Wilding and former Federated Farmers sharemilkers chairman Ciarán Tully recently reviewed Federated Farmers’ sharemilking and contract agreements and included more clauses to help farmers and sharemilkers negotiate. They liaised with arbitrators to rewrite the sharemilking and contract agreements.
One of the biggest changes to the agreements was that farm owners no longer had the right to deduct money owed by the sharemilker or contract milker from the milk cheque.
“At the end of the season if there is money owed, there is scope to deduct money from the final payment,” DLA Phillips Fox solicitor Oliver Hobbs said.
The change was in line with other industries and protected a contractor’s income stream, he said.
Another change was the ability to protect a farm owner from a sharemilker trading stock and decreasing the quality of the herd, which could affect production and reproduction.
Sharemilkers had the potential to make good money out of buying and selling cows, which was key to growing their equity and should be encouraged, but it shouldn’t be detrimental to the quality of the herd, Wilding said.
“A farmer doesn’t want to sign up to a herd of young cows with a high Breeding Worth to find out two years later they’ve been sold and replaced with other farmers’ culls.”
A new clause in the new agreement set parameters to protect both parties, he said.
The flexibility also applied to contract and variable order agreements. There had been a significant shift in recent years from variable order sharemilkers to contract milkers because of the set price, rather than risking the rise and fall of the milk price.
But there still needed to be opportunities for those contract milkers to build their equity. For example, a contract milker could ask the farm owner for stock to rear every season as part of the agreement.
A few calves wouldn’t cost the farm owner a lot, but allowed the contract milker to build up some equity to take the next step in the industry, Wilding said.
The new agreements also included clauses on environmental responsibility, health and safety and adverse events.
There should be open discussions on who was liable for effluent management and ensuring health and safety best-practice, Tully said.
It was also a good idea to discuss options ahead of an adverse event, such as a drought or a big drop in milk price, which could change onfarm costs and affect production.
“It’s a big business you’re running. A drought can shift you from a System 3 to a System 4, you have to have the discussion before that happens. If you wait until it happens, people are stressed and can make bad decisions.”
One of the key changes was that both parties shared the cost of conserving surplus feed and growing crops as they did already with bought-in feed.
This was more consistent and fair and ensured the making of spring silage maximised quantity and quality of the main feed supply, Tully said.
For example, this year there was less incentive for sharemilkers to make grass silage because palm kernel was so cheap and they wanted to keep costs down. By sharing the cost the best decision could be made to maximise grass quality.
Surplus feed at the end of the agreement was often a contentious issue and should be discussed, he said.
The grass always belonged to the farm owner, but the sharemilker should be reimbursed for any surplus supplement or feed bought-in.
‘Run-down or sub-standard accommodation would not help attract quality staff and while having a heated swimming pool might sound like you’ve hit the jackpot, when the bill arrives for heating it you might quickly change your view.’
Capital development versus maintenance costs should also be worked out before signing the contract. Normal practice and what was considered maintenance should be recorded and agreed.
“Don’t lump sharemilkers with the cost of regrassing 40% of the farm in their last year, which they won’t get any value from. If that hasn’t been the norm or past practice, that’s capital.”
Sharemilkers and contract milkers should view the entire farm and all accommodation before they signed a contract.
“Run-down or sub-standard accommodation would not help attract quality staff and while having a heated swimming pool might sound like you’ve hit the jackpot, when the bill arrives for heating it you might quickly change your view.”
Entering into a written agreement should never be taken lightly, Wilding said. All parties should go through each clause in the contract, discuss an ideal resolution and give the contract to an independent party to review before signing, Tully said.
“And the rules are no different with family or friends.”
Communication was the key to any good business agreement, and discussing everything up-front and having regular meetings would reduce the chance of serious disputes.
Today’s farms had bigger debt ratios, the ownership model was often different and owners often couldn’t justify putting on a sharemilker who took half the milk cheque.
A farm owner had more skin in the game, with investment between $45,000 and $60,000/hectare compared with a sharemilker’s risk of $7500/ha and that had to be reflected in the financial return to each party, he said.
Too many farm owners were tossing out the herd ownership option because a 50:50 percentage didn’t work for them, but there could be negotiation on a different percentage that would suit both parties. Farm owners had to remember many of them got where they were through sharemilking and should try to offer opportunities to allow the next generation to progress.
It was also often a good business decision because a sharemilker was a skilled operator and had real skin in the game.
Likewise, sharemilkers would turn down an offer because it was less that 50%, but there were other opportunities to build equity.
“Don’t get it fixed in your mind that’s its 50:50 or I’m walking away. That’s a stupid attitude.
“The term 50:50 sharemilker has not been on the title of the Federated Farmers agreement since 2001, reflecting it is a negotiable agreement.”
Setting the percentage should be determined by the quality of the farm asset and the operation costs. Every farm was unique and its profit capability should be valued in the negotiations, he said.
A well-established farm with excellent infrastructure, automation, and quality pasture with minimal weeds would benefit the sharemilker financially, so the farm owner could demand a higher percentage of the milk cheque.
On a more run-down farm with poor infrastructure for milking and feeding cows, and needing to be regrassed, a sharemilker might struggle to maximise production and would have higher costs, so should be offered a higher percentage.
These factors should be considered and openly negotiated during the contract process, along with the farm’s daily costs.
Farm working expenses could range from $3.50/kg milksolids (MS) to $5/ kg MS, which made a big difference to the return. Production could range from 900kg MS/ha to 1800kg MS/ha so sharemilkers had to do their homework to see what their return on investment would be, he said.
“Ask the previous sharemilker for their costs and work out your own figures.”
For more advice, an accountant should be able to work out the costs and potential return.
In most cases 50% of the milk price agreement would still stand as a fair agreement, he said.
There were now clearer guidelines under the dispute resolution clauses and the agreements were aligned with common law to reduce the risk of legal disputes.
