Dairy contracts in European countries: research

6. Conclusions and recommendations

6.1 The purpose of this report has been to present the results of an analysis of the compulsory contracts or mandatory written contracts in European countries as there is currently limited evidence on the impact of these in the countries in which they currently operate.

6.2 In general the study does not find reasons why the MWCs cannot be applied to the Scottish dairy market. However, the specific conditions need to be negotiated between the parties.

Recommendations for the Industry

6.3 To avoid excessive exposure of processors to risk and damages to the dairy supply chain, it is important that the exclusivity clauses should be eliminated and replaced by contracts that stipulate volume, price and minimum contract time duration.

6.4 Given the seasonality of the production annual contracts are probably the most suitable duration of the contracts (evergreen contracts can be negotiated by the parties).

6.5 Farmers commit on contracts a schedule of quarterly or monthly volumes, with deviations negotiated.

6.6 Mandatory written offers in advance (i.e., a formal offer is sent to the producer say two months in advance of the contract termination date) comprising the conditions of the contract for the following period can be useful to avoid the difficulties that producers face in trying to terminate their contracts within a reasonable period if significant changes to prices or the terms of contracts are proposed.

6.7 The pricing scheme chosen (i.e., fixed, formula or a combination of both) is also subject to negotiation and might depend on the duration of the contracts.

6.8 The industry can benefit of encouraging POs. For farmers, they can provide bargaining or at least greater help with understanding the details behind the contracts. For processors they can provide an organised way to collect milk reducing transaction costs.

6.9 In addition, establishing an IBO, bringing together all the stakeholders, would be useful for the industry as it will allow them to discuss supply chain issues. It could be a way to develop collaboration on the dairy supply chain.

Recommendations for the Scottish Government

6.10 Encourage the formation of POs led by negotiators with skills and experience and are able to gain the trust of farmers. A strategy for this needs to be established with problably the Government supporting financially the starting of the POs, although they should be supported by the farmers.

6.11 Encourage the industry to create an IBO, with the participation of all the stakeholders i.e., farmers, processors and retailers, to discuss dairy supply chain issues and move towards a collaborative approach.