Sharemilking

Sharemilkers don’t own the land but are responsible for operating the farm on behalf of the farm owner in return for a share of income. This share is reflective of the amount of capital they bring to agreement and the costs they incur in running the business. Each contract will be slightly different as the sharemilker and farm owner must negotiate the split of income and expenses that best suits their situation.

There are two types of sharemilking agreements

1. Variable order sharemilking (VOSM) – The sharemilker doesn’t own the herd but will provide some equipment to help run the farm, like fencing gear and farm motorbikes. They are paid a percentage of the milk income (e.g. 20%) to cover their expenses which are negotiated with the farm owner.
2. Herd-owning sharemilking (HOSM) – The sharemilker supplies and owns the herd as well as other assets such as tractors, feed-out wagons and motorbikes to operate the farm. These were traditionally known as 50:50 agreements but have become entirely negotiable where the sharemilker and owner negotiate their respective share of income and expenses.

Variable order sharemilker (VOSM)

How it works

Becoming a VOSM is a good step for those wanting to progress towards herd or land-owning dairy farming. It requires minimal outlay to get into the business and starts the sharemilker in business ownership.

In a VOSM agreement the sharemilker doesn’t own the milking herd. They provide the labour and some limited assets to allow them to run the farm for the owner. In return they are paid a percentage of the milk income from the farm to cover their management and other expenses negotiated with the owner. Expenses may include labour, electricity, shed costs, vehicles (including depreciation), and a share of nitrogen and feed among others. The more costs the sharemilker is required to cover the higher the percentage of milk income required to cover expenses.

Setting the percentage share

In simple terms the share is struck by agreeing the costs the VOSM must cover and dividing that by gross milk revenue for an “average” production year at the prevailing milk price.

Typically, the sharemilkers costs will include:

• Farm operating costs: staff (including relief staff), dairy shed costs, electricity, and vehicle costs. Sometimes a share of feed and nitrogen costs can also be included.
• Administrative costs: A VOSM must be able to cover their own administrative, accounting, ACC and insurance costs.
• Depreciation: Is the loss is value each year of plant, machinery and office equipment such computers that’s needs to be allowed for in the agreement or contract.
• Wages to management: It’s important the VOSM gets a better return than they would get from being a farm manager, ie an employee, because they are taking on business risk.

Transparency and mutual understanding are crucial when determining the percentage, especially regarding the sharemilker’s anticipated outcome. Agreeing average production and prevailing milk price is critical. These should be conservative estimates to ensure that the VOSM is highly likely to achieve the revenue targets if they perform well.

Although the agreement is negotiable, there are guard rails contained within the Sharemilking Agreements Order (2011) to be aware of. Notably, a minimum percentage share is regulated for herds under 300 cows.

Minimum payments

VOSM agreements can place sharemilkers in a financially vulnerable position when milk price is lower than expected, and when production is adversely affected by factors such as drought. This can be mitigated by including protection mechanisms into agreements like an agreed minimum payment to the VOSM. It’s also recommended the farm owner and VOSM complete a sensitivity analysis. This can help both parties understand how their business can withstand different milk prices. which can help both parties understand how their business can withstand different milk prices.

Considerations for a sharemilker in a VOSM arrangement

• No two VOSM agreements are equal. A 20% VOSM agreement on different farms with the same production, could deliver a quite different financial result for the sharemilker depending on the costs associated with the agreement.
• A VOSM is exposed to risk from both milk price and milk production. This allows the VOSM to potentially grow equity faster than a contract milker, but also increases downside risk. You must be clear on the farm production system and the owner’s philosophy for dealing with issues like drought You must also be able to cashflow your business if things don’t go to plan.

Considerations for farm owners in in a VOSM arrangement

• Having a VOSM is a good way to reduce day-to-day involvement in the farm. It incentivises the manager’s performance with a personal stake in ensuring milk production is maintained and costs are managed.
• The agreement must be negotiated to ensure the sharemilker objectives are aligned with yours. For example, if the sharemilker benefits disproportionately from increasing feed inputs this can result in conflict. Both parties need to be clear from the outset what production system will be run on the farm including discussion of approach to grazing management, the amount and type of supplement to be used, and how drought will be managed.
• It’s important to discuss the level of autonomy the sharemilker has in decision making and when they need to consult with the owner.
• These agreements have less flexibility than a contract milking agreement and the terms can be difficult to change especially if it is seen to have a negative impact on the sharemilker.

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.

Entry and exit of VOSM agreements

VOSM agreements are easy to enter and exit, but we recommend double-checking the obligations set out in the Sharemilking Agreements Order (2011).

Herd-owning sharemilking (HOSM)

How it works

The sharemilker and the farm owner both contribute to the resources required to operate the farm. The sharemilker takes responsibility for the day–to–day and seasonal management of the farm. Each party pays the associated costs and in return receives a share of the income.

The exact contribution and share of income and expenses are negotiated at the commencement of the agreement. It should be detailed in writing. The following table provides a broad overview of how a typical agreement is divided up.

Considerations for a sharemilker in a HOSM arrangement

• Your reputation and skill level will help you find a good sharemilking job and ensure you are able to secure your next job and your future as a sharemilker.
• Aim to find a farm owner who is seeking a win/win relationship and who is interested in seeing the progression of their sharemilker.
• Farm owners want reliable, highly skilled people running their farm(s) that they can trust to deliver good results. How you deliver on this expectation determines your reputation.
• Timing of entry and exit is critical for HOSM due to livestock values which can fluctuate and affect equity.

Considerations for farm owners in in a HOSM arrangement

• Having an experienced sharemilker operating the farm, allows you to step back from active farming whilst remaining in the sector.
• It is important to have a detailed budget to understand the viability of the business model before making a decision on HSOM and/or a particular farm.
• Ensure there is a clear agreement on who will be responsible for covering specific expenses, especially bought in feed, maintenance fertiliser etc.
• Sharemilkers usually expect a level high of autonomy and the ability to get on with the job on their own terms. Be explicit in your expectations up-front to enable them to deliver the required outcomes.

Keys to success

A successful business partnership between a sharemilker and farm owner is likely to be one where:

• The goals and values of both parties have been shared and are aligned.
• Each party knows their obligations and responsibilities, both physically and financially.
• Both parties have done their due diligence before signing agreements.
• Contracts for the sharemilker and owner have been developed with professional advice.

Entry and exit of HOSM agreements

The duration of the agreement is negotiated at the outset and is usually for a minimum of three years. This helps provide the sharemilker with a certainty of income and allows them to partially finance their business. The term must be clearly spelt out in the agreement.

The exit period can be challenging as the sharemilker and owner try to balance the feed left on the farm and the condition of the departing livestock. Jointly employing an advisor can help to work through this.

Do your due diligence before signing

Both owner and sharemilker must do their own due diligence for the partnership they are entering. The first priority is to establish you have aligned values and objectives. This will make the rest a lot easier. References from previous sharemilkers or employers help here.

The next step is financial, and agreeing terms that make it workable for both parties. No two sharemilking arrangements are equal. Considerations such as land quality, infrastructure, fertiliser and feeding regimes all affect the income expected and the cost structure of an individual opportunity. Being open about the expected operating budget for both parties is a good way to ensure transparency of intended outcomes and ability to meet commitments.

The sharemilker carries more financial risk and getting this wrong can have detrimental consequences. We highly recommend getting some independent advice.

Who else can help

Federated Farmers members and non-members can access sharemilking agreement templates. Members can also access free legal advice to check on parts of agreements.

A reputable farm adviser can help you run through the due diligence required to make sure the agreement will work for you. NZ Institute of Primary Industry Management provides contacts on their website.