Scottish Government publishes paper reviewing milk contract proposals

The Scottish Government has published a paper which will allow stakeholders to come to an informed view over the suitability of mandatory milk contracts in Scotland.

The publication ‘The impact of mandatory written dairy contracts in European countries and their potential application in Scotland’, explains the objective of legislating dairy contracts is to provide extra transparency and certainty for dairy farmers by setting out minimum terms within a contract.

These would include, at a minimum:

  • The price payable for the delivery of milk – expressed either as a static price or a formula;
  • The volume of raw milk to be delivered and the timing of deliveries;
  • The duration of the contract;
  • Details of payment periods and procedures;
  • Arrangements for collecting or delivering raw milk;
  • Rules that apply in the event of force majeure.

NFU Scotland policy manager George Jamieson said: “Although the UK Government’s planned consultation on the regulation of dairy contracts is likely to remain in the pipeline until sometime after the General Election, we supported the initiative in Scotland to inform the debate and we welcome this report, its conclusions and recommendations.

“The driver for consultation on regulated contracts is the recognition that the dairy supply chain does not function as well as it should and that primary producers have a weak position within that chain.

“NFUS and our fellow unions have urged all parts of the dairy sector to view the opportunity to discuss regulated contracts as an opportunity, not a threat.

“The objective is to agree collaboratively on the key fundamental issues that can be agreed in a contract which offers an efficient, progressive relationship in the supply chain.

It is acknowledged that the current voluntary code has not delivered this and we believe that sensible, well-considered regulation, is now essential for all in the supply chain.

“NFU Scotland has already consulted widely on this. Our intensive efforts to consider the issues and potential solutions included roadshow discussions with our members and other stakeholders as well as our own research on how mandatory contracts operate in Spain.

“We have focussed on what is reasonably required in terms of a contract, and how these terms can be reasonably agreed, underpinned by a regulatory requirement on all processors and farmers.”

Jamieson said the Scottish Government’s conclusions and recommendations are broadly in line with the union’s.

“In particular, the need for sensible, regulated contract standards, producer organisations and consideration to be given to interbranch organisations. I urge all interested parties to consider these with an open and objective mind,” he said.

Some key points from the research findings are:

  • There is room for considerable flexibility; no one size fits all.
  • Consideration that exclusivity clauses should be eliminated and replaced by contracts that agree volume, price and minimum contract time duration.
  • Given the seasonality of the production, annual agreements on elements like milk volumes and pricing mechanism are probably the most suitable.
  • The volumes that farmers commit on the contracts can be agreed, e.g. on a quarterly or a monthly basis, with reasonable flexibility.
  • Mandatory written offers in advance.
  • The pricing scheme chosen is also subject to negotiation and might depend on the duration of the contracts.

The report also said that producer organisations could have benefits for both producers and processors.

For farmers, it highlighted such organisations can provide bargaining power and help to understand the details behind the contracts.

For processors, they can provide an organised way to collect milk reducing transaction costs. Both parties can benefit from professional collaborative agreements.

The report also recommended an interbranch organisation is established to bring together all the stakeholders, to allow them to discuss supply chain issues, developing collaboration, trust and efficiency.