Mandatory dairy contracts are a ‘hot topic’ in the UK but things got even hotter when NFU Scotland joined other UK stakeholders in a study trip to Spain to look at its experience with mandatory regulated contracts writes Vice President Gary Mitchell.

In the UK, the recommendation by the Grocery Chain Adjudicator (GCA), accepted by Defra, is to introduce a regulated compulsory contract specific to the dairy sector.

This is a seminal and definitive opportunity that NFUS believes must not be lost in ill-informed rhetoric and lack of effort. This must be an open minded, well considered and informed discussion, as it recognises the dairy sector needs to be reformed to underpin a sustainable, efficient and productive dairy supply chain.

This may be the most significant initiative in the UK dairy sector for a generation, and our plea is that all farmers and processors engage seriously. The 2012 EU Dairy Package included three key catalysts for the dairy sector: member states could adopt compulsory regulated contracts, increase the scale and effectiveness of Dairy Producer Organisations (DPOs) and develop Interbranch Organisations (includes producers, processors and can even include retail).

The UK opted for a voluntary code on contracts which has under achieved, DPO’s have not been developed in the UK to any degree, and we don’t have an interbranch organisation.

In contrast, in Spain, all three options have been adopted and have been in place since 2012.

Defra agriculture minister George Eustice, having considered clear evidence provided by the farming Unions directly and via the GCA, now recognises that there is a need to improve the position of farmers in the supply chain, that mandatory contracts supported by stronger and better farmer collaboration and representation will benefit the entire UK dairy sector.

To be clear, NFUS and our fellow Unions have no desire to support any initiative without clear evidence that it can deliver for farmers and processors.

To add to our knowledge, we led a small group of knowledgeable stakeholders from AHDB, SRUC and the NFU to Madrid. Our collective challenge was to gain first-hand knowledge, meet with the Spanish Government, INLAC (interbranch organisations including farming unions, co-ops, DPO’s) and the Association of Spanish Co-operatives to get the perspective of farmers, processors, co-ops and the government.

The Spanish Government had four main aims (all in line with the 2012 EU dairy Package); stabilise the dairy market, balance bargaining power, and improve both coordination and management of contracts. These ambitions are also very much in line with the GCA recommendations for the UK dairy sector.

There is natural reluctance to change, which can only be overcome though understanding the options. Some in the sector are unreasonably negative to the Defra initiative and while remaining diligent, NFUS and our fellow unions believe the evidence from Spain is very encouraging and removes many of the myths being promoted by some.

What is interesting, and we believe very positive, is that in Spain, not only is there mandatory, regulated contracts but there is additionally a Code of best practice.

The Mandatory Contract established in Spain is regulated by the Spanish Government’s agriculture department to ensure they abide by EU regulations. However, the ‘interbranch organisation’ (INLAC) consisting of processors, co-ops DPO’s and farming unions ‘oversees the implementation, management, custody and arbitration’ of the contracts.

The relevant EU regulation on dairy contracts sets a minimum requirement and, as demonstrated in Spain, can be built on and bespoke to individual member state requirements. Some have stated that it is inflexible, but this is NOT the case.

All parties - farmers, producer organisations, co-ops, and government in Spain - have overcome initial caution and concerns and see the introduction of mandatory contracts, through the interbranch organisation (INLAC), as a positive step.

The result is that ALL milk sold in Spain is now under a contract. All contracts are ‘agreed’ and overseen by INLAC.  In Spain, half of all milk produced is sold through a Producer Organisation and more than a third is sold through a co-op.

The mandatory contracts have increased stability and clarity in the sector, but not necessarily farm gate price or retail power. This is work in progress, and interestingly, government, processors and farmers organisations are open and active in adding to the regulation, and to address retail ‘power’.  The Spanish Government, itself, has a ‘low retail price’ indicator which triggers an investigation.

All parties are agreed that DPO’s must have the ability and confidence of farmers and processors to agree contract issues for all members. Farmers still believe that processors set the ‘agenda’ as options may be limited, but more effective DPOs can resolve this as the mandatory regulations and oversight are in place.

The Spanish arrangements are not a complete panacea.  There is still friction between the parties, but the Spanish Government is very engaged.  Through INLAC there is meaningful dialogue and an agreed process to oversee contracts.

There is also acknowledgement of the key role that farmer collaboration can play in improving the influence of dairy farmers, supported by the mandatory contracts.

There was plenty of ‘dairy’ food for thought in the Spanish sun as we work up our response to the Defra dairy contract consultation.