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.

  • 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

  • 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.

  • 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.

  • 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.

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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.

  • 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.

  • 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.

  • 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.

  • 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.

A variable milk price sharemilking agreement whereby the percentage paid out to the sharemilker and landowners varies according to the milk price.

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  • How it works

    The aim is for a fair return on asset to land owner (5.8%) and sharemilker (9%). It involves full disclosure by both parties of the farm budget to determine the farm working expenses.

    The flexi-rate HOSM agreement is currently a concept developed by MyFarm, a farm investment and consultancy business. The financial examples here and in the associated fact sheet are therefore modelled and not based on real farms.

    The objective is to reduce the variability in the profit range for the sharemilker.  This is achieved by sharemilkers receiving a higher percentage of the milk cheque in low payout years but receiving a lower percentage of the milk cheque in higher payout years. The system recognises sharemilkers typically have a higher cost of funds due to a higher risk profile (compared to farm owners).

    A full farm budget is prepared for the farm business prior to the start of the season. The value of assets being contributed by both parties would also be agreed.

    A table of each party's share of the milk revenue is built based on the initial milk price forecast.

    As the milk price forecast is altered through the season there is a requirement for a retrospective adjustment for the season-to-date milk revenue. The final adjustment will not be known until September of the following financial year.

  • Advantages

    Sharemilker

    • Receive greater protection (and share of revenue) in low payout years. However, in the high payout years they will receive a slightly lower percentage of the milk revenue.
    • Possible to buy part of the herd, not necessarily the whole herd, when starting out.
    • Grow stock numbers or purchase more cows over time.

    Farm owner

    • Release capital by selling herd or part of herd to a sharemilker.
    • Work with an experienced sharemilker who has a stake in the profitability of the farm.
    • Landowners will receive in most years a slightly higher percentage of the milk cheque.

  • Considerations

    • The process is reliant on full disclosure by both parties of their farm working and capital positions.
    • The process requires recalculating and reconciliation payments during the season if the forecast milk price changes.
    • Financial impact of the variation in the milk price on each parties’ budget.
    • Setting up for the season, monitoring and reconciliation payments require input from an advisor.
    • Sharemilkers are exposed to a higher proportion of the farm working expenses and do have a higher cost of funds. However, division of expenses is agreed at start of contract.

  • Keys to success

    • Each party knowing their obligations and responsibilities will enable the relationship to run as smoothly as possible.
    • Openness by both parties to share farm budgets and capital positions
    • Having a third party manage the calculations is likely to be important.
    • Following a process of due diligence before signing agreements will help improve likelihood of success for both parties. 

  • Financial

    Share of milk revenue graph below gives an overview of the potential share of milk revenue at a range of milk prices under a flexi-rate agreement.

    

    Information provided by MyFarm shows the sharemilker revenue split could range from a 62:38 split in favour of the sharemilker at low milk prices, in the order of $4.00/kgMS, to a split of 41:59 in favour of the landowner at milk prices approaching $8.00/kgMS.

    In terms of profitability, in examples provided by MyFarm, under the flexi rate agreement with milk prices from $4.00 to $8.00/kgMS:

    • Sharemilker profitability ranged between – 0.3% to 13%.
    • Farm owner profitability ranges between – 0.2% and 8.8%.

    The approach is essentially removing some of the downside risk for sharemilkers, and as a trade-off removing some of the upside rewards sharemilkers receive in high payout years. For more information see the fact sheet.

  • Entry and exit

    In principle this arrangement will have no material impact on the ability of sharemilkers to enter and exit agreements beyond a standard HOSM agreement.

    Timing of entry and exit is critical for HOSM due to fluctuating livestock values. This can seriously erode equity for the HOSM.

  • What next?

    The flexi-rate HOSM agreement is currently a concept developed by MyFarm, a farm investment and consultancy business. This information is a summary of a fact sheet located here.

    For more information on the flexi-rate agreement please contact MyFarm Business, Angie Fisher at DairyNZ (0800 4 DairyNZ), or your own farm consultant.

A land lease agreement is when rent is paid to the farm owner (lessor/landlord) for the use of dairy land.

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  • How it works

    The lessee (tenant) pays the farm owner to use the land, buildings, and infrastructure in running their farming operation and each party is responsible for different property expenses and the upkeep of the farm.

    The lessee or tenant will run the operation independently of the farm owner and pays an agreed rental (monthly) and maintains the farm as per the lease agreement.

    Ensuring the lease is well-written and obtaining professional advice will help both the farm owner and lessee understand expectations, obligations, and responsibilities.

