Wrong type of contracts reduce profits for everyone

Contracts between milk processors and dairy farmers should change if producers are to produce milk which is more suited to market needs and secure better value for it. This is the subject of a new paper published by the Milk Development Council (MDC) today (9 September 2005), which says that current contracts often lead farmers to produce the wrong type of milk, in the wrong place and at the wrong time.

Raw Milk Contracts and Relationships - The Need for Change highlights eight essential principles that, when considered by milk buyers and farmers, may result in a more efficient and profitable outlook for both parties.

Ken Boyns, chief economist at MDC, says: "Many of the issues with current contracts are because they have evolved from the days of the Milk Marketing Boards which acted on behalf of the thousands of individual dairy farmers. They negotiated as a single body with a small number of large buyers, creating a fair balance of competition between the two groups. These forms of contracts are probably no longer appropriate in a more commercial market place."

Mr Boyns adds: "MDC acknowledges that while contracts are a matter for commercial negotiation between milk producers and buyers, renegotiating the terms, including milk volumes and transparency of pricing, could solve many of the problems which lead to milk being produced that does not meet market needs."

The MDC paper goes on to suggest that contracts should become more differentiated, focusing on the specific needs of different markets and customers.

Mr Boyns says: "The UK dairy industry is moving into a much freer market with a great deal less market support and the rate of change into this free market, which although initially slower than many anticipated, is likely to speed up in the near future. It's essential we manage this change, and clear and transparent contracts are a part of that - the whole industry needs to focus on meeting market needs in order to maximise profitability."

The MDC report is published on the same day as the NFU's A Vision for the Dairy Industry which also calls for farmers to better meet market needs.

Gwyn Jones, NFU Milk Board Chairman, has today called for the industry to examine carefully this new paper from MDC and consider whether the introduction of a code of practice for raw milk contracts by the appropriate industry bodies would improve the situation.

MDC has identified various issues with existing contracts. However, one of the biggest problems caused by contracts is the power of those buying milk to change milk prices at short notice, or even retrospectively, when the farmer does not have an option to stop supplying milk to that buyer.

Mr Boyns finishes: "This means that farmers are in a poor negotiating position. Alongside the financial weakness of this arrangement, it can lead to solutions being imposed on farmers and a lack of partnership and collaboration in the supply chain."