Lower order sharemilkers under pressure

Rural News

Big slog, small gain

7th Mar 12, 2:17pm by Tony Chaston

This Waikato Times article below looks at achieving farm ownership by the sharemilking system, with differing view points on how realistic this is in todays economic climate. Historical remuneration via wages in agriculture allowed very little savings to be achieved even for a retirement house, let alone any deposit as a start into farm ownership.

The sharemilking system however has proven over time, as a way to generate extra income and a path to owning land, and many successful young farmers have used this system. But some are questioning that this system is now proving too difficult especially from the lower order start.

Farm managers are now better paid, and on bigger operations a structured path to increased responsibility and remuneration are tracks that many are now following. Will agriculture be able to maintain productivity growth from managers that are not incentivised by future farm ownership, or can this be achieved by larger wage packets? Your views.

Two years into a 50/50 sharemilking contract at Tihiroa, Mark Foster is questioning the traditional route to farm ownership. Mark, 36, says he made only a $9000 profit last season, milking 200 cows on 63ha belonging to Cowley Properties Ltd, and he wouldn't be able to afford to stay sharemilking if it was not for the job his wife, Nicole, holds at CRV Ambreed NZ. Mark, who managed half a dozen farms before he went sharemilking, says most joining the dairy industry now are going down the farm management route where a set salary and holidays are part of the package.

''The last time I had a day off was 700 days ago. If you can get a good wage for a reasonable number of cows there's a lot less stress in it than sharemilking. The idea has pretty much gone for the majority of young farmers.'' Mark says lower order sharemilking will soon disappear from the options for people wanting a career in dairying but he thinks 50/50 sharemilking will probably carry on.

Don Fraser, of Fraser Farm Finance, says there is a noticeable drop in the number of people going lower order sharemilking and believes farm management is the way of the future. ''As we have got into higher input farming, the farm owner has seen sharemilking as an opportunity to shift some of his costs, like palm kernel, silage, irrigation and even nitrogen, on to the lower order sharemilker. The lower order sharemilkers are not doing as well as they were.

Jim Keir, a former farm business lecturer at Waikato Polytechnic, saw the writing on the wall before his retirement in 1997 when he was advising people to steer clear of climbing the sharemilking ladder to pursue farm ownership. ''I used to advise my students to get a manager's job as it's a career from which you can retire at 55 and go fishing,'' Jim, 81, says. ''Farm ownership is a dead duck. ''With land and stock prices so high, you are subjecting yourself to a life of misery if you want to own a farm.

Meanwhile, Morrinsville farm consultant John Dawson is upbeat about sharemilking. ''There has been no move away from lower order arrangements this year,'' John says. His firm had dealt with a dozen lower order sharemilkers this season, with similar numbers every year over the past decade. John says Fonterra's record payout of $7.90 per kg of milksolids, last season, had absorbed the blow of the drought for most.

Sue Hagenson, FarmWise manager for LIC, says the career path sharemilking offers is envied all over the world. ''It is a win-win arrangement that allows growth, progression and farm ownership for new farmers, and fills the need of many farm owners. For entrants into the industry, variable order sharemilking is an effective pathway to herd ownership and learning how to run a business effectively. Managerial, financial and administrative skills are developed which are not necessarily gained in a salaried situation.''

Greg Maughan, chairman of the New Zealand Dairy Industry Awards, also has no concerns for the future of sharemilking. ''We continue to be amazed at what some people are achieving in our dairy industry in times of high land and cow prices, flood, drought and even economic slowdown. ''Our farm manager winners and dairy trainee winners are also focused on farm ownership or moving into equity partnerships with the ultimate goal to be the majority shareholder or to buy the other partners out.

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19 Comments

by Casual Observer | 7th Mar 12, 3:57pm 1331089045

Even debt free - milking 200 cows on a 50/50 basis is not a good idea unless it is for lifestyle and there is a 2nd income coming in. I strongly advise young farmers against such positions - they are better off financially as a Manager and leasing their cows out.

The comment about no time off for 700days suggests Mark needs a farming mentor. There is no reason what so ever why you cannot employ a relief milker in order to have time off. But it something many young sharemilkers don't do - due to perceived 'work' or financial pressures. What these young folks don't realise is that by paying a relief milker and getting off the farm completely allows you often to do some rational thinking and de-stress. Living on your workplace means for most they never really stop 'working'.

The variety of viewpoints expressed in the article would be completely representative of industry views - depends on where you sit. From what I see it is 50/50 sharemilking that is more under pressure than lower order/contract milking.

by redcows1 | 7th Mar 12, 4:48pm 1331092092

Interesting. We desperately want to own a herd(again), but having looked this year we didn't find much in the way of 50/50 positions that could support herd prices of $2000 plus per cow even at the current payout.

