Fair Dealing Obligations (Milk) Regulations 2024

Monday 25th March 2024 Lords Chamber

Motion to Approve

18:42

Moved by

[Lord Douglas-Miller]

That the draft Regulations laid before the House on 1 March be approved.

Relevant document: 16th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord Douglas-Miller) (Con)]

My Lords, I declare my interests as set out in the register. This evening’s protests around Parliament by farmers, seeking a fair price for their product, I think speaks to the need for these regulations.

These regulations are the first of those that were promised, with pigs and eggs to follow, and are part of this Government’s continued backing of our farmers, as the Prime Minister made clear at the NFU conference only last month. These regulations make use of powers in the Agriculture Act 2020, introduced by the Government to help level the playing field between dairy farmers and the larger processers that they supply. The then Agriculture Bill was debated intently in this House and the expertise of many noble Lords helped to shape these powers, for which I extend my thanks. I hope noble Lords share my delight that this work is coming to fruition.

The dairy sector plays an extremely important role in UK agriculture. Its success is underpinned by countless relationships between producers and processors that work extremely well. However, we have been made aware that, for some time, there are examples where relationships are not as constructive as they should be, and the vulnerable position farmers are in can often be exploited. The public consultation carried out in 2020 sought to uncover the issues and inform the types of interventions required to address them. The responses highlighted the main issues that dairy farmers experience, and we have constructed these regulations in direct response to those issues.

18:45

We also listened to the perspectives of the milk processors. While the central aim of the regulations remains to enhance fairness and transparency for UK dairy farmers, we have also taken great care to avoid unnecessarily constraining those processers who already treat farmers well. Throughout the entire process of developing these regulations, we have undertaken extensive industry engagement with representatives from across the dairy supply chain to ensure that the regulations were effective and proportionate. It is incredibly pleasing to report that, since the introduction of these regulations, the industry has been in agreement that what we have developed strikes the balance between improving protections for farmers and maintaining the flexibility that businesses need to remain agile.

We will have the opportunity to discuss the content of the regulations, but I will summarise the rationale behind some of their most significant provisions. The regulations introduce a legal requirement for a written contract. We appreciate that this is already commonplace in the industry, but enshrining it in an agreement in writing is the most effective way of safeguarding farmers’ rights. We want to see this best practice universally adopted. Importantly, this also allows us to protect farmers from the imposition of changes without their agreement. The consultation responses revealed quite a worrying number of instances where the agreements farmers had signed up to were changed without their consent. Clearly, this is not the basis of a respectable business relationship. The regulations expressly prohibit unilateral contract variations, so farmers know that, once they have signed up to a contract’s terms, their agreement is required before any changes can be made.

The regulations introduce new requirements on processes to be more open about how prices are determined through the inclusion in the contract terms of the factors that will be used to determine the price being paid. We know it is ultimately the market that decides the price of milk at any given time, and these regulations are not an exercise in price-fixing. However, where farmers are subject to price variations, they should be confident that these have been determined fairly, in line with their expectations, and that they are a true representation of market value. Farmers have sometimes been left scratching their heads as to where the price included in their monthly milk cheque has come from. This new approach will ensure a far higher degree of trust and transparency.

When it comes to either party wanting a business relationship to end, there are now new rules that apply to all contracts on the process of termination. The specific details of this will still be a matter of negotiation, but they will now be subject to some broad parameters to avoid unfair practices occasionally seen in the past, such as restrictions on the days on which farmers are permitted to serve notice. This is to ensure that farmers are not subject to unjustifiably short notice themselves, nor are they trapped in a contract that they want to terminate for an excessively long time.

The regulations address problems farmers raised with us about exclusive contracts, which are contracts that stipulate that a farmer supplying one processor must supply them with the entirety of their production volume. These arrangements have a place in the industry and can be mutually beneficial. However, they can also be harmful to farming businesses when used alongside other contract terms, such as volume gaps and A and B pricing. Therefore, it is no longer permitted.

