It was failing to attract new entrants, faced with low commodity prices and crippled by interest rates over 15pc. What evolved were successful dairy farmers with a very vibrant and motivated dairy industry, who developed a progression of labour which effectively produced high-calibre replacement farm owners. While New Zealand dairy industry still faces challenges, its dairy farmers appear to have the ability to spot opportunities where they seem to be few and find solutions to the problems it encounters.
In simple terms, the progression of labour through the New Zealand dairy industry can be grouped into a few simple steps or rungs on the ladder:
•Variable order sharemilking or contract milking;
•Equity partnerships and/or farm ownership.
While there are a number of varying job titles, the progression of a paid employee would be from the initial position of farm assistant, to second in charge (commonly referred to as 2IC) and finally farm manager.
The next step on the ladder is for the employee to take a degree of responsibility for some of the running costs, for an agreed level of the milk income. This has been a good way to give staff a sense of ownership and responsibility for the business performance as this will ultimately affect their income.
Variable order sharemilking is one option, where the sharemilker is responsible for some costs such as labour, parlour, farm electricity, motorbikes and some administration costs, but the owner retains the ownership of the stock. In return, if the position was for milking less than 300 cows, the sharemilker would receive a minimum of 21pc, or if for a position of more than 300 cows, this would often be around 17-18pc of the milk cheque. The positives to the farm owner of having a variable order sharemilker are:
•High calibre and motivated farm manager, which often results in a lift in production;
•It introduces the sharemilker to commercial life, with them being registered for both tax and employment contributions;
•Sharemilker is now self-employed and also is respon-sible for hiring, rosters, firing and paying any farm labour, reducing the labour challenge to the farm owner;
•Sharemilker pays for all fines associated with poor milk quality (grading);
•Easier step to progress from variable order to 50:50 share-milking.
The percentage for the lower order sharemilker is set every year based on estimates of milk price, production level and expenses, to provide the sharemilker with a decent income which would be equal to or greater than a farm manager position. Generally the estimates are fairly conservative in order to motivate the sharemilker, where a lift in production or milk price with low costs will be financially positive to the sharemilker.
The challenge in recent years to this option has been the volatility in the milk price, which has resulted in the agreed percentage being unsuitable, with sharemilkers making either extreme profits at the expense of the owner or potential losses that can't be sustained. The system has also become challenged by the 15-month payment system operated by Fonterra, where there is no income for the first three months of the season, with the final milk payment being 18 months after starting the position. This has implications on cashflow for the sharemilker.
As a result, contract milking has become more popular in recent years, with the payment to the contract milker being a fixed income per kilogramme of milk solid sold, and is often at $1-1.20/kg MS, while paying for costs such as labour, electricity, parlour costs, motorbikes and grading. After variable order or contract milking comes what is termed 50:50 share-milking. A 50:50 sharemilker owns 100pc of the milking cows and obviously has an asset in which they have invested. The sharemilker is responsible for the full costs associated with labour, animal health, parlour, electricity, youngstock grazing, silage making, vehicle fuel and running costs, motorbikes and machinery. The sharemilker is also responsible for 50pc of the cost of bought feed, nitrogen fertiliser, winter grazing for cows and irrigation. In return they receive 50pc of the milk cheque.
The farm owner is responsible for the full cost of P, K, S fertiliser applications, repairs and maintenance to the farm. In recent years there have been fewer opportunities for sizable 50:50 sharemilking positions.
There are numerous reasons for this but obvious ones are the fact that new dairy conversions have too much debt to consider the 50:50 sharemilking option as they can't afford to forgo income associated with stock sales and repeatedly 50:50 sharemilkers have demonstrated a return on capital of up to 21pc that is two to three times greater than that of the farm owners 7pc. Therefore some believe that the payment ratio may change to something closer to 40:60 in the future.
Traditionally, many 50:50 sharemilkers would be able to progress directly to farm ownership. As this has become increasingly difficult, equity partnerships have become increasingly popular. These are people who pool their financial and personal skill resources for the common good of the partnership.
The main reason for working in a group is to allow expansion without tying up too much capital for each individual, or to allow a skilled operator with limited resources to progress into a farm ownership of a dairy business with size and scale.
Many equity managers buy into an equity partnership at around 20-25pc, with a pre-emptive right to increase their equity percentage. A positive point of equity partnerships is allowing involvement in expansion with reduced risks. It also allows farmers to maintain control over their farms while still having the benefits of a group approach.
In addition, it provides a discipline to maintain excellent management systems while at the same time on large units giving the equity manager a better lifestyle as there will often be more labour and the farm will be better set up in comparison to the same investment into a small farm. However, the greatest challenge is for the equity manager to increase the percentage share in the business.
Mary Kinston is a farm consultant based in Kerry. Contact firstname.lastname@example.org