National Farmers' Union of Scotland

08/13/2019 | News release | Distributed by Public on 08/13/2019 03:24

Policy Manager's Blog - 13 August 2019

Whatever Brexit we get, we still need a supply chain that works for all writes Policy Manager George Jamieson.

The upcoming consultation on dairy contracts is the most important opportunity the sector will have to address the power imbalance which underpins unfair contract terms.

This initiative goes beyond dairy and could help deliver supply chain fairness in other sectors too.

Given the dairy sector has tried a voluntary Code, which the independent Grocery Chain Adjudicator has judged to have failed, Government views the dairy sector as an opportunity to 'test' regulation as a potential route to improve all supply chains.

We support this intervention and the stated willingness to regulate. We understand in many cases regulation is not welcome, but sometimes it is essential, so it must be effective and well considered.

In order to gauge farmers and other stakeholders' opinions, NFUS held meetings across Scotland to inform dairy farmers and associated businesses of the potential in government regulating dairy contracts between producers and processors.

Farmers are reliant on processors, retailers, other end users and ultimately the consumer. For dairy, government statistics confirm that the average dairy farmer's income is highly dependent on the market, with 'support' only around 10% of income.

That means a fair share of the returns from the market are fundamental to any chance of profitability for a dairy farmer. The future of production and investment in the sector is dependent on all parts of the 'chain' as none can prosper without the other.

The vagaries of global markets will dictate the value of our product, but the terms in the contract a farmer has with their milk buyer are currently dictated by the buyer. Too much risk, uncertainty, higher standards and even NGO demands are transferred farmers without agreement, because it is easy.

These are very clear reasons why we need contract regulation and the upcoming consultation from Defra will seek opinion and enthusiasm for change. All players must engage positively and follow up with an agreed industry solution, not diluted by ill-informed brinkmanship by those who fear positive progress.

Some key issues to consider;

  • Legislation; Do we need government regulation? We have tried a voluntary code. Should it be improved or do we favour mandatory contracts, which allow flexibility but with minimum base lines?
  • Negotiation; Most contracts allow prices and other terms to be set and varied at the sole discretion of the processor. The contract legislation could require that all terms are freely negotiated and agreed.
  • Producer Leverage; Will the right to negotiate and agree terms increase our leverage? Regulation on contracts alone will not increase leverage but could it incentivise effective producer collaboration and representation?
  • Price setting; Is discretionary pricing acceptable? Processors have their own margin challenges so is it too easy to adjust prices paid to farmers than to challenge their customers for higher prices? If price setting and mechanisms are to be agreed than what type of price mechanisms?
  • Volume management; Many farmers favour some form of volume management, with e.g. processor and producers agreed ranges of production and protocols for expansion. Others are concerned that we will stymy production and risk even more imports.
  • Is there a place for non-exclusivity? Could a farmer commit all his milk to one processor or have the option to supply more than one?
  • Oversight; if there is regulation, then who should oversee this? Some examples in Europe establish an arbitration body, some have set up a cross supply chain industry body.
  • Retail Power; this consultation does not cover retail but is an important factor recognised by producers, processors and government. The GCA does not cover the primary producer but has recognised the need to more protection at producer level.

These are some of the major concerns that will be raised, and we hope we can resolve.

NFUS can only stress the huge relevance of this initiative by Government to improve the position in the supply chain of farmers and improve all food supply chains efficiency moving from short term reactions to longer term planning.

For further detailed Frequently Asked Questions please see