Homework for farm owners - DairyNZ

Following a thorough due diligence process (doing your homework) is key to establishing a successful sharemilking or contract milking relationship.

It is important to have a clear idea of your own business situation including your goals and values, financial situation and farming practices and the impact these have on yourself and the other parties' business.

As a farm owner, you are responsible for a multimillion-dollar business. When looking to establish a successful relationship, an important approach is to view this as a business to business partnership.

A robust process that takes into account your personal and financial position, goals and those of the other party, will more likely result in successful outcomes.

Farm owner checklist

This list will help you consider options for your farming business, help you start the relationship on a good footing, and keep things on track. Use the supporting information below to help you answer the checklist questions.

Download checklist

Checklist supporting information

A clear vision of your current situation, goals and plans and the different operating structures within the industry, allows you to consider which structure will best suit your business, farm and plans. Getting the right fit in terms of people and operating structure is key.

What do I need to know about my situation?

Understanding different operating structures in the industry

What's the best operating structure for my farm?

Taking on a sharemilker or contract milker could be a good move if you are wanting to step aside from the day-to-day running of the farm. It can also be quite challenging not to be fully in control. There is a change in mindset from being in sole charge to a more collaborative approach with another party.

Here is a brief overview of a few progression options, consider:

The level of risk you are comfortable with
Your equity position
The costs you may bear in the business
The profit drivers
The needs and drivers of the other party

Pre-herd owning

Dairy farm businesses that don’t own or part-own a milking herd. Typically a self-employed person, who provides labour, shed expenses and some equipment (e.g. four wheeler) and in return receives either a percentage of the milk income (e.g. 25%) or a set price per KgMS produced (e.g. $1.20). Typically land, cows, and machinery are supplied by the farm or land owner.

Contract milker - paid a set amount per kgMS produced
Contract milker with top-up payments - paid a set amount per kgMS produced, with a top-up payment if the milk price goes over a certain level
Variable order sharemilker – paid a percentage of the milk income
Variable order sharemilker/Contract Milker hybrid – paid a set amount per kgMS and a percentage of milk income.

Herd owning

Dairy farm businesses that own or part-own a milking herd and share an agreed portion of the milk income and costs with the land owner. The farmer managing the property is paid on a percentage of milk income. E.g. 45%. The herd owner through agreement provides cows, labour, shed costs, animal health and breeding costs, electricity, machinery and generally share feed and fertiliser costs.

Herd owning sharemilker (50/50)– a split of 50/50 of milk income and costs between parties
Variable Rate Herd Owning Sharemilker – an agreed varied split of the of milk income and costs between parties e.g. 55/45
Flexi-rate agreement (concept) – an agreed split of the milk income depending on milk price (e.g. 60:40 at $4.00 and 50:50 at $6.00)

Leasing

A farm owner leases their property and infrastructure at an agreed set rate to a farmer. Leases are determined by market rates, location, land value, past production, and infrastructure available.

Leasing – set lease rate
Lease with variable lease rate – set base lease rate, if milk price rises above the base rate then a top-up payment is paid to land owner.

Equity Partnerships

An equity partnership is a joint business venture between individuals who have come together to pool their capital and possibly skills to enable the partners to obtain revenue and growth from their farm investment.

Equity partnership in Herd Owning Sharemilking business – two or more parties enter a HOSM agreement.
Equity partnerships in a farm trading company – two equity partnerships in both the farm trading (milking) company and a land owning company.
Equity partnerships in land ownership – two or more parties enter an equity partnership that owns the farmland.

Further investigate different structures using the Farm Business Pathways section of this website or download the Operating Structure Decision Tree to determine which best suits your needs and aspirations.

Short and long term goals

It's important to have a clear picture and plan of where you want to end up and the steps needed to fulfil these goals.

Goal setting is a powerful process for thinking about your ideal future and motivating yourself to turn your future vision into reality.

