In its response to a UK-wide consultation on the possible introduction of mandatory milk contracts in the dairy sector, the Ulster Farmers’ Union (UFU) is clear that it wants to see formal written contracts in place between farmers and processors in NI.
At present, while suppliers to co-ops such as Dale Farm operate under contract, there are many other farmers working without a formal arrangement in place. For some, those relationships go back many years, and are built on trust between farmer and processor. For others, a lack of contract has worked to their benefit, and they have essentially been free to move processors, taking advantage of some lucrative short-term deals.
But in recent times there are fewer deals about, fewer milk buyers in the market, and various processors unwilling to take suppliers off each other. Some famers have also signed up to one- and three-year fixed price deals which are essentially a contract in another name.
The UFU response to the Defra consultation, which was signed off by senior policy officer Chris Osborne, runs to 21-pages. It reflects the views of the UFU dairy committee, and was also informed by an online questionnaire completed by 133 union members. Collectively, they argue in favour of government legislating to make contracts compulsory in the sector.
“All agreements should be covered by a well-considered contract which has been agreed by both parties,” notes the UFU response, adding that verbal terms are not acceptable.
The document also recognises that it is farmers currently without a contract who have most to gain from this legislation, but goes on to point out that many existing contracts have one major omission – a lack of transparency around pricing.
“An agreed pricing mechanism that recognises the needs of both the farmer and the processor is needed,” states the UFU response. It suggests that the mechanism could be based around various market indicators (such as AMPE or MCVE), cost of production models, fixed price contracts of futures prices.
Retrospective
As expected, the UFU also wants farmers to know milk prices in advance, similar to what happens in Britain.
Initially they want prices a one month in advance (eg by mid-September for milk supplied in October), but over time this could evolve so that it is a longer time period.
“This is an important first step and will go a long way to improving transparency in the pricing of milk in NI,” states the UFU.
The argument made by NI processors is that this could lead to lower returns to farmers as co-ops will inevitably be cautious in predicting prices ahead. They would also not want to be in a situation where prices are going down, so farmers decide to dry cows off early and cut production, leaving processors to spread costs across fewer litres. To counteract that, while most farmers in Britain know prices ahead, they also must supply a minimum volume every month.
However, in return the UFU points out that many farmers believe that the current system leads to processors in NI being “weak sellers”. Having an agreed pricing mechanism in place would bring transparency for everyone and help share risk across the supply chain.
“Any pricing mechanism must strive to pay the maximum amount back to the producer,” states the UFU.
Fixed volumes and prices
The Defra consultation also asked whether contracts should fix the volume to be supplied by a farmer. In response, the UFU said it did not support that being stipulated in a contract, but did point out that the industry must be open to having discussions on volume management, to prevent oversupply and price crashes.
On fixed price schemes, the union is in favour of farmers being able to lock in a percentage of supply to help manage volatile markets, but does not call for fixed price contracts to cover all milk supplied.
Duration
With formal contracts in place, there also needs to be termination clauses written in, with a maximum notice period of three months for a farmer, and a minimum notice period of 12 months for a processor, argues the UFU.
Where a processor decides to change the payment terms outlined in a contract, it is “not acceptable” that this is done without consulting farmer suppliers, states the UFU response. It wants farmers to be given at least three months’ notice of a change to terms.
The union also argues strongly for an “effective dispute resolution mechanism” to be written into contracts, to include a potential independent mediator to help resolve any issues between both parties.