    Determining a realistic and fair rental will help increase likelihood of success for both parties.

    The lease rental can be calculated in different ways, for example: 

    1. productive potential of the farm from a pasture-based system, or
    2. using a percentage of capital value.

  • Advantages

    For the Lessee

    • Full control over the management of the dairy operation without borrowing to purchase land.
    • Ability to influence and improve profitability of business and grow wealth.

     For the farm owner/lessor

    • May suit farm owners looking to exit from the day-to-day running of the property but still want to retain land ownership.
    • Less input in farming policy but receive a secure income.

  • Considerations

    • Where dairy company shares are involved, one option is to transfer shares to the lessee (held in trust) for the length of the lease. Another method is where the farm owner retains the ownership and financial benefit from these. Seek advice on the best option and legal requirements.
    • The lease must be clear in terms of environmental obligations.
    • Any farm owner concerns regarding management that can affect the land and assets, such as winter pugging damage, should be addressed in the lease agreement.
    • Accurately documenting the condition of the farm assets at the start of the term is important.
    • Additional factors include the number of houses on the property. Houses surplus to requirement can be priced into the lease or excluded from the lease and rented separately.
    • Retiring farm owners leasing their properties for the first time, may have a temptation to influence the lessee's farm management decisions. Farm owners should be aware that the lessee has full management control, assuming they are meeting their obligations set out in the agreement.

  • Keys to success

    • Determining a realistic rental. As a basis, parties need to appreciate that both the productive potential of the land and any additional feeding assets are valued fairly. For this reason professional advice is recommended.
    • Clear expectations around improvements and maintenance requirements, particularly soil fertility, weeds, fencing, buildings, and machinery etc. should be clearly stated in the lease agreement and monitored regularly by a third party.

  • Financial

    The lease price should be set at a level that allows both parties to succeed.  It is useful to compare the annual rental to industry average debt-servicing figures. For examples of two methods for calculating lease rentals and returns to farm owners please see the factsheet.

  • Entry and exit

    Length of terms are open to negotiations. Terms of three to five years with first right of renewal are typical, but any review period can be negotiated. Rent review dates and methods (CPI, market, agreed percentage) are typically included in the lease.

    From the lessee perspective, given the investment in cows, plant and equipment, and staffing, there is a requirement for a reasonable period of tenure.

    Clear and robust lease agreements are available from a number of sources within the industry.

  • Next steps

    Use a current lease agreement alongside your farm advisor. For more DairyNZ information on support and advisors click here. If you are a Federated Farmers member you can access legal advice and purchase land lease agreements.

This is a land lease agreement with a lease price that varies based on the milk price. If the final milk price is higher than the one used in the base calculation, top up payments will be paid to the farm owner.

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  • How it works

    Base rental

    Typically, a base rental is calculated on the productive potential of the property from a pasture-based system and paid monthly. Farms with a significant amount of infrastructure such as animal barns should have these assets valued separately with a rental calculated for these that recognises the interest costs and depreciation on these assets.

    For example: base rental = Production x base milk price x rental rate (20-25%)

    It may be agreed between the parties that this base rate sets the minimum payment that will be made to the farm owner.

    Top-up payments

    End of year – the simplest option to manage top-up payments is to maintain the base rate until the final milk price is known and a single top-up payment or adjustment is made when final milk price is announced.

    Throughout the year – top-up payments are made as the milk price changes throughout the season. For example, if your season started on the 1^st of June with a $5.10/kgMS milk price and then in November this changed to be $5.90/kgMS a calculation would be completed for the 5 months the farm had been leased and a top-up payment would be paid to the farm owner. The base rate would also be adjusted for the remainder of the lease.

  • Advantages

    For the lessee

    • The lessee has a predetermined method to calculate lease costs at a range of milk prices at the start of the season.
    • Lessees have full management control assuming they are meeting their obligations.

    For the farm owner/Lessor

    • Allows for people to exit from the day-to-day running of the property, retain land ownership and receive a secure income
    • Ability to receive a greater return on the land as the milk price increases.
    • Ensures the viability of the lessee, who will then be in a stronger position to maintain the property.
    • A floor milk price is often used to calculate the base rate. This means a minimum income is guaranteed. Some lessors will move with milk price and not have a base rate in place.

  • Considerations

    For the lessee

    • Must budget for potentially large top up payments in a high milk price year.
    • If the lessee is making top-up payments throughout the year, this is not immediately covered by an increase in the milk price due to phasing of the advance rate.
    • A floor milk price is typically used to calculate the base rate. This means the lessee carries risk if the milk price falls below that.
    • Needs a clear understanding of environmental obligations.

