Muller answers producer questions over new contract
Muller has unveiled its final contract offering and its 1,900 producers have until the start of May to decide whether to sign up.
Farmers Weekly put producers’ questions to Muller and asked the NFU to scrutinise their responses (see table, below).
The new contract will complete the amalgamation of 650 Direct Milk DPO members (who formerly supplied Dairy Crest) and Muller’s existing milk pool of 1,250 producers under one standard contract.
See also: Milk production costs set to continue above farmgate prices
The initial proposals were shown to dairy farmers at 16 meetings across the UK in November and December last year.
Farmer opinion varied regionally, but some of the 1,000 Muller producers who attended the meetings described the introduction of the new terms as tantamount to blackmail. One meeting in Scotland was even compared to a riot.
The polarised reactions forced Muller to go back to the drawing board and to twice delay sending out the contracts, by a combined total of three months.
One of the most contentious changes for producers was the introduction of quarterly production forecasts, which had previously been required by Muller on a monthly basis, coupled with increased fines for poor forecasting.
In reaction to strong producer views, and following close consultation with the NFU, Muller increased its forecasting leeway from 5% to 7.5% and reduced fines for volumes delivered between 7.5% and 20% different to those forecast (see table, right, question six).
Futures markets
The UK’s second largest processor has also included the option for producers to link up to 25% of their output to a milk futures contract in an attempt to reduce exposure to price volatility.
The new Muller Farmer Forum representative body will have 21 producer-elected members – nine will be on non-aligned contracts.
The forum will elect the seven-member Muller Milk Group Farmer Board, which will hold monthly meetings with management and will be responsible for any future changes to Muller’s representative structure.
More than 50% signed up
Muller agricultural director, Rob Hutchison said he was greatly encouraged 1,000 producers had already signed up, and completed contracts were arriving at a rate of 40-50 a day.
He added: “We have also had a substantial increase in enquiries from farmers who don’t currently supply the business.
“Our priority is to work closely with farmers who may still have questions about the new contract to provide all of the information they need – we are on hand to help.”
NFU chief dairy adviser, Sian Davies said it was positive Muller had listened to feedback and made changes to its contract before launching this year. “However, each dairy farming situation is different and as such it is also important that farmers get individual advice on their contract,” said Ms Davies.
Muller contract questions and answers |
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Producer questions |
Muller response |
NFU response |
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1. I’m not sure how the new futures contract will work and if I should take it up? Will we receive more help with this from Muller? |
Final details are expected this month and the Muller Ingredients Contract option will be launched from July. Eligible farmers will be able to lock up to 25% of their production against a price linked to the UK Milk Futures Equivalent price to help manage the risk of market volatility. We will provide further information to eligible farmers and support including workshops on the principles of futures trading within the contract. |
It’s extremely positive Muller is looking at new pricing options for their suppliers – this is something the NFU has called for over recent months as an aid to help manage dairy price volatility. Clearly, this is optional and farmers will need to look at their individual costs of production and work out what type of margin they want to achieve before locking in on this contract. |
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2. I was a big believer in the Direct Milk DPO and PO’s in general. Now it’s gone, will Muller accept the formation of a new PO for its suppliers? |
Yes, if that is the representation model chosen by the farmers who supply us. The new elected Muller Milk Group Forum will be responsible for reviewing and agreeing any proposed changes to the future representative structure including DPO status. |
It’s a step forward Muller has adopted a structure similar to Dairy Crest Direct with initially a forum and then a board, with suppliers themselves electing their representatives. |
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3. Clause 2.4 in the new contract means aligned producers could be subject to lower penalties than non-aligned producers. There is a feeling that non-aligned producers could be effectively carrying the cost of this. |
Clause 2.4 relates to supplementary agreements for farmers who supply Aligned milk pools. These set out additional requirements over and above the Muller standard contract that must be achieved for the farmer to remain on the aligned contract. The clause clarifies where there are different standards, the terms of the supplementary agreement prevail. |
A percentage of Muller suppliers are also aligned to a retailer and have additional requirements based on the needs of the specific retailer – this can include higher animal health and welfare requirements, different milk quality requirements and additional environmental standards. These types of clauses are commonplace in aligned milk contracts. |
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4. The new farmer representative board is funded by producers but has no power on negotiating farmgate prices. What decisions if any can the board make? |
The board will discuss topics with the company including milk price, contract terms, operational and technical aspects of direct milk supply. Whether or not the forum decides to raise funds for independent advice is a matter for elected producer representatives. In its initial period, the company will provide some start-up funding. |
All decisions in relation to the activities of the new Muller board and forum will be decided and agreed by suppliers. For some activities, such as managing supply and negotiating prices, there are legal protections afforded by being a formal structure such as a producer organisation or non-processing co-operative. |
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5. Will some of the current board be able to stay on for two to three more years and why are the numbers are still weighted in favour of aligned producers? |
The board will be completely revised within two years. Three of the seven positions on the board will be up for election in July 2017 with a further two positions elected in April 2018 and the final two in April 2019. The intention is to drive change while retaining experience for this transition period. The balance of aligned and non-aligned producers fully reflects the make-up of the 1,900 farmers who supply the company. |
The NFU understands the new forum will represent the Muller milk pool. The majority of Muller suppliers are aligned. It is the forum that will elect the Muller Farmers Board. Suppliers have had the ability to put themselves forward to represent their fellow suppliers and the NFU is encouraged to understand that there were enough applications to fill the 21 places on the forum. |
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6. I believe the new 7.5% forecasting tolerance for each favours a 365-day housed system. How can we predict weather patterns three months in advance? Combined with the already severe seasonality brought in a couple of years ago this effectively penalises producers who wish to maximise milk from grass. |
In the past few years our industry has seen destructive levels of volatility driven by misalignment between supply and demand which damages farm enterprises, processing companies and confidence. We feel it is the responsible course of action to act to build a supply chain where farmer and processor are much more closely aligned, leading to a more sustainable industry. We don’t, therefore, feel it is unreasonable to ask for forecasts and we have listened to feedback and relaxed the penalty and the first band from 5% to 7.5%. |
With the removal of EU milk quotas, we need milk processors and farmers to take more responsibility in managing milk volumes. For this to work, we need better signals on supply and demand and that’s why we agree there is a need for better forecasting. That said milk buyers need to be wary of issues beyond a farmers’ control that can impact supply. It’s also vital milk buyers encourage a milk supply profile that matches their demand profile. This is where a producer organisation could provide benefits by managing forecasts, supply and profile. |
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7. The 12 weeks’ notice on contract variation means if we sign up Muller can effectively do what they want. What other industry would tolerate that kind of contractual terms? And in a contract that already is priced by purchaser’s discretion? |
This is in place to ensure we can respond to the increasing volume of legislation changes without having to carry the high cost of replacing all contracts. Any contract variation will, of course, be discussed with the farmer board. |
In most other milk contracts milk buyers can vary contract terms with no notice or discussion, leaving farmers with no option but to live with the change or hand in their notice. Muller allows farmers to end the contract if they are unhappy with the variation, and that includes a variation on price – this is significantly better and fairer than most dairy contracts offered in the UK. |