It's important goals you set are:

S – Specific

M – Measurable

A – Attainable

R – Relevant

T – Time-bound

Use QuickPlan to build a clear plan for your business and life. QuickPlan provides interactive strategic planning tools for farm owners, sharemilkers and dairy farm employees.

Current financial position

Do you know your current financial position?

When making a change to your current operating structure, it is good to have a current balance sheet, budget and to have spoken with your banker and accountant.

Putting together a balance sheet will detail what is owned (assets), what is owed (liabilities), and your current equity position (assets minus liabilities) at a given point of time.
Use the balance sheet to determine if you have the equity for the operating structure you are considering.
It is also important to have a good handle on your personal spending. Developing a personal cash budget helps you know where your personal income and expenditure is going (e.g. where you are spending your income e.g. groceries, electricity, travelling, helping family etc.). Having a good handle on your personal drawings from the business is an important part of making good decisions about the suitability of an operating structure.

Whether you need to understand your current financial position or develop a budget, DairyNZ have a range of tools to help.

Clarity of vision and values

A vision is a high level statement that describes what you would like your life to be like and the principles or values you want to live by.

It includes three main areas:

What important things you want to have,
what contributions and accomplishments you want to make and,
what type of person you want to be. For example, “We want to increase the size and profitability of our farm business to achieve financial freedom” or, “It is important to us to create a balanced and positive home life for our family”.

One of the common characteristics we see amongst successful people and businesses, in addition to a strong clarity of vision, are the values and guiding principles they apply to help make decisions in all areas of life. These are the principles they live by. For example, “treat others as you would want to be treated yourself.”

The values you live by are the things that are important to you, the essence of what you believe in, for example, honesty, reputation, helping others or creativity.

Your values and vision help you determine and prioritise different focus areas in your life e.g. family, business, leisure etc.

Take time to clarify what is important to you and the vision you have for the future. This will help you weigh up different options and figure out whether another business party is the right fit for you.

Use QuickPlan to build a clear plan for your business and life. QuickPlan provides interactive strategic planning tools for farm owners, sharemilkers and dairy farm employees.

Non negotiables

Have you thought about what things are so important to you that you would not think about working with a person who didn’t meet with these criteria?

Some examples:

You are very particular about the tidiness of the farm
You want someone with a family to support the local school
You only want a particular breed of cows on your farm.

Often your non-negotiables will line up closely with your values and guiding principles. Whatever the reasons, they are important and valid for you but within these constraints you still need to make a sound business decision.

When we are faced with opportunities we need to think strategically about the options open to us, and then weigh up the pros and cons of the various options before selecting our pathway.

The Decision Making Matrix is a tool to help you compare options, of either a personal or business nature. It provides a structure for evaluating options against key criteria.

Strengths and weaknesses

Do you know your strengths and weaknesses and are there areas you could improve in?

Some areas to think about are:

Are you ready to step back from the day to day decision making on farm?
Are you comfortable negotiating agreements and contracts?
Do you have a handle on your current financial situation and debt levels?
Do you have a farm policy or your farming philosophies written down to share – are you able to communicate these?

How are you going to manage your weaknesses and build on your strengths to help build a strong business partnership?

Carrying out a ‘self-assessment’ on various areas of your own life - both business and personal, will help you to identify your strengths and weaknesses by highlighting areas that need attention compared with those that are okay or on-track.

SWOT analysis

A SWOT analysis identifies our Strengths, Weaknesses, Opportunities, and Threats.

You can do a SWOT on yourself, your business, your industry, your country, etc. Focus on internal factors to define strengths and weaknesses and look outside your current lifestyle or business for opportunities and threats.

Identifying these factors will enable you to build on your strengths, take advantage of opportunities, manage/support or avoid your weaknesses, and steer away from threats when you are identifying the best strategies to achieve your vision.

Trusted advisers

If you are not comfortable with the idea of conducting the interview process and negotiation alone, it can be worthwhile engaging someone else to help you with this process.

