Compulsory milk contracts: What can UK learn from Spain?
"To learn more about how these regulations can be used in practice, we looked at the Spanish industry where compulsory contracts were introduced about 5 years ago.
"This was done as part of a package which aimed to stabilise the dairy market, balance bargaining power along the supply chain and improve the relationship between farmers and milk buyers.
"Legislative support for the creation of Producer Organisations and the establishment of an Interbranch Organisation (IBO) were implemented at the same time to support these objectives," AHDB says.
Below is a summary of the key features of compulsory contracts in Spain:
- All sales of milk in Spain must be covered by a contract which specifies the milk price, volumes and term of the contract.
- The price can be either fixed, variable or a mixture of fixed and variable, but is set for the duration of the contract. In the case of a variable price, the reference used to adjust prices must be specified in the contract and be verifiable from published data. This data is collected by the IBO ‘Inlac’
- A variety of Price Indices are published for use within contracts using variable pricing. Milk buyers can also create their own index, although it must be specified within the contract to ensure transparency around pricing.
- Volumes must also be specified in the contract. The Spanish regulation allows for delivery tolerances to be specified in the contract.
- Contracts are offered to farmers for a minimum duration of 12 months. Farmers can refuse the initial offer however and agree a different length.
- Variations to contracts within the contract term can be negotiated between parties, but must be agreed in writing and notified to the Government Dept. responsible for monitoring the regulation.
In essence, milk buyers retain some discretion over the price level, as this is set at the beginning of the contract.
However, changes to prices within the term of the contract can only be made in line with the agreed index. The most commonly used indices used in Spanish contracts are a weighted average of the Spanish liquid milk price or movements in the wholesale prices of SMP
Contracts offered by the largest processors are dominated by fixed price offers (around 70%), with the remaining contracts paid variable prices.
With fixed price offers, the need by processors to be able to adjust to market conditions has led to contracts which incorporate two fixed prices - one for the first part of the term and another for the remainder.
While initially met with resistance by milk buyers, both the farmers and the processors feel they have improved the situation in terms of improving price stability and transparency. ■