    For the farm owner/lessor

    • Have less input into farming policy.
    • Depending on the agreement and method of top-up payments, will not have the use (receive) of the top-up payment until it has been announced, so should budget accordingly.
    • Farm owners need to ensure that environmental and safety obligations are being met.
    • Retiring farm owners leasing their properties for the first time, may have a temptation to influence the lessee's farm management decisions. Farm owners should be aware that the lessee has full management control, assuming they are meeting their obligations set out in the agreement.
    • Where dairy company shares are involved, one option is to transfer shares to the lessee (held in trust) for the length of the lease. Another method is where the farm owner retains the ownership and financial benefit from these. Seek advice on the best option and legal requirements.
    • Houses on the property can be priced into the lease or excluded from the lease and rented separately or excluded.

  • Keys to success

    • Determine a realistic rental. Parties should appreciate they may be leasing two classes of assets – one is the farm, and in addition there may be assets such as feed pads, feed bunkers or in-shed feeders that allow for and increased profitability.
    • Typically the base rental is at 20% - 25% of the milk price.
    • A reasonably modest base milk price is generally used to determine the base rental, e.g. $0.50/kgMS below the average for the last three years. It is agreed that this will set the minimum payment made to the farm owner.
    • Clear expectations around improvements and maintenance requirements, particularly soil fertility, weeds, fencing, buildings, and machinery etc. should be clearly stated in the lease agreement and monitored regularly by a third party.

  • Financial

    The lease price needs to be set at a level that allows both parties to succeed.  It is useful to compare the annual rental to industry average debt servicing figures.

    View an example of setting a base rate and an illustration of the two types of top-up payments (during the season or at the end) in detail on the factsheet.

  • Entry and exit

    Length of terms are open to negotiations. Terms of three to five years with first right of renewal are typical, but any review period can be negotiated.

    From the lessee perspective, given the investment in cows, plant and equipment, and staffing, there is a requirement for a reasonable period of tenure.

  • Next steps

    Use a current lease agreement alongside your farm advisor. For more DairyNZ information on support and advisors click here. If you are a Federated Farmers member you can access legal advice and purchase land lease agreements.

An equity partnership is a joint business venture between two or more individuals who have come together to pool their capital and often their skills to enable the partners to obtain revenue and growth from their farm investment.

In our overview of these operating structures, we have assumed that milk company shares and hence dividends ownership and payment are agreed upon by the parties involved.

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  • How it works

    The actual business structure of the partnership will vary. It utilises sharing of skills and investment to gain a greater return than each party could achieve alone.

  • Advantages

    • Can create a business with expertise in different areas.
    • Enables parties to invest in the agricultural sector without having to be involved in the management of the property
    • A method of succession planning
    • A method of releasing equity within the business for retirement planning.

  • Considerations

    • Undertaking due diligence on the business/farm and the potential equity partners is critical to success.
    • Being in business with other parties introduces the risk of the financial security of the other investment parties.
    • Equity partnerships are still exposed to the risks of running a business in the dairy sector, e.g. the milk price, climatic events, regulatory risk etc.
    • There can be some significant challenges in cases where the equity manager/sharemilker only has a small percentage of equity (<20%) in the business. The equity manager/sharemilker should be aware of the cash returns on their investment and how easy it is to remove equity.

  • Keys to success

    • Equity partnerships should generally focus on agreed profit and cashflow objectives, rather than relying on the potential for capital gain.
    • Undertake due diligence on both the potential business/farm and the potential partners.
    • Having the right people with similar farming philosophies and values
    • Good communication and governance throughout the duration of the agreement
    • Clear understanding of the business goals, management plan and measures of success for the business
    • Universal agreement around the payment of dividends. Is the expectation that dividends are paid out each year or reinvested for development? Additionally, are shareholders required to invest further capital if there is a deficit?
    • If one equity partner is to run the day-to-day aspects of the business as a manager/contract milker or sharemilker, a separate employment/sharemilker agreement is required with a very clear process of reporting and performance review process to address any performance issues.

  • Financial returns

    The returns from an equity partnership would reflect any standard owner-operator model divided between shareholders (e.g. 20% of profit plus 20% of capital growth).

    Typically, the key driver of the business is profitability leading to greater return on investment. Return on investment can vary significantly depending on the farm management ability, timing of entry and exit, quality and value of the land asset purchased.

    The average return on total assets over the 10-year period from 2005-2015 was 7.1%. However, returns vary significantly from year-to-year as shown in the graph below.