There are many people in the industry that can help you. If you surround yourself with a core of knowledgeable people, this can be helpful and save you making costly mistakes.

For trusted advice you may have a consultant, mentor or friend. The most important thing about this person is that you either know that they are successful in their farming business, that you trust them or that you know of someone else who has used their services and been happy with the outcome.

When you think about the amount of money involved in your business setting aside a sum for good advice is a sound investment.

Find out about selecting the best person and the interview process .

The other party

When you go into a sharemilking or contract milking agreement with another business party you are really coming together in a business to business partnership. Finding your values and farming philosophies well-aligned will help improve your chances of success and business relationship longevity.

What do I need to know about any potential business partners?

References

Either by asking for references or asking people who know the sharemilkers or contract milkers you are considering signing an agreement with, you can get a better feel if they are going to be a good fit with you.

Asking the right questions can help you gain a real feel for how they operate. Sometimes what people don’t say about a person can tell you just as much as what they do say.

Offer up your own referees or references, and if you already have a contract milker or sharemilker in place make some time for them to meet with any new candidates to learn more about the farm and working with you.

This resource for interviewing people is designed for employers selecting someone for a salaried position, the principals of interviewing however are the same regardless of whether you are the prospective sharemilker or the farm owner.

Values

It is important that your values are well-aligned with any prospective sharemilker or contract milker, or that both sides appreciate each other’s values and can live with them.

There will always be differences between parties but the important thing is to be aware of them and the impact they may have on your business partnership.

For example, if their main driver is production and yours is profit, then this could cause some friction if you want to dry off towards the end of the season to preserve cow condition and they want to keep milking as long as possible.

Take time to tease out any prospective sharemilkers farming philosophies, their plans for the future, the values they hold themselves and as a family.

Long term goals

If you have been through the section about your own situation and goals, then you can take a long term view when looking for a contract or sharemilker to suit your business plan.

Consider your overall goals and how this relationship would help you meet them. Achieving your goals or the vision you have as a farm owner will require putting some target figures for wealth creation, debt levels, annual cashflow or profitability down on paper and then running a budget to make sure the sharemilking or contract milking arrangement is viable for you.

Be sure to look at different scenarios such as milk prices changes, production or farm working changes. These will impact the cash surplus or deficit and therefore your longer term plans.

If you are comfortable doing so, then share your goals with any prospective sharemilkers to help them assess whether the relationship is going to work. Being upfront will reduce second-guessing and their response to your goals and plans for the future may tell you a lot about whether you’ve got the right people fit.

Is there a possibility that the role will change over time, e.g. start as a contract milker but might end up variable order or herd owning position? Take into account how this would affect your profitability and share with any prospective sharemilkers as they will also be making plans and want to see how you could both grow your businesses together.

Relationship

Each party understanding their responsibilities and obligations clearly is one way to increase the likelihood of having a successful sharemilking relationship.

With sharemilking, often problems are caused by differing points of view and not communicating effectively.

If you are going to be working together it is important there is mutual respect and a willingness to cooperate for the good of the business – under these conditions, it is likely you will be supportive of each other.

Conversely, if you have a widely differing set of values and beliefs this will make it more difficult.

During the process of meeting with a prospective sharemilker or contract milker, you will have spoken over the phone, met in person and spoken to referees. Take time to mull over how you think interactions will be with this person if you are in an ongoing business relationship.

My farm

When it is your farm and you have been running it a certain way for a long time, it can be difficult to take a step back and examine the way things are currently being done and be open to change.

What do I need to communicate about my farm business?

Taking a close look at the farm business and thinking about it from a sharemilker or contract milker perspective, will allow you to think about how the day-to-day running of your farm impacts people’s time and costs.

Being honest and upfront about any limitations or costs associated with your farm will allow you both to build trust and ensure you both get optimal business outcomes.

