By chair of the Sharemilker Farm Owners’ Section, John Numan
The Sharemilker farm owners’ section of Federated Farmers and the Sharemilkers’ section frequently review the Federated Farmers employment contracts used for Contract Milkers, Lower Order Sharemilkers and Herd Owning Sharemilkers.
As anyone who has used them will know, unfortunately, the contracts are lengthy as they attempt to cover the variability of numerous farming systems and their individual farm policies.
I believe there are still good progression pathways through the industry with an end goal of farm ownership. But there are roadblocks that even a good solid contract can’t fix.
We need to make sure these pathways remain fit-for-purpose so land values and the return on capital has a margin sufficiently above the cost of funding to encourage the interest of young New Zealand’s wanting to get into dairy farm ownership.
The average age of land-owning dairy farmers is about 60 years old. And to that expected environmental and compliance changes and some marginal return on capital (in the operations that haven’t maintained a cost structure proportionate to their productivity), plus the continuing shortage of independent contractors, and it’s not surprising the number of owners exiting the industry is increasing.
At least the current milk price makes for positive reading. As I write this, the ANZ bank has lifted its projected pay-out for 2020-2021 by 50 cents to $7.20 per kg of milk solids and adjusted the forecasts for 2021-2022 to $6.40.
But we know staffing, housing, sick leave, environmental and regional compliance admin, plus the cost of consents and increases in on-farm product and service industry costs are all going to chew away into those increased pay-out cheques.
There is a perception within urban New Zealand that farmers are wealthy or asset rich. For some reason this still doesn’t encourage enough young Kiwis to try their hand at dairy farming. Even if this perception was correct for a small minority, they like most commercial business owners have in the last 20 years or more, many times worked up to 80 hours per week with minimal time off, to get their business through tough and busy times.
Yes, it is their choice, but as the current acceptable maximum working hours of 50 per week for support staff is adopted by most, it gets much harder to remind the self-employed person going into their own business that they might need to work a few more hours than that, on a regular basis.
“Ownership” requires an adjustment in the mind-set of a farmer.
The December Fed Farmers’ farmer confidence survey should farmer satisfaction with their banks dropped from 86% to 82% and only sat at 56% for sharemilkers. This on its own is a serious statement. Perhaps it shows there are farmers who need upskilling in business financial management, because they aren’t finding ways to get better results from their banks?
DairyNZ has options available on their website for upskilling on financial management and also provides budgeting information to download. My message to farmers who want to improve their business performance, especially when they are just starting out, is to get used to having serious discussions with their accountants and or seek a mentor with a proven record. Ask questions.
Banks will still lend, but clients have to show good saving history and show no excessive spending on more than the required depreciating assets. The bank is a business too.
I’ve watched ‘Herd Owning Sharemilking’ (HOSM) position numbers decline over the last few years as owners are choosing to sell their properties rather than engage a HOSM. They do this because they believe the return on their capital won’t exceed the cost of funding the HOSM, AND they always suspect their property may not be maintained.
I believe there is still good opportunity to employ HOSMs and receive a better ROC than some commercial investments. I also believe it can be significantly better than the DairyNZ dairy base margins for land owners with HOSMs, as at their current reporting levels the ROC is only 2.75% based on land valves of $40k per hectare.
There is huge scope for owners and HOSMs that have aligned their farm policies and their business skillsets to achieve sustainable business results. I’d like to see the sharemilking sector think outside the square, especially with regard to caring for and improving the property, not just productively but also physically.
Both parties need to understand what the other party is trying to achieve, and what their ROC needs to be. Partial budgets are a great tool for requesting and show casing a plan rather than just being approached with a verbal idea. Put it in writing or in a spreadsheet, work out the numbers first, and agree on the plan.
Last year the Sharemilker Farm Owners’ Section agreed to add into the current contracts for contract milkers and/or lower order sharemilkers a ‘Guaranteed Minimum Return’ to ensure retention of fair performance-based remuneration based on the initial budget for the contractor.
Currently the LOSMs are protected by the 1937 Act and its amendments, but this is now outdated and offers less protection. That’s why the GMR was established. It offers support for the two discussed positions with one contract and should improve retention of the CMs and/or LOSMs in difficult times, either due to low pay-out, extreme dry or other unforeseen circumstances.
Federated Farmers has tried to discuss upgrading the 1937 Act and will continue to do so with the relevant government agencies, in particular the Ministry for Business, Innovation and Employment. The ‘GMR’ is part of our suggested plan to them to improve the legislation.
Here’s an example of how the GMR could work: If a property produces 64,000 ms and had a taxable budget earning capacity set for $77,000 and the pay-out fluctuated significantly or costs were way off budget (with fair justification), then that position would have a protection of 80% of the Plan, minimised to $61,600 for example.
There will be farm owners and sharemilkers alike who see this as unnecessary. However, even though it probably has no effect on good contracts it does protect those on weaker contracts and people who are less capable at solid budgeting. It helps to ensure our industry will retain independence for the CMs and LOSM positions. We encourage the use of the GMR for parties signing a new contract this season for either of the two positions.
We encourage a good, planned budget especially for the performance-based contractors. Talk to your local Feds dairy chair for more information.