Thursday, October 25, 2012

Mobile Milking System: Alternative to Sharemilking?

The third area the mobile cowshed can be useful is by providing an alternative to traditional sharemilking.

3. Alternative career pathway

Dairy farming in New Zealand has always had the share farming system. This is where young farmers with limited capital partner with land owners to operate a dairy farm. Traditionally the farm owner/operator gets to the point where they don't want to milk the cows every day any more and they employ a 50:50 sharemilker. 

The sharemilker provides the cows and runs the farm and the farm owner provides the land. They basically split the farm income & 50:50. 

Financially, sharemilkers can do quite well. They make a return on capital of 15-20% and use the cashflow to buy more cows and grow their business.

This has worked really well over the decades. But dairy farming has changed quite dramatically over the past 20 years.
As the figures above show the since 1990 the number of Hectares in dairy has increased by 69%. Over the same period the number of dairy farms has decreased by 21%.

In 1990 the average herd size was 160 cows, today the average herd size is 322.

Sharemilking is still a good option but, as farms get bigger and the ownership structures become more corporate, there are less and less sharemilking positions around. This is especially true in the South Island. This article tells the story of sharemilkers not being able to find a sharemilking position in Canterbury.
As farms get bigger, the sharemilking positions get bigger too which requires more cows, which means more capital is required by the sharemilker.

Lower order sharemilking or contract milking has become popular. This is where the sharemilker does not actually own any cows or only owns a small percentage of the herd. These LOSM take a cut of the income and pay a portion of the expenses. These positions are still a good way forward and contract milkers can make good money without having to make an initial investment in cows.

The graph below shows the traditional dairy regions of the Waikato & Taranaki, having the highest percentage of 50:50 sharemilkers. These two regions have a much smaller average herd size than Canterbury and Southland. Canterbury and Southland represent where dairy farming is going in the future, because this is where the the main growth has been over the last 10 years. These regions have an average herd size of over 500 cows and as the graph show sharemilking does not feature as highly as it does in the North Island.
Sharemilking is important because it allows a self employed business person to grow their business and create wealth for them selves. Often the real innovation and productivity gains are made by sharemilkers who are driven to succeed and grow their business.

To me, a dairy industry made up of employee managers working for a large scale corporate or syndicated dairy farms would be a tragedy. I'm not saying we are there yet but in 20 years time the industry will be.

So its important that young farmers can invest in their own farming business, make money and eventually buy some land of their own.

Currently a sharemilker needs to find a dairy farmer who has a converted dairy farm and who is also looking to employ a sharemilker with the correct amount of cows for the farm. As I said before these people/positions are becoming rearer. 

A quick read of the sharemilker financials from  Brown Glassford & Co show that the average Canterbury irrigated sharemilker has a total farm capital of over 2 million dollars and has a herd size of 758 cows. Not many entry level position here.

The mobile system has the potential to make small scale dairy farming profitable. Small scale dairy is where young farmers with limited capital need to start.

With the mobile system a young farmer only needs to find a land owner who is willing to either lease some land or take part in a joint venture similar to a traditional sharemilking agreement. The only difference is the land owners land does not need to be converted to dairy.

This means a farmer starting out with 100 cows can joint venture with a sheep farmer or the they could lease some land from an arable or sheep/beef farmer and drive a mobile cowshed onto the land and start milking cows. At the end of the lease or joint venture agreement, the dairy farmer just drives the cowshed away to the next farm. Obviously the land will have to be suitable for cows.

It could be advantageous for both parties. As I have quoted in my earlier post the average operating profit of a sheep/beef farmer is $500/ha and the average operating profit of a dairy farm is $3,000/ha.

If a young dairy farmer leased some land from a sheep farmer for $1,000/ha. The sheep farmer has doubled their money and they don't have to do any work on that land. The young dairy farmer stands to make a 15-20% return on capital under this arrangement. Because unlike traditional sharemilking agreements they will receive 100% of the milk cheque.

So lets look at some financial data, as an example of how much money a farmer milking 100 cows on leased land can make.