It is also worth touching on the way in which the regulations account for farmer representation. We are aware that many democratic organisations, such as co-operatives or producer organisations, are inherently structured to adequately represent the interests of their farmer members. As such, we have allowed for lighter regulation of these groups, exempting them from the pricing provisions and the rules on contract variation.

Finally, the regulations establish how we will ensure compliance. We are recruiting a new agricultural supply chain adjudicator, who will be in post before the regulations come into force. This borrows from approaches which have proven successful in related contexts. The individual appointed will investigate complaints and be able to issue substantial fines to anyone in breach.

In conclusion, I hope that I have been able to assure noble Lords that these regulations are the right approach to some of the problems faced by the dairy industry. They focus on those areas the industry has clearly told us need to be improved. They represent a significant step forward in achieving fairness and transparency for UK dairy farmers. I beg to move.

[The Lord Bishop of Hereford]

My Lords, I applaud His Majesty’s Government for these new contract regulations. They are both comprehensive and long overdue in addressing matters of serious injustice in the dairy farming sector. Unfair milk contracts have been an area of concern for the dairy sector for many years, going back to the voluntary code of practice for dairy contracts, introduced in 2012. In their current form, most milk contracts do not create mutually balanced business relationships between buyers and sellers. Rights and obligations are often heavily biased in favour of buyers.

At times of pressure, purchasers have been able to change contract terms and pricing mechanisms, in some instances even introducing retrospective penalties and price cuts without negotiation. The Covid-19 crisis saw many of these scenarios play out. Farmers were hit with price cuts at no notice, a lack of transparency on pricing, and delayed payments, resulting in significant pressures on producers during this challenging period.

These regulations will see freely negotiated and fairly balanced contracts, tailored to the needs of both buyers and farmers. They mark a significant step forward. It will be important for industry and government to help support the development of farmer representation structures, such as producer organisations within the dairy sector, to make the most of the regulations and improve trust and collaboration across the supply chain.

This legislation contains extensive powers for the Secretary of State to oversee and enforce the code. I welcome the recruitment of the agricultural supply chain adjudicator, who will, among other things, enforce the regulations on behalf of the Secretary of State. Can the Minister clarify whether it is intended that the person appointed to this role will learn from the operation of the Groceries Code Adjudicator, which has been in operation since 2013?

[Baroness McIntosh of Pickering (Con)]

My Lords, I warmly congratulate my noble friend on bringing forward these regulations. They plug a gap which has long been open, as most farmers do not supply supermarkets directly and so are not covered by the Groceries Code Adjudicator.

When I chaired the Environment, Food and Rural Affairs Committee in the other place, I took a small delegation to Denmark to learn about the effectiveness of its milk and other co-operatives. Does my noble friend see this as an opportunity to encourage more co-operatives and producer organisations than we have seen in the past?

I grew up in the hills of the north of England, where I could see how fiercely independent hill farmers and others were. There is often a certain resistance to working together. I hope that the regulations my noble friend has presented this evening will lend themselves to producing such co-operation in future.

The NFU has long argued for fairer, more transparent supply chains. I hope that its pleas will be rewarded in the regulations before us. Can my noble friend assure the House that the Government will lend their support to the development of representational structures, such as the producer organisations and co-operatives to which he alluded? This will ensure that the dairy sector can work collaboratively and effectively with improved trust and greater collaboration across the supply chain.

I warmly welcome these regulations.

[Lord Curry of Kirkharle (CB)]

My Lords, I too warmly welcome these regulations. It is interesting and rather ironic that the farmers are protesting in Parliament Square while we are addressing this topic. When I saw the tractors outside, I felt rather envious. I wished I had brought my own tractor from Northumberland, although it might have taken most of the weekend.

This has been an issue for a very long time. I have been involved in trying to encourage better relationships within the dairy and other sectors for at least 25, if not 30, years. This is an important development. I welcomed it when the then Agriculture Bill came into the House. It was a big step forward for the Government to bring this in as part of that Bill.