    

  • Entry and exit

    Equity partnerships can be difficult to exit if the process is not clearly defined.

    They should be set up with a clear timeframe, e.g. 3 years/5 years/10 years etc.  At the end of the agreement the parties can decide whether to extend the agreement or exit and how this should happen.

    A policy for valuation of the business at the start and end of the agreement should be included.

An equity partnership that owns a herd and enters a herd owning sharemilking agreement (HOSM).

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  • How it works

    Two or more parties enter a HOSM business in partnership. Generally, one of these parties will be running the day-to-day aspects of the business.

    It could be that the farm owner is also an investor in the herd owning sharemilker business. In this situation, the cows may remain on the farm and the incoming ‘sharemilker’ purchases a shareholding in the EP HOSM business, and at the end of the agreement sells their share in the business to the next incoming ‘sharemilker’ or back to the farm owner.

  • Advantages

    Sharemilker

    • Individuals are not required to have 100% of the equity for the sharemilking business
    • If in partnership with the farm owner at the end of the term there is a guaranteed buyer for cows.
    • Benefit of high cash returns of a sharemilking business

    Other equity partner/s

    • Have someone running the day-to-day aspects of the business with ‘skin in the game’ and similar drivers for profitability and efficiency due to sharing of the costs and profits
    • Has more influence over the cows on the property ensuring continuity of cow genetics
    • Land assets are kept separate

  • Considerations

    Sharemilker

    • Potential liaising/reporting to their equity partner as well as the farm owner.
    • The incoming sharemilker is vulnerable to the change in value of the cows as they are buying into the business and selling out again at the end of the agreement.

    Other equity partner/s

    • In a situation where the farm owner is required to re-purchase the shares of the managing sharemilker at the termination of the sharemilking agreement, the farm owner is open to the change in value of the herd.
    • Although the managing sharemilker has a vested interest in herd performance and profitability, if the herd stays with the farm owner at the end of the agreement there may not be the same feeling of ownership in some aspects of management such as reproductive performance.

  • Keys to success

    • Clear areas of decision-making between parties e.g. clarity around who makes decisions within the sharemilking business such as breeding and culling decisions.
    • Having the right people with similar farming philosophies and values.
    • Clear understanding of the business plan.
    • Good communication throughout the duration of the agreement.
    • A clear policy around the valuation of the business at the start and end of the agreement.
    • Clear timeframe for the partnership with clarity around exit strategy and what happens if the partnership needs to be terminated prior to the end of the timeframe.

  • Financial returns

    The key drivers for the herd owning sharemilking business is profitability.

    The equity required varies dependent on the size of the sharemilking business and cow values which can vary significantly from year to year.

    Average returns of a herd owning sharemilking business are around 15% return on asset, although the range can be significant due to the large fluctuations in cow values.

    For a more detailed financial example see the factsheet.

  • Entry and exit

    Entry and exit is relatively easy compared to other equity partnership agreements that involve the land.

Equity partnership that owns the farmland. In some cases, this entity will also own other key assets such as the herd, machinery, and dairy company shares.

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  • How it works

    The business is valued and shareholdings in the land/business purchased at the agreed rate. Typically, the progressing farmer would also operate the farm as a variable order sharemilker, contract milker, or a manager as well as being an investor in the farm.

  • Advantages

    • Encourages a progressing farmer to become part of the business.
    • Helps to align the drivers of success for both the person(s) managing the farm and the farm owner.
    • Frees up equity for the existing farm owner.
    • Given land prices fluctuate less rapidly than cow prices, there may be less asset value risk compared to investing in a HOSM venture.
    • Banks will lend a higher ratio against land in comparison to livestock. This enables more financial leveraging to occur.

  • Considerations

    • Requires a good working relationship between both parties, as do all agreements.
    • Lack of management control for a progressing farmer, compared to farm leases or other options.
    • Cash returns are relatively low compared to HOSM and other models.
    • Exit from the arrangement can be more difficult.

  • Keys to success

    • Clear agreement on how farm management decisions will be made, who has final say on farm management decisions and the exit process.
    • Choosing the right equity partner can significantly grow your business, just as the wrong equity partner may ultimately hold you back.
    • Equity partnerships should generally focus on agreed profit and cashflow objectives, rather than relying on the potential for capital gain.
    • Undertake due diligence on both the potential business/farm and the potential partners.
    • Good communication and governance throughout the duration of the agreement
    • Clear understanding of the business goals, management plan and measures of success for the business.

