Sharemilking has long been considered a cornerstone of the New Zealand dairy industry, providing a viable progression pathway for young dairy farmers to build experience and wealth, and aim to achieve their ultimate goal of farm ownership.
This pathway has been under pressure in recent years, with the number of herd-owning sharemilking (HOSM) positions steadily declining due to a variety of factors. In the past five years there has been significant fluctuation in milk prices, and this volatility has created additional problems for farm owners and sharemilkers alike.
This is a summary of the Pathways to Progression report which was commissioned by DairyNZ and Federated Farmers to explore the latest sharemilking trends and statistics, examine the issues that milk price volatility is creating, and provide some ideas on how the industry may need to react to ensure viable progression pathways continue.
Changes in sharemilker agreements
The dairy industry in New Zealand continues to evolve with larger farm sizes, more corporate ownership, and higher debt levels. These are some of the factors that have led to a steady decline in the number of HOSM. However the overall number of sharemilking agreements as a percentage of farm businesses has remained constant at around 32 percent (Table 1). Although there are fewer HOSM agreements available, these have generally been replaced by variable order (VOSM) or contract milking arrangements.
Variable order sharemilking
VOSM has come under significant pressure in the past two seasons as the agreement struggles to cope with massive fluctuations in milk price. These fluctuations make it difficult to agree to a fair percentage that will work for both the farm owner and the sharemilker, particularly when agreements are typically signed three to six months before the forecast payout is announced.
Major changes in milk pricing within a season can quickly put pressure on either farm owner or sharemilker, or both, if the percentage that has been agreed upon is out of line with what farm budgets can stand. As a result, there have been a number of farms that have moved from a VOSM arrangement to a contract milker or manager situation this season.
Appetite for risk a factor
The choice between contract milking and variable order sharemilking essentially comes down to your appetite for risk. If you can afford to take on the risk of a significant decline in the milk price, then a VOSM arrangement allows you to share profits with the farm owner with the hope that the milk price will rise and there will be an additional benefit. In contrast, if a sharemilker cannot afford, or does not want to bear the risk of these major changes in milk price, contract milking is a more stable arrangement.
The future of sharemilking
There are a number of key points that the industry and individuals may need to consider if sharemilking is to remain a viable and key part of our industry. These include:
- Creating more flexibility and variability with sharemilking agreements in order to suit the individual circumstances of each farm business. For example, we are now seeing VOSM agreements with minimum thresholds to protect the sharemilker, contract milking agreements with variations in contract rates depending on milk price, and HOSM agreements based on profit share arrangements.
- This innovation in agreements is healthy for the industry, however it now means that proper due diligence and analysis is more important than ever.
- Generally, it appears that often there is a lack of effective due diligence from sharemilkers when looking at new sharemilking options. Some of this arises due to a lack of supply of sharemilking positions, which means sharemilkers feel they have few options. However, taking the wrong sharemilking agreement would be worse than doing nothing at all. Discussions on building a due diligence checklist for business partnerships (farm owner, sharemilker) and guidelines are underway. For example, is there is a clear sharing of business and financial plans between farm owner and sharemilker before the agreement is signed? Is it possible for the sharemilker to reference check the farm owner?
Sharemilking still remains a viable progression pathway for dairy farmers aspiring to build wealth and equity for their businesses. While the ultimate goal of farm ownership is not necessarily the end goal for all sharemilkers, a well-structured sharemilking arrangement does provide good opportunity for wealth creation.
Questions sharemilkers need to ask themselves are: what their appetite for risk is; is there a fair reward for the risk involved; and do they have sufficient reserves available should the risk eventuate (e.g. low milk price).
This article was originally published in Inside Dairy July 2016