I have two questions for the Minister. First, did the Government seriously consider whether to extend the existing GSCOP and Groceries Code Adjudicator to include the elements contained in that Bill? There have been at least two reviews of the scope of GSCOP during the years. Many of us have been keen that that scope should be extended down the supply chain to provide greater protection and support for primary producers.

Secondly, if the answer to that is, “Yes, we have considered it but have decided to go it alone and establish our own adjudicator within the dairy sector”, are the Government likely to extend that scope to other sectors? Many of the issues dogging the dairy sector dog other sectors too. Relationships within supply chains are nothing like as good as they should be and, in many cases, degenerate into confrontational relationships. In my view, it is important to look at other sectors. When the adjudicator is appointed, it should be made clear that—if it is government policy—the remit is likely to be extended to include other sectors.

[Lord Grantchester (Lab)]

My Lords, I thank the Minister for his explanation to the House today. This is an incredibly important measure to help resolve deep-seated problems at the producer end of the milk supply chain.

I declare my interests and experiences from being involved in a supply chain, as I have owned a dairy farm and received payments for over 40 years. I supplied milk in the beginning to Milk Marque and subsequently to several other processors, as well as chairing a producer group and the milk co-op Dairy Farmers of Britain. I was also a shadow Agriculture Minister in the Lords during the passage of what became the Agriculture Act, opposite the noble Lord, Lord Gardiner. I thank him for committing Section 29 into the Act.

The milk industry is extremely competitive. It has evolved with the rise and consolidation of supermarkets. Their dominance in the grocery trade has migrated milk away from doorstep deliveries. The consolidation of the top, supermarket end of the supply chain has driven consolidation in the processing sector. I liken it to the challenge of playing musical chairs, whereby the number of processors is successively reduced by the expanding supermarkets, which channel the supply chain towards expanding processors. An example of this business is the Co-op, which, at that time, expanded by acquisition. It reduced its milk suppliers from two to one, whereby the Co-op’s amalgamation costs of £6 million were, in effect, paid for by the dairy supply chain competing to be the one supplier of milk, without much regard to fair dealing.

By contrast, the service sector can be equally unstable and volatile, supplying milk to outlets such as Starbucks and others. In the other place, the debate mentioned the possibility of waste. I agree with the Minister in the other place, Mark Spencer, that there is virtually no waste in the milk chain. The recent example of so-called waste, when Covid shut down such outlets, resulted from those dairy suppliers being suddenly told that there would be no collection of their milk for the foreseeable future, and they faced the problem of safe dispersal immediately, with full tanks and cows needing to be milked again. I pay tribute to Dairy UK and Defra, led at that time by the Secretary of State George Eustice, for rectifying the situation.

19:00

I can explain that farmer co-operatives set up Westbury to produce milk powder so that the price of the commodity product, milk, was not set by the last supply to clear the market. The supply chain has also re-engineered milk away from the spring flush towards the supply trough at winter housing, which has taken considerable investment in the chill chain, such that milk freshness is now maintained at 4 degrees, from the farmer’s milk tank, through processing and distribution, to being on the supermarket shelf. The milk industry is a very mature, successful and effective sector of agriculture, yet it needs this regulation.

In the passage of the Agriculture Bill, debate took place around GSCOP and the role of the Groceries Code Adjudicator, situated in the Business Department, not Defra. I declare my interest as being in the Labour team that took that legislation through the House. The Groceries Supply Code of Practice is different; it is between supermarkets and their immediate business suppliers, not primary producers, which generally do not have direct contracts to supply milk to supermarkets. Careful consideration is needed to determine in which department the agricultural supply chain adjudicator should be positioned. There is a belief that this code of practice can be swiftly implemented, but it has yet to be written. The powers of the adjudicator must be clearly understood in the supply chain and will not in any way relate to prices in the market. This took some considerable time to be understood in the GSCOP, where invaluable experience and advice will be useful, but residing in the Business Department. I agree that the regime should not be interfered with. The great success of the groceries code was in no small measure due to the appointment of the correct person in that independent role.

