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EVERYTHING YOU EVER WANTED TO KNOW ABOUT DAIRY PRODUCER ORGANISATIONS… BUT WERE AFRAID TO ASK

Having historically had very little influence or power with regards to the terms on which they sell their milk, dairy farmers may choose to come together as a Dairy Producer Organisation (DPO) to increase their bargaining position collectively. In this article Prospect Law’s Nina Winter provides a comprehensive introduction to the purpose a DPO typically serves, the activities it can cover, how a DPO is formed and how it typically interacts with its farmer members and milk processors, as well as how Brexit will affect DPOs.

What is a DPO?

It’s a group of dairy farmers who come together to jointly market their milk. They may have other objectives, too. They form a legal entity together (such as a limited company), and the group is then formally recognised by the government as a DPO.

What’s the point of a DPO?

First and foremost, the DPO is there to help improve the farmers’ bargaining position. There is now so much concentration at the milk processor level that, depending upon where farmers are based in the UK, they have often have very little – if any at all – bargaining power vis-à-vis the milk processor. By representing a bigger milk field, the DPO should have an improved bargaining position compared to the individual farmer members of the DPO.

But can’t dairy farmers do that anyway, without being part of a DPO?

Yes to an extent, but they have to be really careful about competition law. If a group of dairy farmers come together to jointly sell milk at the same price, they risk being seen by the competition law regulator as a price-fixing cartel. That’s serious – the farmers can be heavily fined or even risk criminal prosecutions, so they need to make sure they stay the right side of the legal line.

By contrast, DPOs can jointly market the milk – even at the same price across all farmers – and not fall foul of competition law, because DPOs are specifically authorised in law to do certain things.

What are the advantages of DPOs?

As well as hopefully improving the farmers’ bargaining position and giving the farmers some legal protection, the DPO also creates a formal structure allowing the farmers to co-operate with each other in as many ways as they want to. DPOs can be very flexible – farmers can choose the right legal vehicle to suit their objectives and then the DPO can work in the way that the farmers want it to. There are some legal parameters in terms of what the DPO can do, but inside those wide parameters, there’s a lot of flexibility and choice.

How are DPOs different from a co-operative?

In the UK, a co-operative is registered with the Financial Conduct Authority and it is regulated by the Co-operative and Community Benefit Societies Act 2014. The Act is prescriptive about the formation, registration and on-going governance of a co-operative. By contrast, the legal regime for DPOs is much less prescriptive and much more flexible. Put simply, farmers forming a DPO have a lot more flexibility than farmers forming a co-operative.

In addition, co-operatives in the dairy sector in the UK have traditionally undertaken milk processing on behalf of their farmer members. DPOs, being formed by milk producers, are far less likely to undertake processing.  If a DPO wanted to join with a milk processor, together they could form an Inter Branch Organisation (IBO). IBOs are for economic operators at different levels of the supply chain; producer organisations are for producers operating at the same level in the supply chain. 

How is a DPO formed?

Legally, a DPO must be formed on the initiative of the producers. It can’t, for example, be formed because a processor pushed for it. The producers agree one or more objectives for the DPO, and one of those objectives must come from the regulation; for example, the objectives of the DPO might be: placing the farmers’ milk on the market and concentration of supply (that’s one of the regulatory objectives); joint purchasing of inputs; and joint management of waste.

Once the farmers have agreed objectives, they need to form a legal entity and then apply for formal recognition of the DPO from the government. If the DPO meets the legal requirements for being a DPO, the government must by law recognise it, and this should be within 4 months of the application.

Once the DPO has been recognised, it is officially registered as a DPO and it can start doing its work.

What does a DPO do?

Whatever its farmer members want it to do, so long as it pursues one of the statutory objectives, stays within regulatory parameters and carries out its activities properly and effectively.

What could a DPO do?

There’s a huge amount of flexibility in terms of what the DPO could do for its farmer members. At the least integrated end of the spectrum, the DPO could simply negotiate the milk price and milk contract terms on behalf of its farmer members with a processor, and then the farmers would sign up to individual contracts on the terms that the DPO had negotiated.

At the most integrated end of the spectrum, the DPO could buy raw milk from its farmer members, have that milk contract-processed by a processor(s), then sell the processed milk on to customers, with the DPO (not the processor) having the supply relationship with the customer. The DPO could undertake marketing and R&D for its farmer members, buy inputs for them at large economies of scale, optimise production and transport costs, provide technical assistance to its farmer members, and help its members to achieve high environmental standards. The DPO could use futures markets to protect its members from volatility. 