There is very little up to date financial data available for small scale dairy farms, so I chose to base these figures on the client data of Brown Glassford and Co . The irrigated owner operator and irrigated sharemilker data is made up of farms with large herds of approximately 750 cows. As the herd size gets smaller the average measures such as per cow or per kgms can get distorted especially for wages. But the figures above stack up with my itemised budget and with the figures of a few of my smaller scale dairy farming friends.

The budget above shows that a farmer could make $46,800 before tax profit from 100 cows on leased land. Which is a pretty viable business for an one person.

Key points

$3.20 FWE
Some people may scoff at my farm working expenses figure of $3.20/kgms. The average for the 11/12 year was $4.14/kgms. The mobile system is a very basic low input pasture based farming system. Many Canterbury dairy farms (which this data is taken) have moved to a system utilising imported feeds, high stocking rates, high N fertilizer and cows grazed off over the winter. These systems have high FWE. I know farmers who operate low input systems with FWE around $3.00/kgms.

$5.50 payout (projected for the current season)

Interest & Rent
Based on a rental of $1,000/ha, which is at the top end of what irrigated land in Canterbury is being leased for. Interest based on $250,000 mortgage @ 7%.

Setup cost
The mobile cowshed required to milk 100 does not need to be expensive. A 10 cup herringbone design with a second hand plant will be fine and can be set-up for approximately $40,000. I have included Fonterra shares. But farmers can supply other dairy companies, such as Open Country Dairies or Synait, who do not require farmers to buys shares. This would reduce the set up costs by $170,000.

The other option is for a young dairy farmer starting out to joint venture with a sheep/beef or cropping farmer, by using a standard sharemilking agreement.

In this example the land owner will provide the land, the cowshed and the dairy company shares. The land owner will take a percentage of the milk income.
The sharemilker only needs to supply the cows, farm equipment and the labour.

The budget below is based on the budget above, but shows how it would look for both parties.
Both the land owner and the sharemilker make around the same amount of profit as in the previous example. The difference is that the set up costs are shared. In the leased land example the sharemilker pays for all the setup costs. In the sharemilking arrangement the sharemilker only needs to fund the cows, therefore the interest costs are lower.

This option is easily assessable for farmers with a small amount of capital. They will need to be able to get a loan for $100,000-$200,000 to buy 100 cows, which is an achievable target. From here they can build their herd up over the following years. 

From the land owners perspective, I have assumed that they have borrowed 100% of the setup costs. That includes Fonterra shares, cowshed, and other costs.. The budget shows an increase in profitability compared to running sheep/beef. If we refer again to the client data from Brown Glassford & Co and we look at the sheep/beef downlands/flatlands survey. We find that for the 2011 year, the benchmark group have a net farm profit of $263/ha and the average net farm profit is $144/ha.
The budget above shows a net farm profit of $1,181/ha. 

A point worth noting is that many of these sheep properties are not irrigated and may not be suitable for dairy. Therefore it may be unrealistic to compare Canterbury sheep farmers financial data with that of dairy as cows can't be milked on dryland properties. There are plenty of sheep/beef properties that are irrigated that are included in this data. But if we compare the Canterbury sheep/beef farmers financials to that of Southland sheep/beef farmers (where irrigation is not required), we find that the the net farm profit/ha is very similar. So we could assume that this operation is taking place on a irrigated sheep farm or a farm in Southland. The concept stacks up either way.

There are lots of unknowns with doing budgets on a project like this. For instance should the fertilizer costs be much higher to account for the lower fertility of a sheep farm? What will the farm working expenses really be? Will this system be cheaper to run or the same as a conventional dairy farm? The questions go on. No one will know untill it is tried.

I'm not saying that traditional sharemilking or contract milking is a bad idea, I'm simply looking at alternatives for young people who either don't have the funds to go sharemilking or can't get a contract milking job. The future of dairy is clear, farms are going to continue to get bigger and require more capital to setup. This trend is not going to make it easier for young farmers to progress into farm ownership. 

Maybe the mobile system is one way to provide profitable entry level options for young farmers. 

If you do what you have always done, you get what you have always got. 


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