Time to rebalance risk in Northern Ireland dairy sector

Friday, 19 June, 2020

By UFU senior policy officer, Chris Osborne

In 2018, an industry-wide review by the Grocery Code Adjudicator confirmed an uneven distribution of power in the dairy supply chain. The Department for Environment, Food and Rural Affairs (DEFRA) announced that they would launch a consultation on contract regulation aimed at addressing this imbalance. After delays, word is coming through that the publication of the DEFRA-led consultation is imminent.

The milk contract in Northern Ireland (NI) differs slightly to that in Great Britain (GB).  However, the underlying principle is the same; the contract is critical in determining the business relationship between farmers and milk buyers.

The Northern Ireland dairy farmer is a “price taker” which automatically means that they are at a disadvantage in the business relationship leading to implications for the farmgate milk price. This is the most common complaint that I hear from our UFU dairy committee and the wider membership. Furthermore, Northern Ireland dairy farmers are paid retrospectively meaning our dairy farmers, unlike those in GB, do not know the price they are to receive for the milk they are producing.

During times of downward milk price pressure, milk purchasers have the ability, through purchaser’s discretion, to reduce prices without negotiation or explanation.  In NI, the headline milk price is of no value and this is because the buyer has the sole right to change it at will. The DAERA milk price for March 2020 was 25.60ppl and the average NI milk price in 1995 was 25.45ppl. Yet input and retail prices have risen disproportionately. Wholesale butter prices were very stable in the 1990s and from 2008 onwards, they hit a series of record peaks. Yet when it fell back down again, the average was nowhere near the lower 1990s levels.

This consultation is the first and (to date), only opportunity we have had to look at this.

The UFU along with our GB counterparts want to see transparent, fair, flexible and better-functioning contracts which are straight forward to understand. On the back of this vision, the UK farming unions have developed five key points for contract reform.  It is the first two key points that we believe are most relevant to Northern Ireland, namely pricing mechanism and relationships/farmer representation.

  • Pricing mechanism – the UFU want to see a rebalance of the risk between farmers and processors.

Discretionary pricing (whereby a processor can unilaterally vary the price at their choosing) should end and prices should be transparent. We need a pricing mechanism which is objective and verifiable. Discretionary pricing allows for much of the risk in markets and supply chains to be placed on to the farmer and the UFU believe that is unsustainable going forward. As we have seen over the last decade, discretionary pricing does not deliver a true market price. When commodity dairy prices rise, there is no reflective increase in farmgate milk prices. Yet, when dairy commodity prices fall, the reductions are very swiftly passed back to the primary producer.

The last three months has seen NI base milk prices falling in reaction to the turbulence created by the shutdown of the food service sector. Dairy farmers are unable to avail of Trade Credit Insurance and have born a disproportionate amount of the risk.

  • Relationships/farmer representation

The UFU believes that relationships are crucial to improved working between farmers and processors. Whilst NI is dominated by co-operatives, many have made that the case that these relationships could be improved. This consultation will put all processor-farmer relationships under the microscope.

The consultation presents an opportunity-in-a-generation to review the structure of the dairy industry, making it more sustainable, progressive and improve the way farmers and processors work together. Once the consultation is announced the UFU will look into how we engage with local dairy farmers. The likelihood is that this will be done virtually, but this will remain under review.

The UFU wishes to stress that this not about “us and them”. The industry needs to cooperate and what this represents is an opportunity to rebalance risk. To date, the risk has landed firmly with the farmer and going forward this needs to be addressed to secure the future of dairy farming in NI.