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The big issues to be tackled before you sign up to a new milk supply contract

Milk suppliers are grappling for the first time with milk supply contracts, which have been issued by a number of co-ops in the last few weeks.

Farmers must sign up to terms and conditions that will govern their milk supplies over the next number of years.

While these new contracts have caused considerable disquiet here, they have become the norm in Britain over the last few years.

A guide on what should and shouldn't be covered by these contracts was introduced in Britain in September. This voluntary code sets out good practice for milk contracts between producers and purchasers. The code is a response to a number of long-standing issues with dairy contracts, and had input from all of the dairy food chain from farmers to processors.

In tandem with this, the EU has developed a 'milk package' which is designed to secure the future of the dairy sector after quotas go in 2015. These measures are aimed at boosting the position of dairy producers in the dairy supply chain and preparing the sector for a more market-oriented future.

If member states opt in, it gives them the possibility to make written contracts between farmers and processors compulsory in the milk sector, and allows farmers to negotiate contract terms collectively within certain limits.

But, deliveries by farmer-members to their co-op can be exempted from this contract obligation if the co-op already has similar rules in place.

In assessing the fairness or otherwise of the provisions of milk contracts, farmers need to familiarise themselves with their own co-op's rules. Rightly or wrongly, these often offer the co-op board considerable scope to make decisions such as those set out in a milk contract.

big issues

1.Pricing

Britain's voluntary code insists that contracts set out a clear price, either via a clear formula or notification process so a producer can be certain of the base milk price that will be paid.

The code also stipulates that producers should be given at least 30 days written notice of any downward change to the price, new formula or notification process. It also states contracts should not permit retrospective changes.

2.Term and Notice Periods

The notice period generally ties in with what the rules of the co-op provide for membership notice.

The voluntary code recommends that producer notice periods should not exceed 15 months, except in cases where the purchaser cannot give notice to terminate (where the producer has permanent membership of a co-op), in which case the producer notice should not exceed 24 months.

3.Exclusivity

Milk contracts often demand that a producer supplies all their raw milk to one co-op.

This is fine for the farmer who has always supplied the one processor, and due to location or size, never intends to supply anyone else. However, this type of exclusivity will not suit dual suppliers.

In addition, farmers that want to expand production may find themselves in a situation where they want to expand but cannot because their milk purchaser is not interested in any additional milk.

The voluntary code includes a clause to allow farmers to supply milk to other purchasers, where the supplier expands their production and the first purchaser does not want to purchase the additional milk under the same terms and conditions.

4.Milk Volume Forecasting and Peak Management

Co-ops are already limiting their obligations to purchase milk beyond a guaranteed volume in the new contracts that are going out to farmers.

British co-ops (and others) have attempted to manage peaks and supply levels via their supply contracts with +/- 10pc tolerances.

Apart from the issue of whether these volume-related provisions are fair, farmers are also concerned about their ability to withdraw from an agreement and sell elsewhere.

Co-op membership rules may have provisions governing such a situation.

5.Producer Investment

An issue arises as to what milk producers can do if they do not want to be part of an internal investment programme, such as the ones recently floated by Glanbia and Dairygold.

Should a producer who does not wish to increase supply be obliged to fund capital investment by the co-op to fund expansion? The voluntary code in Britain states contracts should clearly specify whether and how any investment is to be returned if the producer resigns.

Farmers need trusting relationships with their co-ops. This can only be achieved by putting in place fair and transparent milk supply contracts.

Farmers must ensure they are happy with contracts before they sign on the dotted line.

Aisling Meehan, solicitor, tax consultant and Nuffield scholar, does not accept responsibility for errors or omissions. E-mail aisling@agriculturalsolicitors.ie

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