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Draft Fair Dealing Obligations (Milk) Regulations 2024

Debated on Tuesday 19 March 2024

The Committee consisted of the following Members:

Chair: James Gray

Abrahams, Debbie (Oldham East and Saddleworth) (Lab)

Ali, Tahir (Birmingham, Hall Green) (Lab)

Bonnar, Steven (Coatbridge, Chryston and Bellshill) (SNP)

† Brereton, Jack (Stoke-on-Trent South) (Con)

† Doyle-Price, Dame Jackie (Thurrock) (Con)

† Edwards, Ruth (Rushcliffe) (Con)

† Fletcher, Colleen (Coventry North East) (Lab)

† Gullis, Jonathan (Stoke-on-Trent North) (Con)

† Hamilton, Mrs Paulette (Birmingham, Erdington) (Lab)

† Hammond, Stephen (Wimbledon) (Con)

† Hopkins, Rachel (Luton South) (Lab)

† Loder, Chris (West Dorset) (Con)

† Spencer, Dr Ben (Runnymede and Weybridge) (Con)

† Spencer, Mark (Minister for Food, Farming and Fisheries)

† Throup, Maggie (Erewash) (Con)

† Watling, Giles (Clacton) (Con)

† Zeichner, Daniel (Cambridge) (Lab)

William Opposs, Committee Clerk

† attended the Committee

Fourth Delegated Legislation Committee

Tuesday 19 March 2024

[James Gray in the Chair]

Draft Fair Dealing Obligations (Milk) Regulations 2024

I beg to move,

That the Committee has considered the draft Fair Dealing Obligations (Milk) Regulations 2024.

It is a pleasure to serve under your chairmanship, Mr Gray.

I begin by saying how proud I am to support the UK’s dairy sector, from the hardworking farmers to the innovative processors and manufacturers which produce the multitude of world-renowned products so dearly loved by consumers. The regulations safeguard the future of the UK’s dairy sector by ensuring that those involved in it are treated fairly. Although there are some fantastic examples of working relationships in the sector, we know that wherever there are commercial imbalances in supply chains, unfair practices sometimes emerge. Farmers are often the victims of such unfairness.

The Government introduced new powers in the Agriculture Act 2020 that allow us to address unfairness with new rules to govern the relationships between buyers and sellers. This statutory instrument, concentrating on the dairy sector, represents the first exercise of those powers. To inform our approach, we conducted a public consultation and have subsequently maintained a close working relationship with industry stakeholders to ensure that the rules are workable and proportionate. I am happy to report that since we introduced the regulations, the broad industry sentiment is that we have achieved that goal.

The regulations establish a framework for fair and balanced contracts; within those broad parameters, we have maintained flexibility for contractual arrangements that reflect different business practices, as long as all expressed terms are clear and transparent. The rules therefore support freedom to contract, introducing additional parameters only where necessary.

The regulations begin by establishing a legal requirement for written contracts. Although these are already commonplace, they are often the starting point for enshrining the rights and responsibilities of farmers and processors in a clear, unambiguous fashion. Importantly, the regulations prohibit unilateral changes to the contracts; once signed, the terms and conditions cannot be changed without consent. Clearly, businesses must adapt and occasionally changes may be needed, but when they are, they should be discussed and agreed, never imposed.

The regulations also introduce a new approach to pricing, requiring processors to be more open about how price is determined and promoting transparency. There are many good examples of where processors openly communicate to suppliers how market conditions and other factors influence the milk price, and we want that kind of openness to become the norm, so that farmers are assured that their price is calculated fairly.

Where appropriate, we have accounted for the fact that where farmers are genuinely represented, either by representative groups or via structures in the company, those relationships can be regulated more lightly. As such, exemptions from the regulations are available: from the pricing provision where balanced negotiations take place, and from the rules on contract variations where amendments are agreed on farmers’ behalf by their elected representatives.

