IP Dairy Farmer - September 2020

Posted on: 01/09/20

Dairy farmers are currently being encouraged to respond to DEFRA’s milk contract consultation which seeks “to end unfair practices across the UK’s dairy sector”. The submission deadline is 15th September. The NFU and NFUS have been pushing for contract reform since 2011 and are the UK dairy Industry’s equivalent of religious zealots on the subject. The voluntary code was an attempt to improve the balance, however it has seen few milk purchasers stick to its commitments, particularly when it comes to farmgate milk price changes. Hence the consultation now, and almost certain legislation.

I have previously commented on this issue and warned of the unintended consequences of the Government intervening in milk contracts and potentially forcing milk buyers to offer a specified fixed price for a fixed period. Far from increasing farmgate milk prices I believe it will add cost and could as easily reduce farmgate prices as increase them.

We had deregulation of the industry back in 1994, and I question whether we really want regulation again. It comes at a time when arguably there are two more important matters the industry has to wrestle with - Covid 19 and Brexit.

The contract regulation position statement from First Milk caught my eye, to the point I believe it should be adopted as a UK co-operative position statement adopted by the likes of Arla, South Caernarfon Creameries, OMSCO, Long Clawson, and the UK’s largest indigenous Co-op Dale Farm. First Milk’s position is that “it’s not appropriate to treat all milk buyers the same”, and I think that is entirely reasonable. Let’s face it, co-op’s ensure members’ milk is given top priority and that any profits made stay with the farmers who have invested in the business, and are not diverted off to private individuals (who, it has to be said, though, have also invested in milk and thus also want a return).

First Milk goes further, though, and offers a solution by suggesting that the remit and scope of the Grocery Code adjudicator be extended to have teeth further down the dairy supply chain as “a better solution than legislating milk contracts”. I concur, and whilst Covid problems have been managed by the co-op’s with limited impact on members I question whether contract legislation would have resulted in some of the private liquid processors treating farmers any different to how they did.

Formula pricing could be a solution and could work if both buyer and seller (AKA processor and farmer or retailer and processor) trust each other and have joint long-term commitments to the supply of dairy products. But trust is very much lacking in the industry, alas, and I can’t see legislation taking away the central gripe of many dairy farmers the world over that, no matter what the price, “it isn’t as high as it should be”.

However, processors know a significant number of dairy farmers won’t leave the industry, and are born optimists. So it’s no wonder some processors take an easy margin and pass what’s left back to the farmer, working on the notion their milk supply will be maintained whatever they pay (which it nearly always is!) To that end too many farmers appear to carry a disproportionate amount of the risk. However, full marks to those processors and retailers who have offered long-term fixed price contracts for a percentage of their farmers milk.

But farmers taking the pain doesn’t always work, and recently some farmers’ response to their milk purchasers’ ability to delay payments and drop the milk price without notice or consultation during the eye of the Covid storm has been to either shut up shop or leave on the processor on the grounds of breach of contract. With that has come litigation, with one threatening farmers with a High Court injunction. That’s a very rocky base for future trust.

One thing I do believe that has changed is the demise of the dairy farmer mentality that if he gets up early every day to milk his cows he is entitled to a living. That was the case until 1994, but it has gone now, and contract reform on notice periods will intensify it further.

The fact is simple, and contract legislation will NOT change this fundamental in any shape or form: milk is simply too cheap with few, if any, milk processors making money in the liquid market out of retailers who always hold the top trumps. Cheese processors are making money, but excluding Covid most make it on exports. With Tesco demanding lower supplier prices and a Government supporting their push for cheap food, farmers will be squeezed even harder. Will legislation stop this? You bet it won’t!

Now to the Dairy Hardship (Aid) fund, and embarrassment and humiliation for some. Although, as I write, the application window has been extended by one month to 11th September which could mean an extra 1825 new applications.  

Back in April there were loud calls for urgent financial support for dairy farmers as a result of Covid 19. Thirteen CEO’s of private milk purchasers wrote to DEFRA claiming to represent 2000 farmers, all facing hardship and needing financial assistance.

At the same time, the NFU Dairy Board claimed 2000 dairy farmers were facing severe financial pressure. At the time, I described those numbers as a back of the fag packet calculation and suggested that any business knocking on the Treasury’s door must go prepared and armed with accurate facts and data in order to win any argument. I used the fishing industry as an excellent example - they assembled all of their facts, and sent in a representative who had negotiating and common sense skills, but no fishing skills!

Then enter left the RABDF who took their own approach with a 2-minute survey for those affected and came up with a much lower and realistic estimate of 300 severely affected farmers.

At the time, DEFRA were unimpressed with the CEO’s and NFU’s fanciful number, and almost laughed at the beefed-up 2000 farmer number, and sensational use of words like the need for government to prevent “a national catastrophe”. Veiled threats of adverse publicity with buckets of emotion were not well received. I believe the disappointing outcome of the scheme would have been different if the NFU’s had dumped the emotion and hype and put forward a more realistic number. Those 300 or so severely affected could easily have qualified for more financial help than was awarded.

The RPA have confirmed currently 145 farmers qualified for the Aid with only 35 English farmers qualifying for the maximum £10,000 per farm, which has truly torpedoed those arguing for help for 2000 farmers.

But I still don’t understand why Covid necessitated extra support for dairy, as it also put other agricultural sectors and many other businesses under extreme pressure, many of whom have simply had to make unpopular moves in order to survive. In the gritty cut-throat world of liquid processing some customers turned their backs on their processors, and one or two even seized the opportunity to stick the knife in.

It’s a dog eat dog world out there, and sure as eggs are eggs milk contract legislation will not sort that out either!

Comments to ianpotter@ipaquotas.co.uk