Herd owning
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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.
Herd owning sharemilker
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.
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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.
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Advantages
HOSM
- Can increase the financial returns for a well set-up and productive sharemilker
- Ability for sharemilker to increase stock numbers
Farm owner
- Allows farm owner to step back from active farming
- Experienced operator in charge of farm operation
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Considerations
- It is very important that a detailed budget is completed by both parties to understand the viability before making a decision
- Higher equity required (than for land) from the sharemilker and bigger swings in profit volatility
- Need clear agreement on who will cover what costs, especially bought-in feed and maintain soil fertility etc.
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Keys to success
- Each party knowing their obligations and responsibilities will enable the relationship to run as smoothly as possible.
- Given the importance of budgeting in negotiating a viable contract for both parties, getting professional advice on this is recommended.
- Following a process of due diligence before signing agreements will help improve likelihood of success for both parties.
- A thriving business relationship between two parties is likely to be one where goals and values have been shared and are fairly well aligned.
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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.
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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.
Variable rate herd owning sharemilker
A contractual arrangement where the farmer managing the property is paid on a percentage of milk income e.g. 45% of the milk income.
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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.
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Advantages
Variable rate HOSM
- Can increase the financial returns for a well set-up and productive dairy farm owner.
- Sharemilker may be able to increase stock numbers
Farm owner
- May allow a herd owning sharemilking position to be created or maintained when it would otherwise not have been viable, e.g. for those with high debt.
- Can give more certainty that the business will be profitable
- Allows the farm environment, contour etc. to be taken in to account to ensure a fairer division of costs and income.
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Considerations
- It is very important that a detailed budget is completed by both parties to understand the viability before making a decision on percentage share.
- Farm owners must understand that not all farms are equal, it may not be viable for a sharemilker to receive a reduced milk income share on more challenging farms or those with higher farm working expenses.
- Higher equity required (than for land) from the sharemilker and bigger swings in profit volatility
- Need clear agreement on who will cover what costs, especially bought-in feed and maintain soil fertility etc.
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Keys to success
- Each party knowing their obligations and responsibilities will enable the relationship to run as smoothly as possible.
- A detailed budget is required to assess a fair and reasonable percentage share for each party, getting professional advice on this is recommended.
- When deciding the percentage shares both parties should have a clear understanding of what the net financial result will be for their business rather than focusing on the share of milk income as a measure of success.
- Following a process of due diligence before signing agreements will help improve likelihood of success for both parties.
- A thriving business relationship between two parties is likely to be one where goals and values have been shared and are fairly well aligned.
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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 |
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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.