One of the reasons for this is with the greater use of supplements half payed for by the sharemilker, the farmowner can run more cows and do more production off the same land while adding more cost for the sharemilker.

Currently we are VOSM but as a comparison if we were 50/50 on this property where we use no supplement or grazing off, we would be better of than the very similar 50/50 job 2 kms away using supplements and grazing off, by approx $50,000. (250 cows 85ha).

As another example, 300 cows doing 90,000kgs, on 70ha with 250t of maize. Needing two people to milk, the cost of maize and labour would be $150,000, leaving only $100,000 for running costs and nothing for a mortgage, on a out lay of $750,000.

Interesting. Note all these figures are supported by dairybase and dairynz economic survey, which reported that 6% of sharemilkers in 2010 year had NO money for personal spending, in a year of $6.30 payout.

by Casual Observer | 7th Mar 12, 5:44pm 1331095496

Agree with you comment about cows prices of $2000 and profitability.

I am wary of dairybase figures as there are only a smalll fraction of farmers on it. We won't use it because you have to pay, whereas our accountant (mainly farming clients) provides the same data across their client base so we have a comparison with a larger number of farms than dairybase - and it's free (no doubt costed in to their fees). What you need to take from the 2010 figures is not that 6% didn't have any money for personal spending, but that 94% did. :-) I would bet that you can go in to any section of the industry/society and find among people who have the same position/income there are those who have no surplus. Farm owners included.

I know a small group of young sharemilkers who are currently sharing financial information. They fall into 3 groups - high input/high nitrogen, low input/low nitrogen, and a group that is somewhere in between. The difference between the last two groups is a matter of a few c/kg. However they are $5kg/ms ahead on profitability so far this season, on the high input group despite this group being ahead on per cow and per ha production. They only compare actual farm working costs. Interest is not included as they are all in different phases - some are first year, some 2nd year, some are in their third year. They are all within a few kms of each other.

Quite frankly if you are only getting 300kgs/cow (your 90,000kgs/300cows example) then unless it was in a severe drought year or a once-a-day regime, something is seriously amiss with the management of that farm. Reducing stocking rate would have to be the first priority.

300 cows 50/50 is another of those 'limbo' positions - it is a one and a half fulltime labour unit positions, but as you can't employ a half a labour unit it defaults to a 2 person position. 350 cows gives greater profitability than 300 and 400 cows even more so as again you can manage with only 2 fulltime labour units. I heard the other day that sharemilkers with 450-500cows are paying a lease to farm owners of up to $25,000 for the use of cup removers and Protrack in a cowshed. You would have to seriously look at the benefits of that if you were the sharemilker - especially in a herringbone as it won't remove the need for a labour unit. Personally I would tell the owner to take it out as I would prefer not to use it. If it ws a herd 600+ cows the economics maybe different. This was in the South Island, don't know if it happens in the North Island.

I hear cows are being quoted in the south island cheaper than in the north at the moment. At $150/head to cart between islands it maybe cheaper to buy down south and move them up north. Just do your homework as to the 'robustness' of the records of cows down south. There's being a few farms sold in the Waikato lately so whether or not that has given rise to the increase in price and it is a spike rather than a sustained price, only time will tell. The banks do have money buring a hole in their pockets at the moment, so I expect they are only too willing to throw money about again.

Good luck with your future plans. You are wise not to rush in. Profitability is the main consideration in these volatile times, not production or stocking rate. :-)

by redcows1 | 7th Mar 12, 6:24pm 1331097879

Fact is there's 4000 or so sharemilking giving 4000 different levels of profitability, nice to be able to add your info to the knowledge.

With the 300 cows doing 300kgs, there are a few, to many, and yes they are questionable but my point is the owner won't worry cause they will do 1350 kgs/ha. They specifically asked for high BW cows :(.

Of course profitability isn't everything, I left the industry for 11 years but came back because I enjoy it, especially the self employed component, so managing is not quite what I want.

by Casual Observer | 7th Mar 12, 8:38pm 1331105883

my point is the owner won't worry cause they will do 1350 kgs/ha. They specifically asked for high BW cows :(. The owner should worry because chances are that there could be animal welfare issues on this farm. If that is the case then nothing won't change anything until the locals (who will know what is going on) take some form of affirmative action. What I don't understand is why do sharemilkers accept such positions, especially if they own high BW cows??? Desperate times for desperate people? :-(

by Andrewj | 7th Mar 12, 6:33pm 1331098408

Try these guys

http://www.dairyexporter.co.nz/article/36171.html

by Casual Observer | 7th Mar 12, 7:22pm 1331101334

It is an interesting link Aj and it will be interesting to see if it gains any commercial traction.