Farm policy

A farm policy outlines how things are done on your farm and can include your general farming philosophies.

If you don’t already have a farm policy, you should look at creating one. A farm policy should give good insight into your expectations as to how the farm operates and can be used as a basis for discussion.

If you are developing a farm policy for the first time, think through how the policies might affect a sharemilker or contract milker. Every policy will have an impact on people’s time, expenses and profitability; laying that out on paper is a good way to make sure everyone knows where they stand.

For example, farmers' views on nitrogen use can vary widely. By being explicit about the volumes and timing of nitrogen you prefer on your farm, the sharemilker can clearly see limits. Be open to negotiation and discussion in some areas, a proposed change may be beneficial to the profitability and sustainability of the farm. Having a new sharemilking partner may help to reinvigorate the farm.

Management policies

Be specific when talking about your management policies with any potential sharemilkers. If you are clear about your expectations and requirements and under what circumstances these might apply, then there is less room for misunderstanding.

If a prospective business partner asks a lot of questions about the farm this is a good thing. It shows that they are doing their homework and trying to get a good idea of how you and the farm business operate.

Examples of the type of questions you might get asked:

What area and what type of cropping and regrassing needs to be done each year?
Is there a contingency plan for adverse weather conditions?
What happens if, due to climactic conditions, an area of the farm must be re-sown, how will the cost be split?
What type of feed and how much is expected to be bought in?
How are the feed costs to be split?
How much area needs to be shut up for feed grown on farm?

You could bring up the key topics around regrassing, cropping, feed and adverse events as you walk around the farm, these must be clear in the agreement as well if you proceed to signing.

Targets

Be prepared to show that the farm targets and operational costs you have stated are accurate.

Pull together and show your production dockets, electricity accounts, feed bills, shed inspection reports or some other verification, this is important for both parties. DairyBase Level 2 benchmarks (physical reports) give a good outline of your farm performance. It builds trust in the relationship and allows the contract milker/sharemilker to have accuracy around their budgeting.

Has anything changed in the setup of the farm since these targets were reached (or set)? e.g. addition or subtraction of a lease block, change in cow numbers, change in bought-in feed. Are you hoping to grow the herd size and is there a plan to do this, what inputs are required?

The first year on a new farm is very difficult for a sharemilker or contract milker to accurately budget, the more you can help them with costs the better prepared they will be.

Impacts on time, labour and costs

A prospective sharemilker or contract milker will want to know about anything on the farm that will have an impact on their operating costs and labour requirements.

Budgeting accurately in your first year on a new farm is difficult, some of these types of questions will help sharemilkers get a handle on likely costs and how they will run the farm.

They will want to know such things as:

Are there regional differences that may impact costs? e.g. weeds
How many days’ storage does the effluent system hold?
How is the effluent stored in covered housing and how often is it cleaned out?
Is water available to all troughs?
How long does it take to shift irrigators?
Does the infrastructure of the farm work with the number of cows?

Consider how the farm location and infrastructure will impact their costs:

Distance from town for relief milkers or an additional labour unit if casual staff can’t be found nearby
Quality of housing for attracting staff
Size of cowshed
Races
Paddock size
Water system.

These are some of the factors which can make a difference to how they run the operation. They also help build a better picture of expenses for budgeting.

As well as the farm infrastructure, think about the accommodation that you have to offer. Is it clean and tidy, are there sufficient bedrooms for farm assistants and/or families? This will influence sharemilkers and contract milkers as housing for staff is part of attracting the right people.

Before signing

Be fully informed and seek advice before signing contracts or agreements.

Realistic budget

If you are preparing to sign an agreement, then you have already made the decision about which operating structure will best suit your needs.

If, during the process of meeting with a potential sharemilker or contract milker, you have made some changes to areas of expenditure (or production/income), now is the time to revisit and update your original budget.

An annual budget will give you a picture of the viability of a business for one season, it is a snapshot of the potential opportunity you are considering. Run your budget past your accountant and/or banker.

