Professional farm management roles as an employee, required to operate farm/s with minimal input from owners. May be responsible for multiple farms. Click here to find out more

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

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  • 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.

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.

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  • 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:

    Milk price	Top-up rate	Total CM rate
    $5.50/kgMS	$0	$1.20/kgMS
    $6.00/kgMS	$0	$1.20/kgMS
    $6.50/kgMS	$0.10/kgMS	$1.30/kgMS
    +$7.00/kgMS	$0.15/kgMS	$1.35/kgMS

    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.

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

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  • 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.

This is a combination of the contract milker (CM) and the variable order sharemilker (VOSM) agreements. This model is currently being used on a small number of farms.

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  • How it works

    Income for the contract milker is completed via two income streams. A portion is an agreed flat rate per KgMS produced (like a CM) and the rest is an agreed percentage of the milk price (like a VOSM).

    For example at a $5.50/kgMS milk price the farm owner and farmer may agree:

    CM rate	$0.70/kgMS
    VOSM	10%

    The CM and farm owner will have agreed the costs that the CM will provide typically including labour, shed costs, electricity and transport (note Contract Milkers have additional costs such as insurance, ACC and administration).

  • Advantages

    • Uses two tried and proven payment models.

    CM/VOSM:

    • Moderates what the minimum payments will be during the season, reducing the business risk of a low milk price.

    Farm owner:

    • Reduces the contract rate for the farm owner in a low payout, and allows them to offer more in a high payout making them more competitive.

  • Considerations

    • The contract agreement should clearly state how and when this payment will be made.
    • The contract rate is dependent on production, so this portion is relatively certain for budgeting. The VOSM percentage depends on both production and milk price – therefore this revenue is not set for the season and it is important to calculate what the highs and lows could be.
    • There can only be one set of contract terms, and given the protection provided by the sharemilking agreements order 2011 the VOSM terms will take precedence.
    • The sharemilking agreement order 2011, does not allow any changes to the VOSM contract that are deemed detrimental to the sharemilker. For this reason careful wording is required so it is clear the flat rate portion of the payment is in addition to the sharemilking portion and not a substitute. It is important to get professional advice if considering using this model.

  • Keys to success

    • The contract rate is set at a fair price for the work and costs provided by the contract milker.
    • To better understand the implications of the payment structure, a sensitivity analysis should be completed at different production levels and milk prices.
    • Accurate budgeting is essential.

  • Financial returns

    Example only.

    On a farm producing 220,000 kgMS with $5.50/kgMS milk price

    Agreed Payment Schedule	$
    Flat rate CM agreement of $0.70/kgMS	$154,000
    VOSM of 10%	$121,000
    Total payment to the Milker (excluding costs)	$275,000

    If final milk price was $4.50/kgMS, then the total payment to the Milker would be $253,000 if production was met.

    To review more financial information including sensitivity analysis review the factsheet here.

  • Entry and exit

    Typically, these are one season agreements. This a relatively new concept and we advise that you seek independent advice. Federated Farmers would be a good starting point or your farm consultant. This arrangement is governed by the Variable Order Sharemilking Agreements Order.