Farmers are generally not used to taking their products beyond the farm gate. Does the Minister agree that careful handling of the fair-dealing obligation in the milk sector must prove successful if this regime is to be expanded with confidence into further sectors of the industry, next being the pig industry? Any hint of price setting or collusion will entangle the Competition and Markets Authority. There must be no misleading in that respect, with regard to what this important framework must achieve in establishing fair, balanced contracts that are clear and transparent. It will necessitate nearly all processors issuing new contracts of supply and farmer/producer organisations of those processors coming out from under the wings of processors into effective business supply managers and negotiators, on behalf of their farmer members. There could be a need for training and support from the department to help them understand how they can make a difference.

It is positive that the business model of producer organisations will allow associations of producer organisations to arise without recourse to CMA attention. Can the Minister assure the House that, whoever the headhunters are, they understand and communicate the powers of the adjudicator’s office, where the first responsibility is to issue necessary guidance? Will that guidance be subject to industry consultation and endorsed by Parliament?

While it is now four years since the Agriculture Act, there has been exhaustive consultations and discussions within the industry. I pay tribute to the NFU’s Dairy Board, under the leadership of Michael Oakes, for contacting every processor and producer organisation to secure agreement that this regulation must be embraced and made to work effectively by the whole industry. It is vital that long-term relationships are built up for the benefit of consumers.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I thank the Minister for his introduction to this SI and for his time and that of his officials in providing a briefing for this long-awaited statutory instrument. Other noble Lords have made positive comments on supporting dairy farmers, and the detail of this statutory instrument. I am grateful to the NFU for its briefing.

Since the voluntary code of practice for dairy contracts was introduced in 2012, nearly 12 years ago, purchasers have been able to change contract terms and pricing mechanisms, even, in some instances, introducing retro-spective penalties and price cuts without negotiation. The Covid-19 crisis saw this happen many times: farmers were hit with price cuts at no notice, and there was a lack of transparency over pricing and delayed payments, resulting in significant pressures on producers. Farmers got a very poor deal.

This SI will introduce mandatory minimum terms for dairy contracts which must be adhered to. As the noble Lord has said, these contracts will cover price, cooling-off periods, notice periods, variations, exclusivity and farmer representation. All these should make a huge difference to how farmers are treated and ensure that they get a fair price for their milk, which is essential for the survival of the dairy-farming industry. It will also bring a level of transparency into milk contracts not previously present.

I fully support this SI and have a point to raise. The Government conducted a call for evidence at the end of 2016 on the remit of the Groceries Code Adjudicator and whether it should cover all primary producers. This concluded that it would be better for primary producers in the dairy industry not to be covered by the GCA. That was eight years ago. Similarly, the consultation on the issue took place between June and September 2020, nearly four years ago. It would seem that the Government, although concerned about an unfair pricing system for farmers, were not in a hurry to do anything about it.

There are large parts of the instrument around termination of contracts, including where the business purchaser becomes insolvent and where there are disputes and enforcement. I welcome these sections, as they give farmers access to redress when things go wrong.

I understand that the debate on this SI in the other place was very short indeed, and I have no wish to prolong the debate here this evening. This legislation, while long in the making, is a positive step forward in addressing the imbalances that we have seen for too long in the dairy supply chain. I also hope that it will lead to support for farmers going forward, as they look to create the right structures to make the best use of the issues in this legislation.

Finally, I place on record my thanks, and I am sure the thanks of many others—the noble Lord, Lord Grantchester, referred to this—to Michael Oakes, who has been the chair of the NFU Dairy Board for eight years. Without his tenacious work over the past decade on this issue, I doubt that we would be debating it this evening. It seems that, without an advocate continually pushing, progress can be painfully slow. Let us hope that progress now speeds up considerably, and that this SI becomes law and is enacted without further delay.