  • Financial returns

    The returns from an equity partnership would reflect any standard owner operator model divided between shareholders (e.g. 20% of profit plus 20% of capital growth) if assets included land, herd, machinery, plant, buildings, and shares.

    If the equity partnership is for land only, then the returns may be similar to lease agreements with shareholders receiving a share of the lease rental.

    Return on investment can vary significantly depending on the farm management ability, timing of entry and exit, quality and value of the land asset purchased.

  • Entry and exit

    Clear business timeframe with the entry and exit process specifically outlined: this should include the exit process if one party needs to exit before the end of the timeframe.

    A clear policy around the valuation of the business at the start and end of the agreement.

An equity partnership, where the land owning and the farm trading business entities are separated.

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  • How it works

    The farm business is structured into two entities, hypothetically called Land Co and Trade Co:

    • Land Co owns the land and buildings and receives an annual lease for this business.
    • Trade Co is the farming operation entity that owns all the operating assets including cows, plant and equipment and dairy company shares.

    Typically the progressing farmer in the Trade Co EP would operate the farm as a variable order sharemilker, contract milker, or a manager as well as being an investor in the farm.

    Land Co would typically lease the land assets to the Trade Co.

    There may also exist an opportunity for the farm/operating manager to purchase a stake in Land Co.  This would be a separate business arrangement and could continue even if the progressing farmer leaves the farm.

    This model has been successfully used in farm succession plans. In some instances, the agreement is structured once Trade Co is 100% owned by the progressing farmer, they agree to progressively purchase shares in Land Co.

  • Advantages

    Progressing farmer

    • From a farmer progressing perspective the investment in Trade Co is reasonably liquid and allows them to benefit from increasing farm profitability.
    • This model creates a shared goal of farm profitability, which helps aligns financial motives between all parties. Having the progressing farmer better understand the business and its expenses can assist with better farm management and skill development.
    • The investment required to invest in a Trade Co is significantly less than if land is included, which makes entry and exit easier.

    Farm owner

    • From the farm owner's perspective having another party provide equity may improve their balance sheet.
    • May suit farm owners looking to exit from the day-to-day running of the property or looking for a succession model.

  • Considerations

    • As with all equity arrangements it is important that the core farming philosophies of all parties are understood and are aligned.
    • If the progressing farmer leaves the Trade Co partnership they must realise any capital gains or losses in stock values at that point in time, and as such are susceptible to fluctuations in livestock values.
    • Setting a fair lease rate, with transparent methodology is critical. There should also be a market based relationship between both Trade Co and Land Co to satisfy all parties.

  • Keys to success

    • Equity partnerships should generally focus on agreed profit and cashflow objectives, rather than relying on the potential for capital gain.
    • Undertake due diligence on both the potential business/farm and the potential partners.
    • Good communication and governance throughout the duration of the agreement
    • Universal agreement around the payment of dividends. Is the expectation that dividends are paid out each year or reinvested for development? Additionally, are shareholders required to invest further capital if there is a deficit?
    • If one equity partner is to run the day-to-day aspects of the business as a manager/contract milker or sharemilker, a separate employment/sharemilker agreement is required with a very clear process of reporting and performance review process to address any performance issues.

  • Financial returns

    Trade Co.

    The returns to Trade Co will be influenced strongly by the agreed rental.  In areas with high land values, calculating the lease rate using productive potential may be more appropriate to ensure Trade Co remains a viable business.

    Trade Co can be expected to offer returns similar to, although slightly lower than, a HOSM business in an average milk price year (10% - 15%). This is due to the proportionally large investment in lower yielding dairy company shares (if required) compared to that of a traditional HOSM where the farm owner would retain the dairy company shares.

    Land Co.

    The financial returns for the Land Co. are driven by the lease rate and any capital gain.

    Financial returns are dependent on the lease rate negotiated. A simple return such as 4% of land value can be used to set the lease
    i.e. 4% of $45,000/ha = $1,800/ha

    Alternatively, the lease is decided from the productive potential of the land
    i.e. 1100 kgMS produced x $5.50/kgMS milk price x 23% share of milk income = $1,392/ha (3.1% return)

    For a more detailed example of equity and returns for this type of Equity Partnership see the factsheet.

  • Entry and exit

    The ability to invest in Trade Co will involve more modest sums, and the entry and exit into this arrangement with a clear contract agreement should be no more difficult than a conventional HOSM agreement.

    Any investment in Land Co is likely a more significant investment and will be less liquid.  It is possible that this arrangement could be conducted outside an investment in Trade Co and a progressing farmer may be able to leave an investment in Land Co ongoing or until such time as another suitable investor is found.