By Aaron Passey, Chairperson Federated Farmers Sharemilkers’ Section
For many people making the move to herd owning sharemilking (HOSM) is a lot harder than it once was. With sharemilkers holding onto good positions longer, fewer farms contracting herd owning sharemilkers and banks tightening their lending requirements for sharemilkers, I thought I would share a few tips I have picked up on how to make the move a little bit easier.
The first step is to create a business plan for how you are going to get into the position to become HOSM. This should include your short to medium term goals to enable you to get into HOSM and your long term goals to ensure that HOSM is the way you want to go. Write these down and ideally put them on display – it’ll help you commit to meeting them. You should also be budgeting to enable you to build up the level of savings or investments needed to be able to afford to buy a herd of cows.
Learning to budget is a critical skill to progress through to HOSM and remain viable when you get there. Always budget conservatively, scaling costs up higher than what you expect and having production at average or below average levels. Set the milk price at reasonable level, e.g. the 10-year average. If you expect the milk price to be above $9 every season you will probably be bitterly disappointed (although I hope I am wrong!).
There are templates and information available through DairyNZ and Dairybase and don’t overlook the expertise available in the business where you’re currently working.
Having good relationships with the rural professionals around you can be very beneficial to your business. Your accountant and farm consultant can help you with writing budgets and most will be able to provide you with further business advice – though most likely they’ll charge for their time.
One of the most beneficial relationships for our farm business has been with our bank managers. Throughout our career we have regularly caught up with them outlining where we are, where we want to go and how we are planning to get there. They will provide you with advice and information free of charge, go over budgets with you, show you where you can make improvements and what you need to be a ‘bankable’ business. Having a strong relationship with your bank manager can mean they will back your cause if you are lacking slightly on one of the lending parameters.
One of the biggest stumbling blocks for a new HOSM being ‘bankable’ is a lack of security. Banks generally will lend 60% of the value of cows on the national herd scheme. This currently sits at $1570/head for a mixed age cow; the banks will lend you $942 and you will need to provide cash or security in the form of assets to cover the other $628 of each cow purchased. If you pay more than $1570/cow you have to make up the additional security requirements, so for a $2000 cow you have to provide $1058 of security per cow.
Timing can be crucial. While it is exciting buying your first herd, rushing out and buying cows as soon as you have signed the contract can be expensive. There are very few farmers under any pressure to sell their cows before Christmas, making it a sellers’ market. However, if you wait till the new year when farms have sold and people selling herds are starting to run out of time to find them a new home, the price will come back and you have more room to negotiate. You can also buy as many heifers as possible under your contract and a portion of budget cows with the expectation of only milking them for a year or two to help drop the average price paid per cow overall.
Finally – a big part of being a bankable business is cashflow. Cash is king. Your budgets must show that your business will be profitable and that you will be able to pay back the debt. Generally the loan term for buying a herd of cows is 10 years). Previous debt repayments and overdraft history also help with this.
The other big thing that helps with cashflow is managing your drawings. While it is nice to have all the new toys, you need to decide how they fit in with your goals. Cutting back on drawings in a bad year also looks really good to the banks, even if it may hurt at the time, but with good debt repayment and reserving funds for what could be a bad year next year (does anyone remember 2014-16?…) will keep you in business to afford and enjoy those toys in a few years’ time.
- Federated Farmers has completed a refresh of its industry-leading Sharemilking, Herd Owning, Contract Milking and Variable Order contracts in time for the start of the new season. All have been updated to ensure that the Healthy Homes Standards Compliance Statement is included.