The current conditions will turn around and agreements need to either have a limited time frame or be set up to ensure all parties are fairly treated regardless of volatility.
While it might sound like basic advice – even patronising – it’s absolutely imperative that for both parties’ financial survival there’s level-headed communication.
“For everyone’s sake you’ve got to get around the table and talk through the solutions,” agricultural human resource specialist John Fegan says.
“Both parties are going to go through some hurt but that hurt doesn’t have to be fatal to the survival of the business or mean bankruptcy,” he said.
With communication and some give on both sides the current trough doesn’t have to become a defining time in dairying’s history where a large number of good young people are lost to the industry.
Solutions will vary depending on specific situations but a short-term answer for some could be to scrap the current agreement and move to an employer-employee relationship.
It would mean staff employment responsibilities reverted back to the farm owner, along with farm working costs that were being born by the contractor or variable-order sharemilker.
The details of electricity, motorbike or farm dairy costs could be negotiated.
“That brings some pain for both sides but it in some cases it may be what needs to happen for a defined period to get through this,” Fegan said.
AgFirst consultant James Allen agreed and said while farm owners took on more costs under that scenario they also took back a percentage of the milk cheque while a variable-order sharemilker or contract milker lost some of the tax advantages they would have had while being self-employed.
Another option for variable-order sharemilkers was to move to a contract milking agreement so they earned a set amount per kg milksolids (MS) and forfeit their percentage of the milk cheque.
They’d need to start by relooking at their budget for their portion of costs, usually wages, electricity, farm dairy costs and motorbikes.
Like farm owners they’d be expected to trim costs where they could without adversely hitting production.
The negotiated contract milking rate then needed to cover those costs and provide a fair income for the contract milker given their level of responsibility and expertise.
A short-term contract could be agreed to, whereby the contract milker agreed a lower rate for what was effectively their wages for the season.
But the contract would have to be for a finite time-frame, and could have the rate linked to an upwards movement in milk price within the season in the interests of fairness.
Hybrid agreements could work but care was needed not to step outside the law.
They could be set based on a contracted cents/kg MS rate and a small percentage of milk price returns.
Variable-order sharemilking is governed by an act of Parliament that doesn’t allow for any changes to the agreement between the farm owner and sharemilker that would be to the detriment of the sharemilker.
Hybrid agreements could reduce the extreme highs but set a floor that ensured the operator stayed in business.
The agreement between the operator and the farm owners needed to be a contract milking agreement in which clauses were included to allow for the percentage milk price payment, and not a variable-order agreement.
The contracted cents/kg MS rate was set based on the operator’s negotiated and budgeted costs which, could include a portion of a reasonable management wage.
The small percentage of milk price income allowed for additional income that reflected there was still a level of risk to their total income but allowed them to enjoy some of the upside in higher payout years.
The negotiated contract payment set a floor and kept them in business in seasons like this one.
Fegan didn’t believe hybrid agreements were common and said care was also needed to ensure payments met the Inland Revenue’s definition of self-employed.
The key thing was to get advice and try not to complicate the arrangement, he said.
Fegan said he was aware of situations where contract milkers and variable order sharemilkers had walked away because the price per kg MS had been dropped to a level that couldn’t cover costs.
If a contract milker or variable-order sharemilker walked away, farm owners were left without anyone to milk their cows and with the responsibility of employing staff, and dairy and electricity expenses.
In most cases this happened when people had been reactive – particularly to Fonterra’s August announcement of a milk price drop to $3.85/kg MS.
“People have had their heads down getting though calving and what I’m hoping is as they come out the other side of that and with a bit of better news with auction (GlobalDairyTrade) prices rising we’ll have cooler heads willing to work out some solutions to get through this,” Fegan said.
