'In good faith' not good enough on milk contracts
KIMBERLY – Milk selling and purchasing in Wisconsin has a history of occurring “in good faith” under the state's Uniform Commercial Code (UCC) that was adopted in 1963.
As such, milk supply contracts typically have an “open quantity” provision, meaning that specific quantity of milk being sold and purchased is not strictly defined, attorney Troy Schneider of the Twohig, Rietbrock, Schneider, & Halbach firm at Chilton told attendees at the Extension Service's semi-annual farm management update.
“Good faith” is a practice that has proven to be acceptable and legally enforceable provided there was no great deviation or “unreasonably disproportionate” change in the quantity of milk involved in the contract, Schneider observed. But what is an acceptable numerical deviation – or what is “substantially disproportionate from a stated estimate” – on open quantity contracts has not been litigated in the courts, he added.
In Wisconsin's dairy sector, there was rarely any attention given to the open quantity agreements between dairy farmers and their milk purchaser processors until the Grassland Dairy case in early 2017, Schneider remarked. In that situation, the major butter manufacturer announced it would no longer buy the milk supplied by 75 dairy farms – 58 in Wisconsin and 17 in Minnesota.
Although Wisconsin also has statutes and administrative codes addressing milk supply contracts, they seldom came into play during an era when most milk buyers were looking for more volume, Schneider indicated. For a combination of reasons, that situation no longer exists, he stated.
Because of that, Schneider suggests that dairy farmers should seek contracts which address issues such as non-performance by either party, that identify remedies for breach of the contract, and that include an estimate of the volume of milk to be purchased so that the milk plant will not, on its own, have the right to drastically vary or eliminate the amount of purchased milk.
From the perspective of milk buyers, a contract ought to have a provision which allows them to be the quantity determining party, Schneider pointed out. They would also prefer a provision to allow an adjustment on milk intake based on market fluctuations while also having a provision not allowing the dairy farm to sell milk to other buyers, he added.
Within a contract, both common law and Wisconsin's UCC allow excuses for non-performance such as a change in the availability of raw materials for reasons such as a storm, fire, drought, or other “Act of God” along with governmental actions (a quarantine to control spread of a disease, for example).
'Lots of gray area'
In general, the topic of open quantity contracts for selling and purchasing raw milk covers “lots of gray area,” Schneider commented. One way to describe it is as an intertwining of economics and law, he said.
To dairy farmers, Schneider advises negotiating on a contract when they have bargaining power, which is not true at the moment. He observed that five years is a common length for such contracts and that most of those which are in place are little more than a tacit agreement or handshake with seldom any serious negotiation. Dairy farmers often signed whatever document the milk buyer offered to them, he noted.
At a minimum, Schneider suggests that a contract include some estimate of the milk volume that is acceptable to the two parties and that an amount of notice time for ending the contract be specified. It might be appropriate to address whether an inspection of animal welfare could be used as a criterion for terminating a contract, he advised.
“We've been living in a Wild West” regarding milk marketing contracts in the Upper Midwest, according to University of Wisconsin – Madison and Extension director of dairy policy analysis Mark Stephenson, who was another presenter at the farm management update.
Stephenson said more formalized milk supply contracts have been in place on the West Coast because of a milk surplus and on the East Coast because of milkshed deficits. As a result of the Grassland Dairy episode this year, he expects more attention to be given on specifics on milk volumes and pricing in the Upper Midwest.