The sky is the limit, and it really is up to the farmer members of the DPO to decide what they want the DPO to do. The key starting point is the rationale for the group of farmers coming together in the first place. Have they come together as producers all supplying the same processor? Or do they have a common production system?  Or are they in the same geographic location?  Or do they have the same vision for dairy farming of the future? Or do they have environmental objectives they want to achieve? Or do they have a brand idea that they want to develop together? Or do they simply want a better bargaining position and more stable prices for their milk?

Does the DPO have the right to terminate a farmer’s milk contract, or enter a new one on the farmer’s behalf?

Not unless the farmer members of the DPO want it to. The farmers might want the DPO to have the right, on their behalf, to terminate their milk contracts and move the milk across to another processor; this would certainly give the DPO a significant bargaining position with processors.  But equally the farmers might prefer that the DPO negotiates the terms and price, but they have individual milk contracts with the processor. If the DPO supplies more than one processor, then a farmer might be able to move his milk around between processors that the DPO supplies, benefitting from whatever price and terms the DPO negotiated with those processors. If the DPO supplies only one processor then the rules of the DPO will need to specify what happens when a farmer terminates his milk supply contract with that processor.

Does the DPO own the milk that its farmer members produce?

Again, only if the farmer members of the DPO want it to.

Does a farmer have to supply all of his milk to the DPO?

Not from a legal perspective; farmers can market some of their milk through the DPO and some elsewhere. Obviously if the farmers forming the DPO want to supply the DPO exclusively, they can make that a rule of the DPO. But farmers cannot be members of more than one DPO – that’s set out in the regulation. In addition, the milk going into the DPO must not be contracted to a co-operative.  Since co-operatives almost always require their farmer members to supply milk exclusively to the co-operative, that effectively means a farmer cannot be a member of a co-operative and a DPO.

Do all farmer members of the DPO get the same milk price?

That’s entirely up to the farmer members. They can all have the same price, or they can have different prices, as they choose.

Can a DPO sell to more than one buyer?

Yes.

How big can a DPO get?

Up until 31st December 2020, a DPO could cover up to 3.5% of EU milk production and up to 33% of milk production in a Member State. With Brexit now completed, a DPO is able to cover up to 33% of UK milk production.

Do DPOs have to be processor-orientated?

Not at all, and certainly a DPO cannot be formed on the initiative of a processor – it must by law be formed on the initiative of the milk producers.

What does “recognition” of a DPO mean?

It’s the process by which the government formally accepts the DPO as a DPO; once “recognised” by the government, the DPO can start work for its members. It’s really important to stress that recognition of DPOs is not done by processors – a common misconception. If the DPO is recognised by the government, it’s a DPO and that is that.

What if the processor won’t negotiate with the DPO?

There is nothing in law to compel a processor to negotiate with a DPO, and it wouldn’t be feasible to make it a legal requirement for processors to have to negotiate with DPOs. 

Certainly, if a DPO is formed with the sole objective of giving the processor a hard time, and it takes that approach from the outset, it’s highly unlikely that the processor will want to engage; after all, who wants to buy from a supplier whose key objective is to cause you difficulties?

Processors in the UK are likely to be somewhat sceptical about DPOs and the key for the DPO will be to offer the processor a compelling proposition.  What can the DPO offer to the processor, to encourage the processor to come to the table? Clearly a big milk field will help, especially at times when processors are recruiting. But what if the DPO offers a supply profile that meets the processor’s needs? What if the DPO manages the relationships with the farmer suppliers, so the processor only needs to have one negotiation – with the DPO. What if the DPO can offer the processor cost savings (e.g. by arranging transport of the milk to the processor’s facility)?

In addition, the likely forthcoming regulation of milk contracts by the government will mean that processors have to operate differently in any event; what a great opportunity for DPOs to enter the market and offer processors some compelling solutions at a time of challenge and transition.

What will happen to DPOs after Brexit?

Up to 31st December 2020, DPOs were regulated at EU level, whereas now domestic legislation has come into force and DPOs are recognised and regulated under that UK legislation. The provisions that have come into force are much the same as the EU provisions, but they have been tweaked to reflect the fact that they apply across the UK, rather than across the EU.

About the Author

Nina Winter is a Senior Solicitor with 16 years post-qualification experience in litigation and dispute resolution, with particular expertise in judicial review challenges to government and public body decisions and an established reputation as a legal expert in the agricultural industry. Nina read law at Oxford University before training and qualifying at Eversheds. In 2006 Nina joined the legal team of the National Farmers’ Union (NFU), the leading trade association representing farmers and growers in England and Wales. In 2009 Nina was appointed as the NFU’s Chief Legal Adviser, a position she held for 12 years before joining Prospect Law. Having worked as in-house counsel for 14 years, Nina is able to quickly identify the legal issues at stake and to work pragmatically and seamlessly as part of a team to achieve the client’s objective. Nina’s expertise in agriculture means she brings a comprehensive understanding of the issues facing agri-businesses to her legal work.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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