[Baroness Hayman of Ullock (Lab)]

My Lords, I start by thanking the Minister for his introduction and saying how impressed I was to watch him pouring a glass of water at the same time: he is clearly channelling his feminine side by doing two things at once.

These draft regulations, as we have heard, propose to introduce minimum standards for the contracts that businesses use when purchasing milk from dairy farmers. We fully support the aim to improve fairness and transparency in the UK dairy sector, which, according to Defra, is characterised by small, fragmented dairy producers. We have heard a lot about the unfair commercial terms on which farmers have had to go into contracts, so we very much support this SI. Like other noble Lords, I thank the NFU for its work on this issue. The NFU has made it clear that it strongly supports the regulations, as unfair milk contracts have unfortunately been an area of concern for many years. The right reverend Prelate the Bishop of Hereford talked about the voluntary code of practice for dairy contracts, which came in in 2012. This has clearly not been working, so we very much welcome the regulations in front of us today.

While I have said we very much support the regulations, I have a number of questions for the Minister. The proposed requirements include that all contracts should be made in writing and contain clear pricing terms, through either a fixed or variable price, setting out how the price to be paid is generated and establishing a means for producers to challenge variable price calculations. We are very pleased that unilateral changes to contract terms will be prohibited and that the Secretary of State is going to be able to impose fines. The Minister said in his introduction that this is only the first and that further legislation will cover other agricultural sectors. The noble Baroness, Lady Bakewell, mentioned how long the regulations have taken. It has dragged on. Can the Minister say why it has taken so long? It is four years since the Agriculture Act was passed. Although he mentioned pigs in his introduction, does he have any idea when we are likely to see the SIs for the other areas we are expecting—pigs, eggs and fresh produce?

The agricultural supply chain adjudicator and the Groceries Code Adjudicator have been mentioned. Transform Trade sent an interesting briefing expressing its concerns around departmental fragmentation and the sectoral siloed approach that it feels the Government are taking by addressing the problems in only four sectors, and only at the farming stage. Its concerns include the fact that risks and costs will continue to be passed on to all supply chains; and that while the adjudicator may be able to address farmers’ experience of unfair trading practices, where the cause of that unfair trading practice originated with the food retailers, the retailers will continue to get away with passing unfair trading practices. I would be interested to have reassurances from the Minister on this concern.

Of course, not all farmers work in the four sectors that are covered. How does Defra intend to keep an eye on what is happening in the other sectors that are not protected? Will the adjudicator appointed to enforce the milk codes be able to share information relevant to the GCA’s ability to assess whether the 14 largest UK food retailers they cover have breached the Groceries Supply Code of Practice purchasing code? We need to be sure that this is working effectively.

The noble Lord, Lord Curry, asked about the scope of the GCA. This is a really important question. When I was in the other place, we did a lot of work on the GCA when it was established, and it really needs to be seen to be working effectively, including within this new regime.

My noble friend Lord Grantchester talked about food waste. He mentioned that there is little waste within the dairy sector, but the design of regulations under these powers is potentially a missed opportunity to implement the Government’s stated policy of using them to reduce farm-level food waste, as was said during the passage of the Agriculture Act. As we are expecting further SIs to come forward in a similar way, I would be interested to hear why the Government’s consultation on using the powers did not make explicit reference to, or explicitly invite evidence on, how the powers could be used to reduce food waste. Food waste prevention may well be on the Government’s radar, but it is not clear from the consultations that were carried out, so my final comment is that further elaboration and confirmation around that would be very welcome.

19:15

[Lord Douglas-Miller (Con)]

My Lords, I am very grateful for all the views shared on this SI. I believe we all recognise that the market needs to operate fairly, and that where there are vulnerable parties in the supply chain, the Government are justified in introducing protections. A great number of the questions this evening were focused around the adjudicator, its role, what precisely it is going to be doing and when it is going to be appointed, and I will come back to that in a little more detail and just answer one or two of the other questions first.