Some years ago the call went out for a 4% yoy increase in production. What the powers that be, that called for this, and the people that follow like sheep, failed to take in to account was that what is good for the industry isn't necessarily good for individual farmers.

However a lot of advisers etc pushed for higher stocking rates as a way of filling some of this gap. It resulted in the inevitable theory v practice differences and many farmers got stuck on this high input treadmill due to higher debt levels. I shudder when I hear farmers talking about the amount of inputs they are now using and justifying it by saying 'Dairy NZ advisors say that it pays to do this and that we make xx amount of profit from it.' Then I ask if that is proven in their own financial accounts and I get a blank stare - they have not really looked in to how it is affecting them as an individual farm! :-(

I believe that high stocking rates have a lot to answer for. That is what is so interesting in the young sharemilker group I referred to above. They are each tyring different methods - the high input folks used tons and tons of pk during the southland dry and milked twice a day, and the others used minimum amount and went on to 18hr milkings. At the same time they are willing to learn from each other and review what they are doing. The end of year results for this group will be interesting.

by ITYS | 8th Mar 12, 8:55am 1331150156

I'm sorry CO but you have just demonstrated how a genuine message gets lost in translation/ignorance. The call went out for 4% PRODUCTIVITY. Not production. PRODUCTIVITY, PRODUCTIVITY, PRODUCTIVITY. Hopefully you see that now. Without getting into the mother of all debates about what productivity is, my take on it (as previously one of those advisors you are so scornful of) is reducing you unit cost of production by 4% per annum (by a combination of reducing costs where possible and increasing production through better management of grass). Of course this isn't a performance metric that can be carried on to the nth degree as it would imply that at a given point in time that we could produce milk for half the cost.

High stocking rates are another example of how a very innocent message about the POTENTIAL opportunities that came out of DRC No. 2 dairy back in the late 90's under the watchful eye of Dr. J Penno (who obviously is now eroding shareholder value rapidly elsewhere). The reserach talk about the PRINCIPLES of the opportunities of running higher stocking rates. The problem is that principles are lost and silver bullets are expected. So the unsophisticated farmer goes and ups stocking rate without changing any other aspect of management. He then sees huge feed deficits at the margins. He then fills these with feed. Then a drought hits and he hits the wall quicker than ever before. More feed. And PRODUCTIVITY goes backwards quicker than ever. But does that mean the message around the principles of higher stocking rates is wrong?

HIgh inputs haven't necessarily led to significantly higher debt levels - the ponzi scheme that is land ownership transfer through 2005 to 2007 has created that bubble of debt.

High inputs have eroded PRODUCTIVITY and PROFIT as the generally unsophisticated farmer believed the hype of their local salesman. But hey, PRODUCTION went up so it's OK isn't it? Hello? Is anyone going to help me?

Not until you help yourself.

by Mitre | 8th Mar 12, 10:27am 1331155656

ITYS,

your dairy industry concept of "Not production. PRODUCTIVITY, PRODUCTIVITY, PRODUCTIVITY" is still short of the real measure of farming success - PROFIT! PROFIT! PROFIT!

Andrewj above gives a lead on where to go to find new techniques to gain optimal profit from available farm resources. There are many routes to "some" farm profit or loss but only a few routes to optimal farm profit - an LP analysis selects the best mix of on-farm and bought in resources by marginal analysis to show the maximum profit available. It is bio-economics in action at a practical farming level.

by Omnologo | 8th Mar 12, 11:15am 1331158516

Good comments ITYS, Miter and CO. Maybe marginal anaylsis is the key to profits, but the advocate in AJs link wants a big chunk of that profit to head to foreign corporate processors. It's probably a semantic position in the sense the current genreration of farmers and politicians have already sold their souls and our futures into foreign owned hands anyway.

As far as high stocking rates go, many high profile farmers employ this policy, Crafers being one of many. It seems it's the easiest way to manage a large scale farm. But would you want to work on these farms and in such conditions yourself; animal welfare, horrendous hours, tyerrible conditions, low pay. How many dairy farmers would want their kids to get involved in the industry described in this article?

by ITYS | 8th Mar 12, 12:01pm 1331161318

It's not my diary industry concept. Read a little closer and it is simply parroting the mantra on the McInsey Report which first brought the word productivity to the table which was subsequently bastardised to production by those with the vested interest and those who wanted to believe they were acheiving something worthwhile.

