Herd owning
4 min read
Herd owning sharemilking is a type of dairy farming business where the sharemilker supplies the herd and operates the farm, receiving a percentage of the milk income. The page details two types of sharemilking agreements: a traditional herd owning sharemilking agreement and a variable rate agreement. Both methods have their own advantages, considerations, and keys to success. It's essential for both parties to understand their obligations, responsibilities, and to create clear agreements on cost-sharing. Timing of entry and exit is critical as fluctuating livestock values can affect equity, and professional advice is recommended for negotiation and due diligence.
Looking for different career options? Below is a summary of the herd owning roles in the dairy industry, including pros and cons. Investigate the different farm business types and consider what would work best for you.
The sharemilker supplies the herd and operates the farm on behalf of the farm owner, the sharemilker receives 50% of milk income and all money from the sale of livestock.
How it works
Under a herd owning sharemilking agreement, the sharemilker traditionally received 50% of payout. Herd owning arrangements can range between 40 and 60% of milk price and the dividend may or may not be included in the sharing of income.
Advantages
HOSM
Farm owner
Considerations
Keys to success
Financial
Drivers
The key drivers for the herd owning sharemilker are the cash returns from their business, and the ability to build equity through herd ownership.
Equity required
Equity requirements for purchasing livestock are higher than those for farm land. Livestock assets averaged $814,000 between 2011 and 2016 for an average NZ HOSM. Equity of a minimum of $500,000 is likely.
For a detailed financial example view the factsheet here.
Entry and exit
Contracts are for a given term with a simple and proven entry and exit process.
Timing of entry and exit is critical for HOSM due to fluctuating livestock values. This can seriously erode equity for the HOSM.
A contractual arrangement where the farmer managing the property is paid on a percentage of milk income e.g. 45% of the milk income.
How it works
The herd owner (or variable-herd owner) through agreement provides cows, labour, shed costs, electricity, transport and sometimes a share of the feed and fertiliser costs.
Herd owning sharemilkers typically make a greater return on equity invested than farm owners, and accept a higher degree of risk.
No two variable rate HOSM positions are equal. Some farms have excellent infrastructure, good contour and productive pasture other farms can be more challenging resulting in higher farm working costs for the sharemilker.
In some cases, receiving a lower milk income percentage on a well set up farm will still be more profitable to the sharemilker than receiving 50% of the income on a more challenging farm.
An example of a variable rate agreement might result in the farm owner receiving 55% of milk income compared to 45% to the sharemilker. Costs may be split 50% each between the parties.
Advantages
Variable rate HOSM
Farm owner
Considerations
Keys to success
Financial
A variable rate herd owning sharemilker offers cash returns from their business, and the ability to build equity through herd ownership. Equity is required.
The following comparison highlights the difference in returns between a 50:50 and a 45:55 herd owning sharemilking contract.
Example:
Production | 150,000 kgMS |
Milk price | $6/kgMS |
Milk income | $900,000 |
Stock income | $80,000 |
50:50 | |
Sharemilker receives | $ 530,000 |
Farm operating expenses | $390,000 ($2.60/kgMS) |
Operating profit | $140,000 (after all labour incl. WOM, i.e. DairyBase) |
Farm owner receives | $450,000 |
Farm operating expenses | $300,000 ($2.00/kgMS) |
Operating profit | $150,000 |
45:55 | |
Sharemilker receives (45%) | $ 485,000 |
Farm operating expenses | $375,000 ($2.50/kgMS) |
Operating profit | $110,000 |
Farm owner receives (55%) | $495,000 |
Farm operating expenses | $315,000 ($2.10/kgMS) |
Operating profit | $180,000 |
Entry and exit
Contracts are for a given term with a proven entry and exit process.
Timing of entry and exit is critical for HOSM due to fluctuating livestock values. This can seriously erode equity for the HOSM.