DairyNZ templates include a sensitivity analysis which shows you the range of cash surplus or deficits possible when circumstances change – for instance an increase or decrease in payout, changes to production or a change in your farm working expenses.

How do I work out what variable order or contract rate to settle on?

A rule of thumb when assessing a contract milking or variable order sharemilking offer is to crunch the numbers and make sure the role is viable and covers the following:

Appropriate manager wage
Expenses
Personal time-off allowance
An allowance for the risk taken on (staff, production, Health and Safety, environmental, milk price)
Potential to grow their business

Ensuring the Contract rate or Variable order percentage is fair and allows the progressing farmer to succeed will help improve the longevity of the arrangement and give greater incentive to ensure the farm business prospers. Often people ask “what is the going rate?” to find out what others are paying, contract and variable order roles are so different in expenses, additional income for calf rearing, production variability (smoother for higher input) that the “going rate” can be misleading. Concentrate on what drops out the bottom and what is covered to ensure you have a fair opportunity.

If you are changing to a different operating structure, for instance you’ve been an owner operator and this is your first variable order sharemilker partner coming on board, you could link up with another farmer who has experience in budgeting for farm owners.

Current contract

Contracts and agreements are updated on a regular basis to reflect changes in case law, legislation and changes to the farming environment.

Having the latest version of agreement or contract means both parties can be sure the contract they have signed contains the most up-to-date information and draws out common areas of dispute for upfront discussion and agreement.

Contracts are available from a variety of sources:

Federated Farmers
Farm Advisers (including Rural HR specialists)
Lawyers

If you are a Federated Farmers member, the agreements and contracts come with access to legal advice. Through membership, you gain support from other farmers who are willing to share their expertise and experience.

If you are unfamiliar with a sharemilking agreement or contract milking arrangement then seek advice to understand all the clauses. Spending a few hundred dollars to have someone talk through the agreements with you and the implications for your farm could save you headaches and money.

Clear understanding of terms

When going through the contract be very clear about what you are responsible for and under what circumstances.

Each party knowing their obligations and responsibilities will enable the partnership to run as smoothly as possible.

It is not enough to just say that you will perform a job or pay for a certain item. You need to know to what level and at what point that might change. Having a Farm Policy alongside an agreement helps to clarify expectations.

Make sure you have a current agreement or contract and fill in the gaps – don’t leave parts of the contract vague as future issues will no doubt arise.

Once again, if you are not sure talk it over with one of your trusted advisers.

Working through the contract together

Even though contracts are relatively standard, each farming business is unique. Both parties need to spend a significant amount of time going through the clauses, negotiating, and agreeing on how it will work on this particular farm.

It is good practice to sit down together and work through the agreement, discussing how various clauses affect the farm and costs for each party.

Some farmers bring in a third party to independently work through the agreement discussing sections in terms of cost or impact on each side. This person could be known in your area as being knowledgeable about contracts or you could choose to split the cost of a farm consultant with expertise in contracts.

After meeting and agreeing these clauses, it is recommended practice to take time to deliberate and seek advice before signing the agreement.

As a farm owner presenting an agreement and then working through it, you most likely understand the document more thoroughly. Allowing the other party to take more time going over it and seek advice is important and helps them to be sure of responsibilities - after all, you will be working closely together for at least one if not several years.

If everyone has a very clear understanding of what they have agreed to there is less room for misunderstanding.

Trusted adviser

It is important to go through a contract thoroughly before you sign it and understand all the terms and implications for your farm business. If you are not familiar with contracts, get someone you trust such as a farm adviser to go through it with you.

There is a balance between finding someone for your farm and making sure both sides have taken time to get the right fit. This is a relationship where you may both be living on the same farm for a reasonable period, you’re sharing profitability and the livelihood of your farm business with another party.