My noble friend Lady McIntosh of Pickering asked a few questions around co-operatives and producer organisations. As I said in my opening remarks, with these regulations we have looked to protect what was already working and to prevent only what was going wrong. Our consultation revealed clearly that many relationships in the dairy supply chain are exemplary and working well for all parties. This includes those where farmers have effective representation, be that through the producer organisation model or with the structures of a co-operative. As a result, some parts of these regulations do not apply for producers represented in this way. We hope this encourages purchasers to consider relationships with representative organisations, as evidence suggests that this can be beneficial to all parties.

I move on to the issues around the adjudicator, which were very eloquently expressed by the right reverend Prelate the Bishop of Hereford. The noble Lords, Lord Curry and Lord Grantchester, also touched on many of the issues, and the noble Baroness, Lady Hayman, talked extensively about them, so let me talk a bit about the role that the new adjudicator—the enforcement agency, if you like—will have. Our new adjudicator will focus on the first stage of the supply chain, on a sector-by-sector basis. We are confident that this targeted approach, looking in-depth at specific areas of the supply chain, will be very effective. We are currently recruiting our new agricultural supply chain adjudicator. The final decision will be taken by Ministers following the due Civil Service process. I have taken on board a lot of the comments made about the skills necessary for this individual and how we would like to replicate the process that was so successful with the Groceries Code Adjudicator.

I think it was the noble Lord, Lord Curry, who asked why an extension to the Groceries Code Adjudicator was not used instead. The idea of expanding the remit of the Groceries Code Adjudicator was explored in the formal call for evidence in 2016. This concluded that an extension of the GCA’s role further along the supply chain would not be appropriate. The reasons for this include that it would extend the GCA’s remit significantly. These regulations are focused on the contracts that dairy farmers hold directly, which are almost exclusively with processing companies. The Groceries Code Adjudicator instead regulates the relationships between the largest grocery retailers and their direct suppliers, another point covered by the noble Lord, Lord Grantchester.

There were further questions about why we are not going to use the regulations on all sectors. We will use the powers of Section 29 to protect farmers wherever necessary. However, the different needs and working practices of each industry mean that a targeted approach is needed to draft the most effective regulations. Our work on drafting this statutory instrument and the upcoming pork regulations has justified this approach, with the needs of each industry being very distinct. As well as developing regulations to apply to the UK pork sector, we have recently concluded consultations on the UK laying egg and fresh produce sectors. The Prime Minister has also announced a new review into the broiler chicken sector. There were a number of questions about what is going to be coming forward and the noble Baroness, Lady Hayman, also asked when we would see these SIs. When I have been asked that recently, I have replied, “Before the Summer Recess”, and I am hopeful that we might do even better than that in this case.

I am also picking up on the very important point from the noble Lord, Lord Grantchester, about the need for careful handling here, to ensure that the rollout into other sectors does not get derailed by heavy-handed or inappropriate activity. I am hearing that loud and clear.

I also picked up a number of questions from the noble Baronesses, Lady Bakewell and Lady Hayman, on why we have been waiting so long for these regulations. We can all acknowledge—I certainly do—that these regulations have taken longer than expected. However, it has been extremely important that we consulted and engaged extensively to ensure that we are able to take everybody with us on this journey. Again, for the reasons expressed by the noble Lord, Lord Grantchester, it is important we get this first step right. As noble Lords know, I am relatively new to this. Now that I am seeing it, I will push it forwards as fast as I possibly can.

The noble Baroness, Lady Hayman, also asked why these regulations do nothing about food waste. The fair-dealing powers can be used to address practices that result in on-farm food waste. In sectors where this can be an issue, such as the fresh produce sector, we can intervene and introduce new rules to reduce the amount of food going to waste. However, these regulations apply to the dairy industry, and it is only in extremely rare cases that milk is wasted—a point raised earlier. Our consultation did not reveal that a specific intervention was required to address this in this SI.

In summary, I hope noble Lords will agree that this SI is both necessary and proportionate.

Motion agreed.