairyCo, that confirms the long held view of dairy farmers that when milk and dairy markets start to rise, the UK dairy chain is slow to pass on the benefits to producers. Conversely, when they start to fall, farm gate price cuts are quickly brought in.

A key message from the investigation is that, where such asymmetric price movements have been identified, they are never to the benefit of the farmer. Instead, the greater bargaining power of other parts of the chains means that they can capitalise from such price movements.

To increase the bargaining power of producers, the DairyCo report also recommends changes to the standard structure of contracts between farmers and milk buyers. These often omit basic contractual details such as agreed price levels and/or price-setting formulas, have long notice periods and do not specify how future changes in terms and conditions are to be negotiated. Its conclusion that contracts would be less likely to lead to asymmetry if the mechanism for setting prices was known and agreed by both farmer and milk buyer fully backs NFUS work.

NFUS Vice President Allan Bowie said: “If we are to have a sustainable dairy industry in the future then there has to be a fundamental shift in the way the dairy supply chain engages contractually with dairy farmers. There is an overwhelming need for change in the way that chain operates and these latest reports fully endorse NFUS calls for transparent, market related pricing mechanisms to be a compulsory part of all dairy contracts between producer and milk buyer."

“Today’s reports both recognise that the status quo with regards to how the current supply chain operates is no longer an option."

“Having presented written evidence to the EFRAC committee on milk contracts and on the latest European dairy proposals, it is heartening to read the MPs’ response. They called on the Government and Defra to ensure that UK dairy farmers are offered written contracts by processors that specify either the raw milk price or the principles underpinning the price, the volume and timing of deliveries, as well as duration of the agreement."

“Europe is also examining solutions around more robust milk contracts and stronger producer organisations. While we may have wanted the committee to go further on the scale of producer organisations, the MPs did urge Defra and Westminster to exceed the European line in their desire to deliver a stronger negotiating position for dairy farmers and ultimately generate a fairer milk price."

“On fairness, farmers have had a long held belief that on rising markets, milk price increases from milk buyers can be slow to materialise but when markets start to fall, farm gate price drops are quickly introduced. Today’s independent report for DairyCo establishes that asymmetric pricing across liquid milk and cheese markets takes place and that practice must stop now. All milk buyers and retailers need to accept that the days of screwing quick wins out of dairy farmers are over and we must work together to get a long-term solution."

“Building a stronger and more competitive dairy farmer base is in the interests of all parts of the chain, particularly if we are to make the most of the strong, global demand for milk and dairy products. All parts of the chain, including farmers, need to be profitable now so that we can invest for the future."

“By September, we will have given all parts of the dairy chain adequate opportunity to consider our proposals and take on board the recommendations of politicians and others. We will have platform at the Dairy Event in Birmingham on the sixth of September, and, for the long term health of the UK dairy industry, we will be inviting all parties to come and meet with us at that event with a positive response and an improved vision for the sector.”

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