Dairy farmers contract fight: Demand right to go at any time

The ability to terminate a milk supply agreement at short notice is a “farmer’s trump card” — but three major processors say no.

UDV president Paul Mumford says dairy farmers need the leverage of being able to leave a processor at short notice to negotiate a better milk price.

Dairy farmers are demanding the right to terminate their 12-month contracts with milk processors at any time, allowing them to leave for higher-paying rivals or leverage step-ups.

United Dairyfarmers of Victoria president Paul Mumford said the ability to terminate a milk supply agreement at short notice was a “farmer’s trump card”, but was only on offer from a couple of processors showing “good industry stewardship”.

Bega’s and Saputo’s agreements already allow farmers to cease supply at any time during the 12-month contract and divert milk to rivals at short notice.

But New Zealand giant Fonterra and local firms Norco and Bulla Dairy Foods lock farmers into milk supply agreements for the whole season, only allowing them to terminate if the companies commit a “material breach” of contract.

Mr Mumford said the UDV was calling for flexible termination clauses to be enshrined in all agreements, as farmers prepare to greet what he called a “revolving door” of processors next month, eager to secure milk for the 2021-22 season.

“We’re in the box seat,” he said. “You will see a revolving door of (processors’) field teams coming to shore up supply, so do your due diligence.” But the dairy industry leader admits not all farmers have the bargaining power to demand flexible termination clauses, which he would like to see in all agreements as part of a review of the Mandatory Dairy Code that is due to commence in July. In the meantime Bega beverages executive general manager Mark McDonald said the ASX-listed company was happy to let farmers give just 30 days’ notice if they wanted to leave, relying instead on good relationships and a leading milk price to keep them.

“You would rather not have people bound to you,” Mr McDonald said.

A Saputo spokeswoman said it also offered suppliers flexibility “by providing a right to cease supplying us, either temporarily or permanently, but we request they provide 14 days’ written notice”.

However Fonterra has a different view, with its farm source director Matt Watt arguing “fixed term contracts for the full dairy season provide certainty for both farmers and us for forward planning”.

“Farmers have more certainty around returns to help them plan ahead with budgets, and for us, we have more certainty around milk volumes to enable competitive pricing and incentives to be offered.”

But that argument is undermined by the fact the dairy code already dictates processors cannot unilaterally terminate a farmer’s contract, unless they commit a “material breach”.

The code also states there is no requirement for farmers to be locked in. Given the imbalance in market power the code simply remains silent on farmers’ rights to terminate, only requiring any agreement to clearly “specify the circumstances in which the farmer may do so”.

Bulla dairy and procurement general manager Rohan Davies said the company did not allow farmers the right to simply terminate at short notice as its relied “on our supplier’s milk to manufacture products throughout the year which allows us to honour our contracts with our customers”.

“Our suppliers understand the importance of the annual planning to Bulla’s operation and our use of fresh milk and cream throughout the year to support Bulla’s cream and high-quality ice cream production.”

Alex Robertson, vice president of dairy lobby group Farmer Power, said he understood Bulla and other companies’ views, but if they wanted to lock farmers into 12-month contracts then they needed to offer higher prices.

“What if processors were to offer both, floating (flexible) and locked in agreements and then let people decide if they want to be freewheeling and not committed,” Mr Robertson said.

Mr Mumford said farmers should try to build flexibility into their agreements with processors, but admitted that was not always possible given the size of the dairy processors they were dealing with.

Some farmers have overcome the power imbalance by forming companies to broker better deals.

But Mr Mumford said the ideal would be to redraft the Mandatory Dairy Code so give all farmers the flexibility to withdraw from contracts at short notice. Norco did not respond to questions on its termination clauses.