Last year’s SOS Dairy campaign highlighted what dairy farmers can achieve by working together.
New legislation could take this one step further, as dairy farmers can now form producer organisations (POs) and work together collaboratively to market their milk.
“There is a lot of pressure out there and a lot of tension in the marketplace,” says NFU dairy adviser Luke Ryder.
“I think producers realise the benefit of having representation with their milk buyer and having greater control.”
NFU Scotland milk policy manager George Jamieson says although POs are not for everyone – proximity to like-minded farmers and milk buyers is essential – they offer the opportunity to work together more collectively.
“The big challenge to the industry as a whole is to be brave enough to believe in POs, and that you are signing up to a farmer organisation that will look after your milk,” he says.
Both Mr Ryder and Mr Jamieson warn that as with the dairy voluntary code of practice, membership of a PO is not a silver bullet to increase milk prices. Dairy farmers need to remember that even after joining a PO, the legal terms of their current milk contracts are still valid, and they may have to wait until contract renewal before negotiating new terms through the PO.
What is a producer organisation?
“A PO is farmers coming together to work collaboratively to try and strengthen their negotiating position in the marketplace,” says NFU dairy adviser Luke Ryder.
POs already exist in other sectors, but the legislation for dairy POs only came into play at the beginning of this month, as part of the EU Dairy Package. In essence, a PO is a group of producers coming together to pursue a specific aim – selling milk together or negotiating milk contract terms, for example.
What can it offer dairy farmers?
It is hoped a dairy PO will go much further than simply negotiating a better milk price for its members, says Mr Ryder.
“When you come together as a group you are trying to negotiate for yourselves a much stronger position in the marketplace,” he says.
“But the key thing is that you have got to have a clear aim of how you are going to add value to your milk.”
Other PO benefits include the ability to benchmark your farm against other farms, exchange knowledge with other producers, buy inputs together and so on, adds Mr Ryder.
How do you set one up?
The starting point is getting together as a focused working group to ascertain the overall aim of the farmers involved, says a report on dairy POs, compiled by the NFU and supply chain consultant European Food and Farming Partnerships (EFFP).
Thereafter, producers can seek advice on how to set up a PO by contacting their local farming union and organisations such as EFFP and the Scottish Agricultural Organisation Society.
They then have to apply for membership as a legal entity with the Rural Payments Agency, which is handling POs for the whole of Great Britain.
What are the requirements for forming a dairy producer organisation?
Every EU member state is allowed to have up to 33% of its milk overseen by POs – in Great Britain, this equates to about 4.3bn litres of milk.
The minimum requirement for membership is 10 farmers or 6m litres of milk, says Mr Ryder.
In addition, producers wishing to join a PO must not be a member of an existing dairy farmer co-operative, and can only become part of one dairy PO, he adds.
Is there any funding available to set one up?
Dairy farmers in England have until 3 June to apply for funding from the DEFRA dairy fund, launched in July last summer at the peak of the SOS Dairy campaign.
Part of the Rural Development Programme for England, the dairy fund invites applications for grants ranging from £25,000 to £1m to help meet the costs of farmers setting up co-operative or collaborative projects, as well as exploring new market opportunities. Farmers must be the primary beneficiaries.
How does a producer organisation differ from existing co-ops and producer groups?
A PO is a more formal version of a producer group (for example, Dairy Crest Direct), with the legal powers to carry out business-to-business transactions such as marketing milk and negotiating the terms of a milk contract.
Unlike a co-op, in which farmers invest and receive returns, a PO is a service organisation such as a buying group or machinery ring.
What is the legal position of a producer organisation in terms of negotiating with milk buyers?
So long as a PO complies with all the requirements set out by EU law (explained above), it can take advantage of competition law exemptions. As a result, a PO is able to negotiate milk prices and contracts with various different buyers.
The key legal requirement of a PO is the reporting of its activities to the RPA. It must make clear which milk buyers it is negotiating with and how often, how many farmer members it is negotiating on behalf of and what litreage of milk that represents.
How is a producer organisation run in terms of staff, responsibilities and farmer board?
There are three main structures under which a dairy PO can be run, says Mr Ryder.
These are: an agency acting on behalf of its members in price negotiations, an agency contracting with processors on behalf of its members and a body that takes ownership of the milk before selling it on, similar to a milk broker.
Exactly how each of these PO structures will run is dependent on what the farmers decide when they become a legal entity and register as a PO.
“A PO is going to incur costs – nothing is for free,” says Mr Ryder.
Day-to-day running of a PO will involve administration and farmers will have to decide how to finance that – either through a levy or an introductory membership fee, he adds.
As well as being a legal entity, a PO must provide limited liability and an ability to contract, a constitution which provides democratic accountability, obligations for members to provide finance, procedures to determine, adopt and amend the constitution, agreed penalties for members breaking rules, a sign-up and resignation procedure for members and proper accounting and budgeting.