The Code of Practice for Contractual Arrangements between farmers and processors is a major achievement for the industry and will help ensure greater transparency and fairness in milk supply and pricing.
It was officially drawn up by the Australian Dairy Industry Council (ADIC), with farmers through Australian Dairy Farmers (ADF) and processors through Australian Dairy Products Federation (ADPF), who worked collaboratively and in good faith to establish the code.
The dairy industry Code of Practice builds upon the new legislation by setting out good practice for contracts between farmers and processors.
It will address issues with contracts that may be contested under the Unfair Contract Terms law for Small Business, which began operating on November 12.
The code applies to all standard-form contracts between processors and farmers, but does not preclude a farmer negotiating an individual contract with a processor.
Although this Code is voluntary, it is designed to set out recommended minimum good practice in terms of milk supply contracts.
Other benefits of a voluntary code include greater flexibility to adjust the code to suit the changing needs of industry rather than go through the potentially lengthy bureaucratic process, it is less intrusive, and the industry signatories have a greater sense of ownership leading to a stronger commitment to comply with the code.
All parties adopting this code have done so in full and it is anticipated that most of the milk produced in Australia will be covered by the code.
For purposes of definition, a contract is any written or verbal agreement between a farmer and a processor whether it is termed a contract or a supply agreement.
Farmers and processors are encouraged to engage in discussion on all elements of the standard form contract prior to signing.
The following 11 elements represent the Code of practice with further details to be found in the Addendum:
Clauses in the contract should clearly and simply state the mutual obligations of both farmer and processor.
Contracts should have a price or pricing mechanism that is negotiated and agreed; and/or have a pricing mechanism or price notification process.
At any given time, a farmer must be able to be certain of the base price that will be paid for the milk produced.
3. Pricing Mechanisms
Where the contract provides for a pricing mechanism it must include the exact pricing mechanism/formula to be used and how any variations are to be dealt with.
4. Contractual Variations (Step-Ups and Step-Downs)
The actual price paid to farmers may be subject to adjustments, provided that such adjustments are compliant with the Code.
If an adjustment occurs, a description must be set out clearly including pricing (or adjustment calculations) desired by either party.
Any downward changes to price adjustments cannot be made unless the farmer is given 30 days’ written notice of any proposed downward changes.
In that time, the farmer must be allowed to terminate their contract without penalty.
5. Loyalty Payments
A farmer is entitled to all loyalty and other payments where they have supplied to the end of a contract irrespective of whether they remain a supplier post a contract end date.
6. Volume/Exclusivity Clauses
Where a farmer has a contract with a processor and wishes to expand their production and a processor does not want to purchase the additional milk under the same contractual terms and conditions, the contract between the farmers and processor must allow the dairy farmer to supply the additional milk to other processors.
This clause will apply if the primary processor is prepared to take the milk in addition to the contracted volume at a lower price.
7. Contract Duration
Supply agreements may be for fixed terms or may be rolling arrangements.
8. Termination/Notice to Terminate
Unless otherwise agreed, for fixed-term contracts notice of termination needs to be a minimum 90 days in writing, and/or by mutual consent by the expiry of the existing contract period.
The farmer must supply to the end of the contract period.
9. Termination on Fundamental Breach
The contract must allow either party to terminate the contract with immediate effect if the other party fundamentally breaches the terms of the contract.
10. Dispute Resolution
A contract must include a clause which describes the process on how disputes between the parties to the contract will be managed.
It is proposed that the completed best Practice Code on Contractual Agreements as agreed by industry be reviewed after one year and then subject to a review every three years, or whenever the need arises.
A review can be requested by one or more parties to the Code.
The Australian Dairy Industry Council will take responsibility for the review.
The Code on Contractual Arrangements will be reviewed after one year and then subject to a review every three years or whenever a need arises.