Wednesday, July 6, 2022

Always check contract content

As people are now looking ahead to 2013/14 season and what career moves to make, it’s timely to look at both types of arrangements. Before farm owners and prospective milkers sign up professional advice should be sought regarding the content of the contract and what is expected from both parties. Contract milking is primarily an agreement where the milker agrees to milk the cows for a certain rate/kg milksolids (MS). Depending on the size of contract, rates appear to be between 80c/kg MS and $1.40/kg MS. The operator usually provides labour and some basic equipment. On the larger positions, the ingoings and overheads may be quite large, involving tractors and plant, and suitable financial arrangements need to be made for the first winter where there’s no income. Some farmers offer payments (with clawback later) over winter so the contract milker can have some breathing space until production starts. For those who supply Fonterra, there is no dividend-related payment.

There can be performance bonuses but beware of sliding scales should production levels be exceeded. If there is a decrease in payment for additional production over shares issued, then will the contract milker still make additional profit? Do your sums carefully. From a farm owner’s point of view, have measurable targets, as wishy-washy bonus criteria can lead to wishy-washy discussion and disagreement.

From a farm owner’s point of view, having a contract milker gives surety of labour cost, assuming production targets are achieved. If the payout increases, then the farmer is able to use the increase for investment or debt repayment. On the larger jobs this can add up to quite a sum. From a contract milker’s angle, it can be a good way to become self-employed, but there are caveats to that.

For the smaller jobs of 200-300 cows the farmer should look at the income the contract milker will gain, and offer an incentive over and above what a salaried manager would receive. This is due to the milker taking up staffing and day to day risk management. There is evidence that contract milkers, having paid Accident Compensation Corporation (ACC) levies, insurance and legal/accountancy fees, and had less time off than a salaried manager with entitlements, could end up with less in their pocket than a good manager’s wage.

Prospective contract milkers should do calculations around the business’ ability to pay for weekend staff and statutory holidays and annual leave. No one is saying have all this time off, but the income should be able to support it, otherwise you are possibly supporting someone else’s holiday.

Example
Contract milker 200 cows $1.10 = (21% of $5.25k MS payout)
Income
200 cows * 330kg MS/cow = 66,000kg MS
66,000kg MS * $1.10=     $72,600
Expenses
Dairy power        $8000
Relief staff           $2940 @21 days at $70/milking
Rubberware        $1200
Bike/fuel          $5000
Accountant/ACC/ insurance  $1500
Drawings                           $30,000
$48,640
Surplus for tax and growth     $23,960

  • This assumes production is met. Remember there’s no upside to this if payout rises. An allowance is needed for tax and plant replacement.

A herd manager can expect a $50,000 package with 90 days a year off and no machinery or production/pay risk. There needs to be individual analysis done to see what will work for you. What are the trade offs in time off, income, stress and family work/life balance?

Define relationship

Speaking of time off and income, Inland Revenue (IRD) has taken interest at various times regarding the nature of contract milking. While there can be little doubt that someone employing a team of five people and 1200 cows has their own business, on a 250-cow farm with a sole operator it may appear to be different.

On its website, the Department of Labour defines tests for whether someone is an employee or an independent contractor. This is well worth a read.

A simple example would be for a chef to phone a plumber to fix the kitchen sink. If the plumber can fix any sink in any building for anybody, then they are probably an independent contractor. If the chef specifies a certain plumber has to fix his sink and isn’t allowed to do work for anyone else, then it could be argued that the plumber is actually an employee. That being the case, the chef may become liable to pay the plumber’s holiday pay and ACC and meet the minimum wage rules.

Contract milkers, in theory, should be able to take on multiple jobs if they wish. This supports the independent contractor role. If they are not allowed to do this without good reason, it may be an employer/employee relationship. Farm owners engaging the services of a contract milker should make sure they have a clear understanding of the risks around this agreement and seek professional advice if unsure.

The Variable-order sharemilking agreement (VOSM) is covered by an Act of Parliament and any reviews have to be agreed to by the Minister of Labour. The agreement defines payment to a sharemilker in a percentage form. The sharemilker has the advantage of being able to take an increase in payout and grow their business. Conversely, if payout falls, the sharemilker has to have robust financial arrangements to weather the downturn.

As time moves on, the number of Fonterra shareholders paying dividend related payment adjustments (DRPA) to sharemilkers is decreasing. The reasons for this are many and varied, but the key message is a sharemilker with no DRPA should try to negotiate on costs elsewhere. Some sharemilkers have successfully included a sliding scale, where as the milk price increases, DRPA decreases. This ensures sharemilker income is protected, to a degree anyway, at the lower payout range.

In terms of negotiations, both parties should show some flexibility. While the owner has the right to pay/not pay DRPA, the business relationship should be a positive one with mutual benefits. Talk to local sharemilkers and owners who think outside the square regarding extra work carried out, growing youngstock and use of management abilities across other enterprises.

TAF hooks

Now that Trading Among Farmers (TAF) is live there are potential areas where conflict may arise between shareholders and sharemilkers. If a Fonterra shareholder intends trading shares for units, the discussion on sharemilker payments around unshared supply has to be had up front and early on. If not, there is a risk of lower income to the sharemilker, or on the other side of the ledger, a shareholder having to pay DRPA to a sharemilker off a milk price-only payout. Most operators in this area have had the discussion, agreed on a solution, and noted it in the contract. Have you?

The challenges around both contract milking and VOSM agreements are making sure that an adequate level of profit is achieved for both parties to fund growth and some lifestyle. If you are growing equity in the early stages of your career, then your plans look different to someone looking to free up retirement income or reduce their commitment to the business.

There are plenty of good operators wanting to build equity to buy herds and enter herd-owning agreements, while there are some owners who may not, up until now, have given much thought to taking on herd-owning sharemilkers. While there are plenty of good farm consultants out there to assist with managed properties, someone with skin in the game will often go the extra mile in serving both businesses.

Good communication between farmer and operator is essential, so take the time to go through the agreement at the start. You are allowed to take the agreement away for scrutiny so don’t feel pressured to sign on the day. If the farmer gives the applicant a contract for information rather than a solid offer, then there is some leeway if the farmer sleeps on it and decides that the applicants aren’t suitable. A prospective milker can also then politely decline the offer. For someone to progress successfully in the industry, it should take a good half day with a calculator and a phone line to a successful VOSM or contract milker asking questions.

Federated Farmers offers a full range of contract milking, VOSM and herd-owning agreements.

We need to keep new blood coming into the industry for it to survive and thrive. We will face labour challenges in the next 10 years from competition from town jobs. Many people enter the industry with the dream of building wealth for their family. If contract milking or VOSM cannot offer this then we all run the risk of good people looking through the dairy sector from a job only point of view. Long hours, isolation and lack of ability to grow may put people off farming as a career.

Federated Farmers, with support from DairyNZ and AgFirst, recently carried out a study on how people are progressing through the dairy industry, available at www.fedfarmers.org.nz.

  • Ciarán Tully is Federated Farmers’ Dairy’s Sharemilkers’ Section chair.
Total
0
Shares
More articles on this topic