Tesco cuts contracts with farmers supplying fresh milk citing declining sales

Tesco is to axe contracts with some farms supplying them fresh milk due to sales declining | Katharine Hay

Tesco has announced some contracts with dairy farmers supplying fresh milk will be axed later in the year.

The supermarket’s Tesco Sustainable Dairy Group (TSDG) said the decision will affect “a small number” of dairy farms in the UK.

The National Farmers Union Scotland claims the supermarket is making the move in response to declining liquid milk sales across the country, and that the decision is likely to affect Scottish dairy farms.

A Tesco spokesperson said: “These changes will allow us to buy a higher proportion of each farm’s milk, while also encouraging farmers to continue to adopt sustainable farming practices.

“These improvements will result in a more sustainable dairy group for the future.”

Further detail on which farms Tesco will be cancelling contracts with will be announced in September.

The retailer said the farms affected will be given 12 months’ notice.

While liquid milk sales are declining, general dairy products remain robust, according to NFUS.

Roughly half of the milk produced in Scotland goes to fresh liquid milk, but the other half goes into other dairy products, including cheese which accounts for about 25 per cent of the milk produced, the union said.

Responding to the news from Tesco, NFUS milk committee chairman Bruce Mackie said: “The announcement from the TSDG that it is to reduce the number of dairy farmers directly supplying the retailer for its own label fresh milk will likely see some Scottish dairy farmers lose that contract even after those who opt to voluntarily retire from production are taken into account.

“Established in 2007, the TSDG was the first supermarket aligned contract and is the largest group of dairy farmers working directly with a retailer in the UK.  We will use our network of members to assess how the decision will affect them and how we can assist.

“Given the current fluctuation and uncertainty around milk prices and contracts, it is imperative that the affected farms are not disadvantaged during the 12 months’ notice period.”

Mr Mackie said farmers impacted by the decision should be given the chance to move to a contract with Müller, another large milk supplier, as soon as possible or given the option to terminate the contract and move to another milk processor, should another buyer be available.

Earlier this year, Müller reached an agreement to acquire Yew Tree Dairy, which had some 100 Scottish dairy farming suppliers.

Mr Mackie added: “It would be grossly unfair to hold these producers at a lower price given the higher costs involved with adhering to the Tesco code of practice when they know the clock is ticking on their contract. “We recognise that the decision has been justified on the back of declining liquid milk sales.

“However, the overall market for dairy products remains very robust and products like yoghurt, cheese, butter, and dairy desserts continue to enjoy strong demand.”

NFUS said yoghurt, in particular, has benefited in the market from consumers recognising health benefits, with high-protein and probiotic varieties gaining popularity.

The union said butter sales have also seen a resurgence, driven by the move away from margarine and processed spreads.

A Tesco spokesperson said: “Our Tesco Sustainable Dairy Group farmers benefit from fair prices based on the cost of production. Since the group started in 2007, we’ve paid more than £340m over market prices, including £40m in 2023 alone.

“As well as providing long-term support, our dairy farmers have also taken industry-leading steps to reduce the environmental impact of milk production and drive best practice in animal health and welfare.”

The news comes after new dairy legislation on contracts came into force last month following more than a decade of campaigning by farming groups.

The Fair Dealings Obligations (Milk) Regulations 2024 aims to protect farmers across the supply chain.

The National Farmers Union said it is hoped the new rules will establish “transparency and accountability” by stopping contract changes being imposed without agreement.

According to Defra, there will also be a system in place to enable farmers to verify the calculation of variable prices. 

Scottish Dairy Hub and NFU Scotland Milk Policy manager Tracey Roan said the change had followed a consistent campaign by the unions of “calling out unfair practices in the dairy supply chain.”  

"A significant proportion of the calls that all UK farming union dairy teams receive are from farmers with issues which ultimately relate back to their milk contract," Ms Roan said. "It has taken a great deal of work from a dedicated team within NFU Scotland to help drive this over the line."

According to the Scottish Dairy Cattle Association’s (SDCA) six monthly figures for dairy herds and dairy cows in Scotland, during the first six months of 2024, there has been a net decrease of 21 dairy herds (2.6 per cent) within the country making a current total of 773.

The total number of dairy cows is 180,250, a decrease of 398 or 0.25 per cent over the same period.

The average herd size in Scotland continues to rise, however, and now stands at 233, up by six from the start of the year.

New herds have started up in Dumfriesshire, Wigtownshire, and Lanarkshire, meanwhile 16 herds in Ayrshire chose to leave dairying between January and July this year.

Farming unions said this comes as no surprise with increased regulatory pressures, continued inflationary pressure on key inputs, a lack of labour and interest rates still driving up the cost of borrowing.

They said the latest figures follow the national trend of declining dairy producers. A recent annual AHDB survey of the major milk buyers, it was estimated that there were 7,130 dairy producers in the UK, highlighting a decline of 440 or 5.8 per cent on the previous year.

The NFUS said despite falling producer numbers, milk production in the UK is only back 0.2 per cent year-on-year.