For most dairy farms, the milk contract is the single most important piece of paper and governs the relationship farmers have with their milk buyer. Unfair milk contracts have long been an area of concern for the dairy sector and as the timeline below demonstrates, for the last decade NFU Cymru, alongside the other UK Farming Unions (NFU, Ulster Farmers’ Union and NFU Scotland), has
been lobbying to improve the fairness and transparency in the supply chain.
Throughout our lobbying work NFU Cymru has been clear, we don’t want to ‘fix anything which isn’t broken’ as there are many successful relationships that exist across Wales between farmers and milk buyers. However, there are others which place a disproportionate amount of risk on the farmer, and we saw most recently during the Covid-19 pandemic, how contract terms and pricing mechanisms could be changed at the buyer’s discretion often at short notice without reasonable discussion, negotiation, or agreement.
What is this new legislation?
The introduction of this legislation, known as the ‘Fair Dealing Obligations (Milk) Regulations 2024’ represents a significant step forward towards a fairer supply chain and introduces mandatory minimum terms for dairy contracts, essentially a code of conduct which all contracts must adhere to. The legislation is now working its way through the UK Parliament where it will undergo debate in committees in both the House of Commons and the House of Lords, before being either accepted or rejected (there is no opportunity for amendment at this stage).
Assuming the regulations are accepted as we expect them to be, there will then be an implementation period to allow for a managed transition as all contracts between a farmer and their milk buyer will need to be updated and brought into compliance:
• Three-month implementation period for new contracts to be compliant, meaning every new contract issued three months after the date this regulation comes into force must be compliant with the code.
• A further 12 months (on top of the previous three months so 15 in total) for existing contracts to be brought into compliance.
What does the legislation say?
The main areas the legislation will cover include:
Price
This legislation will not set the price nor will it introduce minimum prices. Price will continue to be market led but this legislation will introduce greater transparency for the farmer. For example, if the contract contains a variable price, there must be mechanisms in place to ensure that price can only move in reference to the agreed factors set out in the contract.
Farmers will also have the power to challenge the price, via an independent third party, if they feel that their milk buyer has not followed the correct process.
Variation
All variations to the contract must be agreed by both parties. This means that milk buyers cannot enforce changes without agreement from the individual farmer or their representative organisation. This will not apply where the purchaser has an internal democratic structure, as defined in the regulations, for example a co-op, or where the farmer is a member of a producer organisation (PO), because these bodies have their own structures agreeing variations to contracts.
Farmer representation
The regulations allow farmer owned structures such as co-ops and POs to have greater flexibility in terms of the contracts they are able to negotiate with the milk buyer. The fact that these organisations negotiate on behalf of a number of farmers increases their bargaining power, which should put them in a stronger negotiating position than individual farmers. The regulations will also
likely make these structures more attractive to processors, as it would be easier than negotiating with each and every individual farmer supplier.
Exclusivity
Exclusive contracts (where a farmer must send every single litre they produce to a processor) are still permitted. However, they are prohibited where the milk contract is for a fixed volume, it will also not be possible to have tiered pricing in an exclusive contract.
Notice periods
The legislation sets out maximum notice periods to be given by the farmer and minimum notice periods to be given by the processor for contracts of more than 12 months. The regulation also
allows a farmer to terminate more swiftly in certain circumstances, such as when a milk buyer misses payments for milk or becomes insolvent. There are several other areas covered in the regulations such, as dispute resolution, force majeure and the introduction of cooling off periods.
NFU Cymru is developing further detailed legal guidance and will be working to support members in the coming month as the industry looks to transition onto new compliant milk contracts.
How will the regulations be enforced?
From the start of this journey the four UK farming unions have believed that a mandatory code only works if there are measures in place to ensure it is being followed. The legislation contains extensive powers for the Secretary of State in Defra to oversee and enforce the code.
A farmer has the right to refer concerns about contracts which may breach the regulations to the Secretary of State, providing they have already followed the dispute resolution procedure set out in their contract. If the Secretary of State finds that there has been a breach, they will be able to impost a financial penalty and/or require the processor to pay compensation to the farmer.
Defra has also indicated that it intends to establish an Agricultural Supply Chain Adjudicator, who will (amongst other things) enforce the code on behalf of the Secretary of State. At the time of writing, limited information was available about the proposed adjudicator, but NFU Cymru will be seeking opportunities to engage with Defra to ensure that the proposed Adjudicator is fit for purpose and has the confidence of our producer members.
Legal advice
NFU Cymru members can access free initial legal and professional advice through NFU CallFirst on 0370 845 8458.
NFU Cymru farmer and grower members can also access the NFU’s Contract Checking Service.
The contract checking service is a service offered by the NFU panel firms of solicitors, in association with the Legal Assistance Scheme. The contract checking service can be accessed via NFU CallFirst. Under the contract checking service, the NFU’s panel firms will provide a fixed fee quote for carrying out an initial review of a contract and producing a report, based on your objectives and requirements.
The fee will vary depending on the length and complexity of the documents, but prices can start from as little as £275 + VAT for the initial report. If you wish, the panel firm will also be able to consider the contract in more detail and assist with the renegotiation of specific terms, as well as advising on the implications for your business; this later stage will be charged at the firm’s standard hourly rate, minus a 12.5% discount for NFU Farmer and Grower members. LAS subscribers can apply for a contribution of £250 per contract, up to a maximum of
four contracts at £1,000, from the NFU’s Legal Assistance Scheme as part of the contract checking package. The panel firms will be able to advise on all aspects of a contract, including whether it is compliant with the new regulations.