Mandatory contracts – do they deliver price stability?

Published 20 August 18

One of the main reasons the Spanish government introduced mandatory contracts for the dairy industry in late 2012 was to improve the stability and transparency of farmgate pricing. But did it work?

We have compared farmgate prices* in Spain relative to the EU-28 average before and after the introduction of mandatory contracts. Two full price cycles were examined to ensure that periods of both high and low prices were covered.

 Spanish Price Stability

In the period prior to having compulsory contracts, Spanish farmgate prices were slightly more volatile than the average EU-28 price, with a range of €9.0/100kg compared to €7.8/100kg for the EU-28.

In the second cycle, where compulsory contracts were in place, Spanish prices showed much less volatility than in the EU-28 as a whole. While Spanish prices compared well to the EU-28 average at the peak of the cycle, they did not fall as far during the downturn. This meant that the average price in Spain over the full cycle was 3% higher than the EU-28 average. 

Overall, it appears that the use of compulsory contracts has been successful in improving the stability of farmgate prices in Spain. This may be the result of a more stable supply chain or because processors have had to absorb the market volatility, which historically would have passed back to farmers.

* Farmgate prices were measured in €/100kg and standardised to 4% b.f. and 3.3% protein to compensate for price effects of differences in milk composition