Pre herd owning

Looking for different career options? Below is a summary of the pre-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.

How do I work out what variable order or contract rate to settle on?

A rule of thumb when assessing a contract milking or variable order sharemilking offer is to crunch the numbers and make sure the role is viable and covers the following:

• Appropriate manager wage
• Expenses
• Personal time-off allowance
• An allowance for the risk taken on (staff, production, Health and Safety, environmental, milk price)
• Potential to grow your business

If the amount of money you will make from the offer does not equal or exceed the factors covered above, you may need to negotiate with the farm owner.

If you are negotiating, approaching the farm owner in a clear manner with numbers you can back up - such as a budget, a new rate, or a proposed reduction in expenses, shows you have logically worked through the offer and are proposing something reasonable. It may be a starting point for negotiations so be prepared to work through the agreement coming to a fair deal for both parties.

Farm manager and/or operations manager

Professional farm management roles as an employee, required to operate farm/s with minimal input from owners. May be responsible for multiple farms. Find out more about dairy farming roles.

Contract milker

A contract milker (CM) is a self-employed farmer managing the property who is paid on a negotiated set price per kgMS produced.

• How it works

  Typically providing labour, paying for shed costs, electricity, and vehicles and also has administrative, insurance and ACC costs.

• Advantages

  Contract milker:

  • Given milk production is relatively stable compared to milk price, the contract milker agreement reduces the financial risk for the contract milker.
  • Contract milker agreements are common and relatively simple to understand and administer.
  • Minimal equity is required
  • Having ‘skin in the game’ brings a vested interest in increasing productivity.

  Farm owner:

  • Can take a more hands off approach with the farm
  • A set income for the contract milker e.g. $1.20 per kgMS makes budgeting simpler for farm owner

• Considerations

  Contract milker:

  • Not affected by a decline in milk price, but neither do they benefit from a lift in the milk price.
  • At the smaller end of the farming scale <150,000 kgMS, profit margins for a contract milker are sometimes not sufficient to allow them to build equity and progress.

  Farm owner:

  • Budget wisely, if the payout drops significantly the farm owners’ income suffers
  • Responsible for ensuring farm infrastructure etc. is maintained
  • A fair and reasonable contract rate is agreed to ensure a viable business for the contract milker, which will help with success and longevity of the relationship.
  • Instilling good reporting mechanisms that satisfy your need to show how the business is tracking will allow a more hands off approach. If a farm owner is closely monitoring and directing the day to day activities of the contract milker then the relationship may be closer to that of an employee. Click here for more info.

• Keys to success

  • Good budgeting is essential to understand the costs and profitability of the Contract milking business prior to agreeing a rate and signing the contract.
  • A basic annual farm plan should be agreed before the season. This will ensure both parties understand what inputs can be expected throughout the season and have confidence in the milk production target.

• Financial returns

  It is important both parties understand the contract milkers budget to set a fair contract rate.

  The contract milker should take into consideration depreciation of any equipment and cashflow for the first few months of the season, before milk income is paid.

  For an example budget click here

• Entry and exit

  Contract milker agreements are relatively simple and easy to enter and exit and are often on a one year rolling contract.

Contract milker with top-up payments

A contract milking role with a set price per KgMS, in addition an agreed top-up payment is made should the milk price rise above a certain threshold.

• How it works

  A contract milker with top-up payments typically provides labour, pays for shed costs, electricity, and vehicles and has administrative, insurance and ACC costs.

  A base rate (e.g. $1.20KgMS) is paid during the season. It must be set at a viable level that allows the contract milking business to get ahead.

  A top up payment would be received when the final milk price is known, after the end of the season. An agreed schedule would be set at the start of the season.

  For example:

Note: The above values are examples only. Parties must negotiate their own top-up rates.

• Advantages

  Contract milker with top-up payment:

  • The top up payments provide an extra boost to progressing farmers
  • A contract milker requires minimal equity
  • Certainty of some income to ensure costs can be budgeted for

  Farm owner:

  • Allows farm owners to increase the contract rate in good years which makes their position more attractive to quality Contract Milkers in a competitive market.
  • Evens out the risk of having to offer a high $kgMS in low milk price years.

• Considerations

  • The top-up payment will be paid from the farm owner's account
  • If there is a lag before the milk price is confirmed this flows onto when top-up payments can be made.
  • Setting the level for top-up payments too low will require top-ups to be paid most seasons, it also reduces cashflow for a Contract Milker during the season.
  • The contract milker payment structure is lower risk than a VOSM structure. It would be realistic to expect the returns as a percentage of the milk income to be slightly lower.

• Keys to success

  • The contract rate is set at a fair price for the work and costs provided by the contract milker.
  • Good budgeting is essential to understand the costs and profitability of both the contract milker and farm owner.
  • The farm owners and the contract milkers should agree in principle a basic annual farm plan. This will ensure both parties understand what is expected throughout the season.

• Financial returns

  Will vary depending on contract rate.

  For a working example click here.

• Entry and exit

  Contract milker agreements are relatively easy to enter and exit and are often on a one year rolling contract for this reason.

Variable order sharemilker

An arrangement where the farmer managing the property is paid on a percentage of milk income e.g. 25%.

• How it works

  This operating structure doesn’t own or part-own the milking herd. The sharemilker and farm owner will have agreed the costs that the sharemilker will provide typically including, labour, shed costs, electricity and transport.

  These agreements known as VOSMs are governed by legislation – the Variable Order Sharemilking Agreements Order 2011. Subsequently they have less flexibility than a contract milker and no alteration to the agreement can be made if it is seen to be detrimental to the sharemilker under this order.

  The VOSM payment method can be very profitable for the milker at high milk payouts but is vulnerable to a low payout.

• Advantages

  Variable order sharemilker:

  • Sharing profit and production can provide a significant equity boost in high payout years.
  • Low equity required to get into business

  Farm owner:

  • A VOSM shares production and payout risk and has a vested interest in the profitability and sustainability of the farm
  • Reduces the level of day-to-day input into the farm

• Considerations

  • Will the VOSM business survive a low milk price? Protection mechanisms can be built into agreements.
  • A minimum percentage share is set for herds under 300 cows.
  • The terms of the agreement can be difficult to change.

• Keys to success

  • All parties should agree in principle a basic annual farm plan. This sets expectations as to what inputs can be expected throughout the season and creates confidence in the milk production target.
  • Good budgeting is essential prior to agreeing the contract. Especially if a percentage of feed costs are paid by the VOSM.
  • The VOSM must complete a sensitivity analysis to understand how their business can withstand different milk prices.

• Financial returns

  A VOSM requires minimal equity.

  They will typically provide farm bikes and tools.

  Financial returns will vary and is highly dependent on milk price. Understanding the exposure to milk price is crucial.

  Example of exposure to milk price:

  Farm production: 150,000kg MS
  VOSM income: 23% share of milk income
  VOSM business expenses: equivalent to $1.20/kgMS (with 23% share of feed costs)

  Low milk price:

  Income: Milk price of $3.80/kgMS x 23% = $0.87/kgMS income
  Costs: With costs of $1.20/kgMS
  Loss - of $0.33/kgMS or $49,500 ($0.33*150,000kg MS)

  High milk price:

  Income: Milk price of $8.00/kgMS x 23% = $1.84/kgMS income
  Costs: With costs of $1.20/kgMS
  Profit - of $0.64/kgMS or $96,000 ($0.64*150,000kg MS)

• Entry and exit

  VOSM agreements are relatively simple and easy to enter and exit. They can be difficult to change. Be aware of your obligations under the Variable Order Sharemilking Agreements Order 2011.