The regulations also introduce new rules addressing other problems farmers have experienced, including in the process of contract termination. The details of any process will still be a matter of negotiation, but will now be subject to some broad restrictions to avoid unfair practices. We want to encourage stable, constructive relationships and avoid short-termism; as such, all contracts must include clear notice terms, with farmers receiving a minimum of one year’s notice of termination by a processor. To ensure that a farmer never feels unfairly trapped in contract, it must also be clear how farmers themselves can request cancellation.

The regulations establish new rules on contractual exclusivity. Although we are not preventing this where it works well, it has occasionally been used in a way that disadvantages the farmer. Some of the practices used alongside exclusive arrangements, such as volume caps and A and B pricing, are no longer permitted in such circumstances. All processors must write into their contracts a clear dispute resolution procedure, setting out how a farmer can raise an issue and how it will be dealt with. That will mean better communication between the parties, which has sometimes been lacking, and could prevent many of the issues we have seen emerging.

We know that ensuring compliance will be critical to the success of the regulations. We are in the process of recruiting the Agricultural Supply Chain Adjudicator, who will be in post before the regulations come into force. The individual will be responsible for investigating any complaints related to the regulations and has the power to issue substantial fines to anyone found to be in breach.

I hope I have provided the Committee with the reassurance that this instrument is necessary, effective and welcome. The regulations do not interrupt what is already working well, but instead will ensure that the whole industry operates at the same standard, benefiting the entire supply chain.

It is a pleasure to serve once again with you in the Chair, Mr Gray.

I am grateful to the Minister for his good explanation and introduction. I echo his points about the excellence of the UK dairy sector. The regulations have been a long time coming: people in the industry have been pressing for change for a decade or more. It is almost four years to the day that we sat here discussing the Agriculture Act 2020 which paved the way for the regulations today. I am aware there has been full consultation and, I suspect, a fair amount of negotiation behind the scenes, and I share the Minister’s view that producers and processors are largely happy. If it is good enough for them, it is clearly good enough for me, so we will not oppose the regulations today.

I welcome the new regulations. But the delays have meant that too many dairy farmers have suffered while waiting for them. It is right that contracts be in writing and as transparent as possible, with clear pricing terms through either a fixed or variable price and a proper explanation of how the price to be paid is generated. Farmers do need to be empowered to challenge prices if they feel the correct process has not been followed, and they should be able to terminate contracts within a longer cooling-off period or if a buyer misses payments. It is right that any alterations to a contract will have to be agreed by both parties rather than buyers just changing their minds unilaterally.

As ever, enforcement is critical. The Government have chosen to create another adjudicator, in addition to the Groceries Code Adjudicator. As the Minister said, the post is currently being advertised through headhunters on a significant salary. It is not clear why a separate system and a new enforcement agency should be set up when we already have the Groceries Code Adjudicator. We touched on this during the passage of the Agriculture Act, four years ago, when we argued that the powers of the Groceries Code Adjudicator could be extended and possibly facilitated by the additional funds allocated to the new agency.

Can the Minister explain why he has chosen not to consolidate and streamline those tasks within one body, particularly as the activities concerned are similar, well-aligned and actually overlap? Why will the adjudicator sit within DEFRA rather than enjoy the independence that the GCA has? As we anticipate further fair dealing regulations in other sectors, we could end up with a plethora of such adjudicators—I am not sure what the collective noun would be. I cannot help feeling that this is something that could end up being revisited in the future, so it might be sensible to try to work out why it is being done now.

The explanatory memorandum states:

“There is a small anticipated negative financial impact on the public sector”—

beautifully worded—

“for the set up and maintenance of the new enforcement agency.”

In other words, it will cost money—obviously. Can the Minister tell us how much this process will cost?

In the Minister’s introduction, he said that the adjudicator will be in place by the time the regulations come into effect. I have heard comments from the industry, which welcomes the regulations, that they will be implemented in 12 weeks. That is quick, which is good because we want them to take effect, but can the Minister assure us that the adjudicator will be in place by that time? Will he ensure that full guidance will be available? That is important because although the legislation is quite detailed, I suspect that people will look for even more detail, and what we do not want to see is a situation in which rules are enforced but the industry does not quite know how to do that.

