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The voluntary Code of Practice agreed between milk processors and producers and announced at the Livestock 2012 event by former farm minister Jim Paice is now, we understand, in the hands of the competition authorities in order to ensure that the Code does not contravene any of the provisions of UK and EU competition law. The Code is welcome even if the details are not yet clear and

that a public stand-off between dairy farmers and the processors was necessary to bring it about. The government is to be congratulated in that it brought both sides to the negotiating table and, reportedly, banged heads together to secure a deal. According to DEFRA, the Code means that, in future, contracts

between farmers and dairy processors will be freely negotiated, fairer and more transparent. Individual farmers will negotiate contracts covering issues including pricing and notice periods. Farmers will have the ability to leave contracts more easily if they are unhappy with the price they receive for their milk. This seeks to redress the major problem that characterises the market for milk procurement at the present time. About two-thirds of all milk produced in the UK is processed by

just six processors and produced by a large if dwindling number of dairy farmers of varying sizes and efficiencies. In a sense, today’s milk procurement market has turned the situation existing prior to the abolition of the Milk Marketing Board on its head. Then, a relatively large number of buyers sourced their milk through one seller whereas now, the opposite is true; a large number of sellers seek to sell their milk to a relatively small number of buyers. Once the Code emerges from the thicket of regulatory approval,

we will need to give it time to prove its effectiveness. Should the Code prove to be an inadequate re-balancer of the powers of processors relative to that of their dairy farmer suppliers, then the new farming minister, David Heath, told MP’s that ‘I will certainly seriously consider the possibility of making contracts compulsory if the code fails to deliver the necessary changes’. This implies that government is seized with the possibility that it will be necessary to legislate. However, the government is already in the throes of legislating in this area in the shape of the Grocery Adjudicator Bill which first saw the light of day on 24th May last year, being introduced into the House of Lords on 10 May 2012. This followed a Competition Commission investigation which concluded that ‘the transfer of excessive risk and unexpected costs by grocery retailers to their suppliers through various supply chain practices if unchecked will have an adverse effect on investment and innovation in the supply chain, and ultimately on consumers.’

PAGE 2 OCTOBER 2012 FEED COMPOUNDER Government appears lukewarm to the idea that the Grocery

Adjudicator might play a role in the operation of the voluntary Code of Practice that has emerged from the face-off between the dairy processors and their farmer suppliers. In fact, it would seem appropriate for the adjudicator to be involved in the dairy Code of Practice in that the latter and the Grocery Adjudicator start from the same starting blocks – the disparate power of the milk processors and big supermarkets relative to their suppliers. And while the Grocery Adjudicator has coercive powers which, on present appearances, are not at the disposal of the voluntary Code of Practice, the latter faces exactly the same range of problems as the former, a marketplace where the distribution of market power is heavily weighted in favour of a small number of players. For if both the Grocery Adjudicator and the dairy Code of Practice

aim to curb the ability of, respectively, the supermarkets and the milk processors to exploit their power at the expense of their suppliers, the fact remains that many of the latter see in the emerging situation the prospect of improving their returns at the expense of their milk processing and supermarketing customers. Despite recent increases in the prices paid to dairy farmers for

their milk, a significant proportion are producing at less than their cost of production. And this is true not just of milk but of other livestock products too. The British Pig Executive (BPEX) calculates the cost of pig production in September 2012 at just under 169 pence / kg deadweight while producers are receiving 155 pence deadweight. Clearly, this is not a sustainable situation Both the voluntary dairy Code of Practice and the Grocery

Adjudicator are seeking to ‘rebalance’ the respective powers of the various players in their markets. The unspoken presumption is that the dairy processors and the

supermarkets will use their relative buying power to secure an unfair advantage over their suppliers, their advantage being used to secure a larger share of the total value added to the final product as it passes from farm to the consumer. That may, or may not, have been the case in the past and it may,

or may not, be the case that the Code of Practice and the Grocery Adjudicator’s efforts result in the disappearance of market-distorting practices. The fact remains that, however successful the Code of Practice and the Grocery Adjudicator are in eliminating unfair practices, there will still be a need to keep watch over the added value generated by the entire supply chain and, in particular, the proportion accruing to the different players in the chain.

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