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Anthony Gibson: Dairy code of practice should stop abuses

By Western Morning News  |  Posted: September 19, 2012

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The milk contract code of practice reminds me very much of the supermarket code of conduct, in that I suspect it will curb the worst abuses of market behaviour, without altering the fundamental balance of power between farmers and their processor and retailer customers.

It could hardly be otherwise, given the over-riding imperatives of competition law. Any arrangement, voluntary or statutory, which put the interests of producers before those of consumers, would very quickly be struck down by the competition authorities, which is why, even now, final publication of the code is being delayed, while the lawyers pore over the small print.

But we know the essentials of what has been agreed – a minimum three months' notice period for producers quitting a contract and at least 30 days' notice of a price cut – and we know that they will make processors think twice before cutting the price as their default response to market turbulence. The days of a dairy company seeking to make up for its own inefficiency or miscalculation (as with the cream price) by imposing a retrospective price cut on its producers are over, and a thoroughly good thing too.

Perhaps even more important, though, is the effect that the new contract should have in what the NFU's Andrew Butler calls "tightening the market". That won't stop prices falling when supply is running ahead of demand, but it should mean that prices rise further and faster when the fundamentals are strong – as they should have done last summer, for example.

If it doesn't, that is when David Heath or one of his successors may indeed need to reach for the statute book.

Even before its publication, the code is already bearing fruit. Arla's decision to increase the price to its non-aligned producers by 2.5ppl from October to bring it into line with what its supermarket suppliers are paid, and to simplify its pricing structure, is a direct response to producer demands for greater transparency on the one hand, and simplicity on the other.

Not everyone will be a winner from this process. Those farmers who get closest to the ideal milk supply/quality/constituent profile will no longer be quite so richly rewarded, while those with a supermarket contract will no doubt be looking to re-establish their differential, given all the extra hoops they have to jump through. But it will make it easier to compare and contrast, and so make a really well-informed decision on whom to supply.

Having said all of that, it is important to keep the code in its proper perspective. It does not mean that the producer price will never again be cut, or that costs will always be covered, still less that retailer pressure on dairies will be eased. Those are the facts of dairy industry business life and the best protection against them is not a new contract, important and valuable though it is, so much as selling to a processor who is efficient and innovative, has market power and, above all, has your best interests as a producer at heart, rather than those of its shareholders.

I am referring, of course, to Milk Link, whose members must have been watching the mayhem in what might be called the private sector with a degree of quiet amusement in recent months.

The balance of contractual advantage as between producer and processor is of much less relevance if you get a return as both, while the only real antidote to retailer power is scale, which is what Milk Link/Arla will provide.

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