Producers are organising in order to demand better contracts from egg packers.
Free range egg producers have met to discuss the future of contracts amidst ongoing concerns prices have fallen too low for many farmers to make any money.
At a BFREPA meeting on 23 May in Gloucestershire at Adam Henson’s Country Farm Park, around 100 producers heard from BFREPA chairman Robert Gooch and Ed Savory from Birkett’s solicitors, who are working to develop model contracts, designed to protect producers from aggressive terms and conditions. The model contracts are expected to be ready for use in June.
Producers said they often lost money on eggs because contracts were weighted in favour of packers’ requirements.
“The supermarkets dictate what we’re getting for our eggs and the packer is in the middle and bowing to the power of the supermarkets,” said one producer. “We have to take it because we have a contract that says we have to supply for the whole flock.
“We have to accept the price [at the moment]. There should be a clause that says if it falls below a certain rate we can stop supplying. It needs to be flexible. At the moment, we are at the bottom of the pile. We lose money but are still contracted to produce the eggs.”
The group discussed the oversupply in the egg market, and the practicality of withdrawing from contracts. Several producers said this wasn’t very practical because there often weren’t alternative buyers for their eggs.
“If they’re pushing you too low, what’s the point?” said one producer. “You may as well stop and have a holiday.”
Another producer added: “Up in Scotland there is not the choice to go to different packers.”
Savory, who is developing model contracts, said “contractually it was achievable” to have agreements that allowed producers to terminate the contract if prices fell too low for them to make any money.
He said there were various options. “We need to have a mechanism that’s easily achievable,” he said. “The cynic in me says if it’s a baseline price, then the packer may drop to that price and say that’s the price. A minimum profit margin is an alternative mechanism.”
The group also discussed how the quality of their eggs was determined. Savory said that while examining contracts provided to Birketts, he regularly came across clauses that meant packers informed the producers how many had been graded as seconds with no opportunity to dispute that decision.
“I wonder how many producers have to just take it on the chin, and there is no recourse if the packer says they’re not the right quality,” said Savory. “We are seeking to rebalance that a little and there should be the option to say ‘I don’t agree with this grading’ and bring in a process.”
The process of egg collection was another point of contention. In some of the contracts the producer’s liability was extended beyond the farm gate. “It’s one example of where there are clauses which often people don’t read and understand,” said Savory.
One producer said he had had a pallet of eggs tip over on the back of his packer’s lorry, sending 10,000 eggs smashing to the ground.
“In all fairness the packer did pay,” said the producer, “but we had the job of clearing up 10,000 eggs on the farm, which was a horrible job and took hours.”
Problems in transit
The group also discussed liability should damage happen in transit between the farm and the packing station. “Sometimes we get grading that is three times worse than other pallets,” said a producer. “You have to raise the complaint and then substantiate it, so the onus is on you.”
“Technically they should be paying for the eggs of the grade and quality they collect, but it’s very difficult because it’s ‘he says, she says’,” said Savory.
The group discussed potential remedies such as including a clause that would allow a phased reduction of a flock if a producer was losing money.
“Trying to rework a contract when there’s oversupply is like pushing water up hill,” said a producer. “What about a phased reduction? If you could say, I will take 15% of flock out, that becomes an attractive option if you’re losing money, and it doesn’t leave the packer on a knife edge.”
What BFREPA wants
BFREPA examined dozens of its members’ contracts with packers and has recommended several areas for improvement in its new model contracts, including:
Exclusivity – agreements were found to be quite onerous in terms of the obligations being placed on producers. Strict terms are imposed.
Codes of practice – one set of agreed codes and regulations would be better than the current variation of terms shown from one agreement to another.
Pricing and payment – title to the eggs passing to the buyer on collection was seen as very one-sided and would be improved being held by the producer until payment has been received. Payment terms vary from two weeks to one month and there is a lack of consistency on price.
Grading– how eggs are graded and priced is solely at the discretion of the buyer. The producer should have the right to agree the grading and prices of the eggs it supplies.
Indemnities – producers are asked to provide a number of warranties to the buyer and also to indemnify against certain aspects of the eggs, and for breach of contract. It is considered that buyers should be required to do the same.
Duration and termination – contracts vary in terms of the length of the notice period. The rights of each party to terminate the agreement should be consistent in any agreement entered into – at the moment it is not.
Case study – when contracts work well for the whole supply chain
Three supply chain perspectives on a retailer-aligned feed-tracker contract
The producer: Patrick Lynn, Nottinghamshire
“Farming can be a volatile business and egg production is no different. Since starting in free-range eggs in 2010 and immediately experiencing peaks and troughs I decided to try and control our biggest and most unpredictable cost in the form of feed; by buying ahead and second guessing the market. I soon came to realise why I was a farmer and not a commodities trader!
“In 2015 the opportunity to join Tesco’s feed tracker contract via Noble Foods arose, and I decided to grab the opportunity. The stability the contract provides has enabled me to plan ahead into the medium term knowing the margin will remain stable and the path to profit is determined in how well we get our birds to perform rather than getting lucky on the feed market.”
The packer: Veli Moluluo, managing director, consumer foods division, Noble Foods
“Since 2015 we are proud to have been able to offer our Tesco producers a unique feed-link contract, which offers a significant amount of stability in what can be a turbulent market place. The feed link tracker is maintained jointly by Noble Foods and Tesco working collaboratively o review the raw material markets, optimise feed purchasing and enhance cover positions with a view to mitigating commodity volatility.
“The objective of the feed-link contract is to ensure that the producer gross margin is all but guaranteed and the prices that they receive for their eggs ruses and falls with the impact of feed within their business. The producers benefit from this approach as they are insulated from the spikes in feed inflation and this leaves them free to concentrate on bird welfare and creating the best possible conditions for the birds to perform.”
The retailer: John Kirkpatrick, agricultural manager, poultry & eggs, Tesco
“The Tesco commodities team, in collaboration with our agricultural teams and suppliers, agree relevant forward pricing decisions based on our assessment of the underlying market conditions. The prices at which feed ingredients are bought links directly into a cost model, with egg costs rising or falling in line with raw material prices, without any commercial negotiation between buyer and supplier. We use our insight in the commodities team to track deflation and or mitigate inflation in these markets.
“This means that producers are protected from commodity-led spikes in production costs, as the price received for their eggs will rise in line with the cost of feed. The contract ensures that our suppliers’ margins are guaranteed as our cost of price for eggs is linked with the cost of feeding the hens that lay our eggs. Not only does this ensure a constant supply of eggs in our stores, it’s a great example of how we are building stronger and more resilient long-term partnerships with our suppliers.
“The feed tracker contract, which was introduced earlier this year, has been offered to nearly 400 free-range egg producers and is benefitting about 10% of the UK flock.”