Of course profit is the real measure of farming success. What make of dumb-ass do you take me for?

I also think that you'll find that the LP model isn't fool proof - All Models are still the eternal search for the silver bullet (the computer said yes! Hurray!). Nothing will ever beat Kiwi ingenuity, education, discussion, flexibility, an understanding of cause/effect and necessity to keep farming as profitable as possible.

by Colin Riden | 8th Mar 12, 3:14pm 1331172890

Nothing will ever beat Kiwi ingenuity, education, discussion, flexibility, an understanding of cause/effect and necessity to keep farming as profitable as possible.

I am just wondering what your experience(s) with LP have been?

by ITYS | 8th Mar 12, 12:05pm 1331161536

Or in other words a 'sophisticated' farmer.

by Casual Observer | 8th Mar 12, 1:25pm 1331166351

ITYS - apologies it should have been productivity but the reality was that in chasing this goal it usually resulted in increased production. To quote from the DairyNZ's '4% Productivity - What does it Mean for Farmers':

The most likely way a farmer will achieve a farm productivity increase is by a combination of increased production and decreasing farm working costs'

http://www.dairynz.co.nz/file/fileid/27259

I am not scornful of farm advisors - we have used some excellent advisors over the years. If you read my comment properly you will see that it was the farmers that just follow advice blindly (trustingly) that I am most concerned about. As to your comment re unsophisticated farmers and sophisticated farmers, I would break that down to those who trust the advice they are given (unsophisticated) and those who don't (sophisticated)

I am a fan of DairyNZ BizStart and BizGrow programmes - they are an opportunity for younger (usually) farmers to delve a little deeper with like minded farmers in to options that a discussion group day doesn't always allow. As you say there are many out there with vested interests and for some, especially young farmers, it can be hard to know what advice to take and what to ignore. I am especially concerned that we continue to have real career pathways for young farmers.

Bankers historically valued production as measure to base lending decisions on, so it is understandable why production is valued as a measure among farmers (a little misguided at times).

Just as it is becoming the norm for farm prices to be quoted 'without shares' now, it is also now normal for buyers to ask 'what level of bought in feed contributes to the production'.

by Robpeter | 8th Mar 12, 12:01pm 1331161315

They called it "productivity" but from then on acted and advised as if the term was really "production" which the dairy industry is still geared up for.

What many have still not understood is that many sharemilker agreements are still shackled by "KPI's" (key performance indicators) that prescibe herd numbers, replacement rates and supplementary feeds amongst other things.

These are relics of a different age when farm incomes vs. costs gave enough room for sharefarming to provide incentives and profits and to achieve production increases from more cows by improved pasture utilisation -to get latent improvements at little cost (more from the "same").

Unfortunately the internal cost structures of NZ (aided and abetted by local and regional councils plus national governments) has now eroded the true profit margin of farms as the administrative structures in themselves become less efficient but increasingly needy.

As for marginal cost and return, little hope there as all the administrators work off averages and benchmarks which by definition mask any marginal change; yet measuring marginal change is the only way to improve or to realise when to pull back.

by ITYS | 8th Mar 12, 12:04pm 1331161450

Who acted as if it was production? The industry-paid advisors? Or those with vested interest?

by Casual Observer | 8th Mar 12, 2:20pm 1331169605

Robpeter - Lower Order Sharemilking agreements are covered under legislation - Sharemilking Agreements Act 1937.

A good relationship between farm owner and 50/50 Sharemilkers sees flexibility with herd numbers, replacement rates and supplementary feeds. While you need a contract for clarification it does not mean that it can't change with agreement by both parties during the term of the contract.

I would be interested to see the detail of what you believe should be in their place.

by Ricardo | 9th Mar 12, 8:20pm 1331277657

Here is the problem guys...majority of farms are tied up in the family structure and passed on through the generations...it's a crime...you can be a sharemilker and work tirelessly for years and you will still find it hard to buy a decent farm at current prices...but the children who are heirs to a farm get the farm gifted to them...so much for living in a society where hard work is rewarded.

People should be able to accumulate as much wealth as they possibly can in their own lifetime....and not have the ability to pass on to their descendants...this way everyone is starting from the same start line in the race....and the truly talented (& lucky) people will be obvious, as they will achieve the best results.

by Omnologo | 11th Mar 12, 11:50am 1331419806

What about siblings of heir apparents. The price of land is so far beyond its economic value that it's difficult for farmers to pass the asset on without tearing the family apart. Do you fancy your chances starting on the same line as a foriegn corporate or NZ super fund? Maybe you should get used to working tirelessly for them, as they are surely hoping you will.