12.0 CONCLUSIONS
The sharemilking industry is presently in a state of flux. The rapid increase in dairy farm land prices over the past five years, combined with a rising cost structure and shrinking product prices in real terms, has led to shrinking returns for farm owners.
This has led to a reassessment of the appropriateness of the 50/50 sharemilking agreement. The possibility has been raised of replacing the traditional agreement with a number of alternatives such as:
- A variable 50/50 type agreement with larger shares to the farm owner.
- The farm owner purchasing a herd and employing a lower order or contract sharemilker.
- The farm owner purchasing a herd and employing waged labour such as farm managers.
All of these management arrangements have been tried at various times in the past. The fact remains that the 50/50 agreement has withstood the test of time over the last century and currently the proportion of farms with 50% sharemilkers is at a 10 year high.
The future of the 50/50 sharemilking industry in the medium term looks to be assured. The main reason for this is that most farm owners just do not want to milk cows until they retire. Therefore they will require labour of some description to run the farm. Those owners who wish to continue a reasonable amount of involvement in the farm may opt for a manager or lower order sharemilker. However, those who wish to almost completely divorce themselves from the day to day operation of the farm generally prefer to employ a 50/50 sharemilker.
The justification for this is the belief, whether accurate or not, that sharemilkers will produce more milk and take better care of the farm because they have large amounts of capital tied up in dairy cows. In fact for the 1994/95 season, LIC statistics showed that lower order sharemilkers (below 28%) produced at least as much as did 50/50 sharemilkers (refer to page 15). Other influences on the future number of sharemilkers include an ageing farm owner population and possible labour law reforms, which may jeopardise the viability of lower order and contract sharemilking positions for the farm owner.
This does not mean to say that the 50/50 agreement will not change. In fact, over the last five years significant change has taken place with a variation in cost sharing, turning the agreement from favouring the sharemilker to favouring the farm owner, although this has been exacerbated by poor returns for bobby calves and cull cows. This has been especially evident in areas such as Canterbury where investment farmers are endeavouring to gain a competitive return on their investment. It is highly likely that the agreement will continue to swing towards the owner over the next few years, until an equilibrium is reached.
A word of caution must be issued at this point. If the agreement swings too far in favour of the owner, sharemilkers may come to regard the traditional goal of farm ownership as unobtainable and leave the industry. This would have a dual effect:
- The motivated labour force represented by the 50% sharemilker would diminish meaning farm owners would need to reinvolve themselves in the farm or hire a manager or lower order sharemilker. The farm manager option may lead to a drop in production, which subsequently causes a degradation in the value of the owner's asset.
- Sharemilkers would find it even more difficult to gather the equity to purchase a farm. This would mean that there were fewer potential farm buyers in the market. If fewer farm buyers are around, there should consequently be a drop in demand for land, resulting once again in a decrease in the value of the asset.
The concept behind Tasman Agriculture's "Staggered Agreement" is sound and provides a good model for further development of the 50/50 agreement. However, to avoid the problems mentioned previously, the threshold at which the staggered agreement is triggered needs to be closely examined. The applicability of this agreement to small farms must also be questioned as in many instances 100-120 cow farms are currently struggling to support a sharemilking set up.
In the future, attitudes are likely to change regarding sharemilking, or even just milking cows, as a career choice until retirement. The goal of farm ownership will become (and is even now) unobtainable for some sharemilkers. Their options, once in this position, are to either continue sharemilking or leave the dairy industry. Unfortunately, life as a farmer leaves very few career opportunities open to those leaving the industry without further retraining. Those paths which are open tend to be practically based and less well paid. For many sharemilkers this would mean an unacceptable drop in their standard of living. This may encourage them to continue as career sharemilkers.
The size of the average sharemilking job is likely to increase further over time. This may also help to make a career as a sharemilker a more profitable and appealing proposition. A 40 ha farm, which five to ten years ago provided a good living, is no longer an economic dairy farm unless it is virtually debt free. There are still currently a large number of these units around the Waikato and over time they will be purchased by neighbours and amalgamated into existing farms, or perhaps joined together to form partnerships between neighbours.