I will also just pick up on the points made by the Secondary Legislation Scrutiny Committee, which raised the vexed issue of Northern Ireland, where some farmers, of course, are selling directly into the Republic of Ireland, where this legislation would not apply. I wonder whether the Minister could say a little bit more about that.

There is just one other issue that I will raise. We know that there is a lot of waste in the food system, particularly when buyers have a habit of rejecting produce that seems to everybody else in the system to be perfectly acceptable. I wonder whether we have missed an opportunity here to consider waste in the food supply chain. That point was made by an academic, Carrie Bradshaw of the University of Leeds. She has pointed out that none of the Government’s consultations on using the fair dealing powers have made reference to waste. Could the Minister say whether that issue was given any consideration?

Although I appreciate that there are differences in how the dairy sector operates compared with the egg, pork or poultry sectors, which require individual consideration, there is a system-wide problem that needs to be addressed. Again, that came up in the discussions about the Agriculture Act 2020. Have the Government conducted a thorough assessment of the fairness, or lack of it, in the food supply chain as a whole, and where does the Minister think the weaknesses now exist? How much progress has been made in mitigating them?

We need to take complaints from suppliers in the supply chain very seriously; that issue is raised consistently in the food industry. As I say, we do not oppose this measure, but we do not think that the Government have really approached this issue with the pace and urgency that are required. A much more strategic approach is called for. We need to be more confident that the food supply chain works efficiently, effectively and equitably —a market in which risks and rewards are shared more proportionately and fairly. The danger is that if nothing is done to improve the supply chain, more suppliers will be driven to the brink and pull out of producing food all together. Sadly, we are already losing too many British growers and food companies. That is bad for them, bad for the UK in general and bad for UK food security.

I am very grateful to the shadow Minister for those questions. What I will say to him for a start is that we talked to the Groceries Code Adjudicator quite a lot and sought its advice. The GCA has a very good working relationship with retailers, including the major retailers. We did not want to break that system up. We want to allow it to continue, because, as I say, the GCA has the sort of working relationship whereby it is able to snuff out challenges and problems quite quickly, because of that close working relationship. I think that to expand that office would have diluted its effectiveness.

Of course, we want to keep the adjudicator within DEFRA. I know that the shadow Minister has been critical in the past that the Department for Business, Energy and Industrial Strategy was the Department overseeing the GCA; it now sits within the Department for Business and Trade, of course, but the DBT consults with those of us in DEFRA. I also know that he has been critical of the fact that BEIS conducted a review of the GCA at one time. Of course, we want to try to retain control of the adjudicator and ensure that it sits neatly within DEFRA, so that we can continue to watch it very closely.

The shadow Minister also talked about timescales, asking when the new adjudicator will be in place. I cannot stand here today and guarantee when they will be in place, because, of course, we are going through a recruitment process. We need to make sure we get the right person; I would rather have the right person than just get anybody quickly. But I am confident that we have a broad pool of quality people to choose from and hopefully the right person will come through that process, although I do not want to prejudge that process until it is complete.

Finally, the shadow Minister talked about food waste. That is something that we have looked at, of course, and we are very keen to reduce food waste wherever we can. Actually, the dairy sector is very good at not wasting food; it is very good at putting milk into cheese and yoghurt if there is an over-supply of liquid milk, rather than just producing more liquid milk. I think that the greatest amount of milk that is wasted is wasted from domestic fridges, rather than within the sector itself. I am sure there is more that we can do on food waste, but that will require another vehicle or another method.

Obviously, this is a cyclical industry and it is particularly distressing when we hear stories of milk being poured into ditches, which of course it should not be, or being disposed of in other inappropriate ways, because of some of the imbalances in the supply chain. Is the Minister confident that the new system will lead to less milk being wasted in that way?

I actually am. I think this measure will help, because it will mean that there is much more fairness in those supply chains and that those contracts are much more robust in how they are formed. So, I think we will be able to avoid such wastage of milk in the future.

The shadow Minister mentioned devolved Administrations. Of course, we have consulted very closely with the devolved Administrations and they are very supportive of the regulations.

Question put and agreed to.

Committee rose.