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For most dairy farmers, their contract to sell milk is the single most important piece of paper they have for their business and shapes the relationship with their milk buyer.

In 2018, an industry-wide review of the Groceries Code Adjudicator, found that there was an uneven distribution of power within the dairy sector. This led to Defra announcing that they would launch a consultation on contract regulation aimed at improving fairness in the dairy supply chain in 2020.

The UK farming unions were supportive of this approach and put in a comprehensive response to the consultation.

Contracts are critical to determining the business relationship that exists between farmers and milk buyers. At times of pressure, when the market is low or a business unstable, purchasers have the ability to change contract terms and pricing mechanisms, even, in some instances, to introduce retrospective penalties and price cuts without negotiation.

Contracts are critical to determining the business relationship that exists between farmers and milk buyers. Picture: Cliff Donaldson

Fairer contracts should increase transparency and trust, to the benefit of both, and any changes should be mutually agreed. Farmers should also be free to take legal or professional advice about the terms of their contracts, to ensure that they fully understand their position prior to signing a contract. This is not about creating a tool for farmers take advantage of processors with; it is a rebalance of risk, and an opportunity to address some major issues in the dairy supply chain to create a better future for the entire industry.

Regulations

The Fair Dealing Obligations (Milk) Regulations 2024 (“the regulations”) introduce mandatory minimum terms for dairy contracts which must be adhered to. The regulation covers all cows’ milk sold by a dairy farmer to a milk buyer. The main areas which the legislation will cover include:

Price: There will be greater transparency on price for the farmer. The regulations allow a flexible approach for a number of different pricing mechanisms to be used to set the price of milk. The regulations will not directly legislate what prices should be and will not, for example, introduce minimum prices.

Cooling off periods: Contracts must include a 21-day cooling off period, during which farmers can terminate their contracts without notice with no penalty or liability. This ensures that farmers have the opportunity to properly consider the terms of their contracts, taking independent advice if they wish to do so, before being committed to the contract.

This is important given that the notice periods can be lengthy.

Notice period: The legislation sets out maximum notice periods to be given by the farmer and minimum notice periods to be given by the processor for contracts of more than 12 months. A processor must give a farmer a minimum of 12 months’ notice to terminate the contract. A farmer has the right to a maximum of 12 months’ notice if they wish to terminate the contract. The regulation also allows a farmer to terminate more swiftly in certain circumstances, such as when a milk buyer misses payments for milk or is insolvent.

Variation: All variations to the contract must be agreed by both parties. This means that milk buyers cannot enforce changes without the permission of the farmer or the representative organisation of which the farmer is a member. (This will not apply where the purchaser has an internal democratic structure, as defined in the regulations, for example a co-op, or the producer is a member of a PO).

Farmer negotiations: The regulations allow farmer-owned structures, such as co-ops and producer organisations, to have greater flexibility in terms of the contracts they are able to negotiate. The fact that these organisations negotiate on behalf of a number of farmers increases their bargaining power, which should put them in a stronger negotiating position than individual farmers.

Parliament

The legislation was laid in Parliament on 21 February 2024, and is now undergoing a process of discussion in both houses of parliament. Assuming the regulations go through as planned, there will then be an implementation period of three months before new contracts must be compliant with the regulations.

Following this, there will then be a period of a further 12 months before existing contracts will need to be compliant. This should allow for a managed transition from existing to new contracts over a period of time to reduce the potential for instability.

We therefore expect the regulations to be fully in force for the whole industry around summer 2025.

Milk contracts update