The corporate/investment farmer is likely to become a much larger player in the sharemilking industry as farm sizes increase. In Canterbury, corporate and investment farmers already have a significant influence on the local sharemilking industry. The high land prices in the Waikato may lessen the influence of the corporates, as the higher price will serve to reduce the return on investment, which is the drive of such investors. If land prices in Canterbury and other fringe dairying areas continue to rise and reach levels similar to those of the Waikato, corporates may find they are unable to sustain a competitive return and thus be forced out of the industry.
The down side to the expansion in farm size has already been experienced in Canterbury, with a lack of smaller sharemilking jobs making it difficult for would-be sharemilkers to gather equity to purchase a first herd.
As farm size increases and assuming land prices continue to rise in real terms, the equity required for a sharemilker to purchase a farm will also increase. As the value of cattle and land diverge further, the ability of the sharemilker to gather equity to purchase a first farm will be severely compromised. The likely result of this will be more and more sharemilkers revising their goals away from farm ownership. The ability of sharemilkers to build capital to direct toward ventures other than farming will become a more prevalent motivation for people to get involved in the industry.
The largest problem facing sharemilkers who wish to purchase farms is the disparity between land and cattle values. It is unlikely that this difference will lessen to any great extent in the future. Further divergence between the two will make it very difficult to gather the equity required for farm purchase in the form of cows. However, some cushioning of this effect will occur through increasing farm sizes making more larger jobs available to the sharemilker.
The challenge for sharemilkers in this position will be to invest their earnings in areas off the farm which will give them good returns until such time as they are able to expand their herd or wish to purchase a farm. However, it seems farmers are not sure of what areas they could invest in. There seems to be a lack of useable information, restricting farmer views on investment opportunities. This shortage will need to be addressed in the future so sharemilkers and land owners, will be able to access competent advice on which to base investment decisions.
The best investment many sharemilkers could make in conjunction with their farm owners, is to improve the profitability of their farming operation. In many instances this will entail improving production, as the average production in the Te Awamutu/Matamata and Morrinsville area is only 803 kgMS per hectare. This compares poorly with the Dairying Research Corporation's No 2 Dairy Control farmlet, which produces in excess of 1000 kgMS per hectare with no inputs other than fertiliser. If farmers are able to lift their production to this level without an increase in their cost structure they will have a larger farm surplus available for reinvestment. This will ultimately mean that they are able to achieve their financial goals sooner.
The comparison between the Canterbury and Waikato sharemilking industries identified a number of interesting points regarding the relative profitability between sharemilking and farm ownership in the two regions. The better payout and more favourable share of income for sharemilkers in the Waikato means that they can build equity more quickly. It must be emphasised that the difference in payouts between the two regions is presently at an extreme. Therefore with the larger farm sizes, as the payouts of the two centres converge, the advantage in ability to build capital is likely to shift to Canterbury. However, on a per hectare basis sharemilking in the Waikato is more profitable. A further advantage for Waikato sharemilkers are the number of smaller properties which require fewer cows and thus have lower entry equity thresholds than do the larger sharemilking jobs in the Canterbury region.
Conversely, farm owners with sharemilkers receive a better return on their investment in Canterbury despite the lower payout. This is mainly due to their higher share of income from the 50/50 contract and the lower land price. As the payout of the two centres converge, this difference will be accentuated unless land prices continue to rise to levels comparable to the Waikato.
When considering purchasing a farm, the lower land price in Canterbury allows sharemilkers to purchase an economic unit more quickly. Furthermore, at current levels of production and payout, an economic farm in Canterbury, which is 12 ha larger than an economic unit in the Waikato due to unavailability of smaller blocks, will provide a higher EFS per hectare, and due to lower land values will also give a greater return on investment.
If a sharemilker's goal is to purchase a first farm sooner, rather than later, it is likely that they will have to become much more mobile between regions. This will occur until such time as land values, payouts, and cost structures in all regions become similar enough to not warrant the cost of moving.
Ultimately, farm owners will have the final say in which direction the sharemilking industry will move, as the sharemilking system only exists as a result of the farm owners' desire to not milk cows all of their lives. However, these needs must be balanced against the needs to allow sharemilkers to build equity towards farm ownership as a means to motivate people to enter the dairy industry.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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