New measures designed to give farmers more power to negotiate milk prices have been approved by Brussels. But will UK farmers benefit?
Three years ago, EU farmgate milk prices plummeted below the cost of production. Farmers took to the streets, dumping millions of litres of milk and blockading roads and city centres. Scores of thousands more withheld milk from the market.
Following this action, and with an eye on potentially greater volatility after the scrapping of quotas in 2015, agriculture commissioner Mariann Fischer Boel set up the Higher Level Dairy Group (HLDG) to reduce market volatility and improve transparency.
The group drew up a list of measures and the resulting EU Dairy Package was recently approved by the European Parliament and European Council.
What is in the EU Dairy Package?
Three key areas are identified in the package to help farmers strengthen their position in the supply chain:
Clear rules to determine the price direct suppliers should receive. This includes compulsory contracts with certain minimum terms including price, volume, agreement duration and termination rights.
2. Producer organisations
New rules to allow producer organisations to negotiate on larger volumes of raw milk – up to 33% of national production, about double the current likely limit in the UK.
3. Supply management for geographically-protected cheeses
Less relevant to the UK.
What impact will the EU Dairy Package have on UK farmers?
In theory, the new regulations are a big step forward, helping dairy farmers establish a more balanced business relationship with their milk buyer, says NFU chief dairy adviser, Rob Newbery.
“Producers would know how the milk price is determined, which would represent a major step-change in milk contracts and go a long way towards addressing the lack of clarity on prices,” he adds.
However, he believes a real opportunity has been missed, as the final text approved by European policymakers leaves individual member states to decide whether to implement the contract terms.
“DEFRA has expressed reluctance to do this, believing more can be achieved by voluntary means. We agree to an extent, but we are adamant that any voluntary code must include price transparency.
“If that code does not tick all the boxes, then we’ll push hard for legislation when DEFRA consults on this voluntary approach.”
Mr Newbery would also like to see additional contract provisions included in a voluntary code. “The commission’s proposals don’t address all of the shortcomings in milk contracts, notably where exclusive contracts lock farmers into selling to one buyer. If processors wish to define volumes by pricing or capping then farmers should be able to sell excess milk elsewhere for a fair market return.”
New regulations allow larger groups of farmers to collaborate through producer groups to improve their negotiating power with buyers.
“Currently, producer groups such as Dairy Crest Direct and Wiseman Milk Partnership are only consulted by the processors,” says Mr Newbery. “They cannot sell their milk elsewhere and are relatively small.
“If they wanted to get bigger they could have fallen foul of competition law – due to complications of a split market with Northern Ireland and Great Britain, they could have only negotiated for about 15% of the UK market before facing restrictions from competition authorities.”
The Dairy Package will allow considerable expansion, he adds. “It may be beneficial for some existing supplier groups to be recognised as producer organisations. Alternatively, larger numbers of farmers could collectively sell milk, perhaps even forming one new super-group.”
Farmers have not co-operated on this scale historically and processors are likely to resist it, he admits. “But we are seeing co-operation in processing growing in strength, so there could be potential to improve price negotiation in this way.”
Voluntary route is the way forward
John Allen, managing partner at Kite Consulting, says voluntary agreements hold more prospect of success than “political props” for a competitive dairying sector such as the UK’s.
While the EU Dairy Package does contain some useful points, its impact is likely to be limited, as many UK farmers are already well prepared for 2015 and beyond, Mr Allen believes.
“Most other EU countries have still to go through what we’ve been through over the past decade. The industry has contracted in that time, but we are now the second-most competitive dairying country in the EU, behind Ireland.”
The growing strength of co-ops means producers, including those on many smaller units, are in a far better place than a decade ago, he explains.
“For those supplying private companies or PLCs, we might find producer organisations come into play. They could become milk brokers, but they would have to start assuming all sorts of responsibilities such as balancing supplies, and I don’t think those organisations are prepared to do that.
“And history tells us that milk brokerage is fine on a rising market, but the potential soon disappears when it falls.”
He believes desired contract changes will evolve out of the government’s preferred voluntary approach. “[Farm minister] Jim Paice has asked the industry to act, and I suspect one compromise will be a shortening of notice period to six months. Processors are likely to give in on this one and it will help keep everyone on their toes.”
Farmers will increasingly use arrangements such as Dairy Crest’s Milk and More to manage risk and fix some of their sales, he believes. More flexibility is also on the cards.
“I think producers will soon be able to fix the price terms for a proportion of their output over an agreed contract period, and sell the rest where they wish.
“Processors are becoming sensitive to large milk producers who are investing big sums in their business and need to manage their risk. It would appeal to me if I were budgeting for that sort of expenditure.”
Will the dairy package help uk producers?
Jim Begg, director-general, Dairy UK
“We have always believed the contractual part of the package was aimed more at member states where no contracts previously existed. We remain committed to voluntary arrangements as the way to deliver the best outcomes for dairy farmers and milk processors working constructively for the future.”
Michael Masters, company secretary, Dairy Crest Direct
“The EU Dairy Package may prove to be a helpful catalyst for change/review of farmer-processor relationships.
“I doubt the NFU, Dairy UK and other organisations would be working so closely on a voluntary code of practice without this stimulus and the interest and overview from the UK government and farm minister Jim Paice. I hope we will see a meaningful review and conclusion as a result.”
Ian Potter, Ian Potter Associates and industry commentator
“I am excited about the potential for a single UK producer organisation capable of handling up to 33% (4.5bn litres) of milk production, particularly if it represented all retailer-aligned producers to give them better bargaining power, a larger share of the cake and to reinstate the liquid premium as opposed to producers relying on retailers to set their own premiums.”
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