It is important that any potential sharemilker or contract milker does not feel pressured to sign a contract straight away, allow them to take it away and obtain legal advice. However, it is also important that the contract is signed in a timely fashion as not doing so leaves you both in a vulnerable position.

Successful relationships

A thriving relationship between two parties is likely to be one where goals and values have been shared and are fairly well aligned. Communication between the parties and a clear understanding of responsibilities in the agreement is also vital.

After I sign the contract - managing relationships

Communication is the biggest factor in the success of any relationship. Are you comfortable talking to your sharemilker about issues and progress on farm?

Sometimes the best way to do this is to have regular meetings on a reasonably official basis. These allow for scheduled and structured conversations to occur on the key topics you need to keep each other up to date about. It can help to have a set agenda for these meetings and if suitable, to put together a farm report that can be discussed. By communicating in this way any problems can be identified early and both parties are well informed. If you are using Federated Farmers agreements, you will find a template for Monthly Management Reports at the back of the agreement.

A resource to help farmers resolve problems has been developed for heifer grazing situations – but the principles apply to negotiating and managing issues in sharemilking as well.

Two farmers describe their approach to communicating and building trust in this short video:

Markus Woutersen, 50:50 sharemilking business. Markus' story and his key business practices

Shared business plan

To give both parties certainty, it is beneficial to sit down and develop a shared plan for how the business is going to operate over the season.

Some examples of what to include in a business plan:

Production and reproductive targets
Cost structure of the farm, for example is it $3.00/Kg MS? Or are the costs over $4.00 with a higher input system?
A contingency plan in the event of drought or any unplanned climatic event
A plan of action is if there is a feed surplus/deficit in spring
Targeted farm improvements i.e. regrassing, what is the expectation of the Sharemilker both in time and other costs
How will any change be communicated between the parties?
Trigger points for buying in feed or drying the cows off
What crops, when and how many hectares.

By coming up with a plan, it enables both parties to have some certainty and confidence in each other and the business.

A shared business plan may be developed in the autumn, after signing an agreement, when there is time to sit down together and work through a plan which covers the term of your contract (reviewed annually).

The plan sits alongside your contract – think of the contract or agreement as the “rules” for the two businesses working together and the shared business plan providing the direction.

Videos

First year on farm

There are many things farm owners can do to support their new contract milk or sharemilker in their first year if business.

Coaching and support is valuable for the success of both businesses and the smooth running of the farm.

Here are nine tips for a bright first year based on interviews with farmers courtesy of our Extension Team:

Have the property ready for them. Tidying up someone else’s mess is never a good start, it puts people on the back foot and uses up valuable time between moving onto farm and start of calving.
Have information and processes available so they can understand the way the farm operates. It is easy for this information to drive out the gate with the last contract milker. Invest time to get this information down on paper.
Have frequent short meetings at the commencement of the contract to allow for questions to be discussed promptly. More frequent meetings at the start establish good communication routines and help answer small queries.
Check that they understand and know how to meet their employer and tax obligations. Encourage them to do budgets and monitor cashflow. They may use tax specialists to assist them but owning their own finances allows them to increase skills in this area and check they are on track.
Be clear about purchasing authority and how the process occurs. This will be different for every farm so it’s worth taking time to clarify your expectations.
Depending on their previous role, the new milker is now responsible for running the whole dairy operation. Aspects of this may be new to them, so identify what areas are new and provide coaching through those situations.
Time management is critical to the running of the farm. Coaching will help with organising and planning activities for the season. However, 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. The idea here is to help with planning, both short and long term, and then let them get on with it.
Focus on the important, not the trivial. People have different ways of doing things, the important thing is that the outcome is the right one.
Encourage. The first season is full of many firsts – accept they may not get it all right. As farm owners you will have “been there and done that” and made mistakes along the way. Keep your conversation ‘above the line’ and always leave them with a word of encouragement. They will know in the thick of a day’s demands, when things have gone wrong, that you believe in them and what they are bringing to the business.

Farm Owner